Erc Comment

8/13/2019 Erc Comment

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Republic of the PhilippinesSUPREME COURT

Manila

BAYAN MUNA REPS. NERI JAVIERCOLMENARES ET AL., Petitioners.

- versus -

ENERGY REGULATORYCOMMISSION ERC) ET AL.,Respondents.:x- - - - - - - - - - - - - - -- - - - - - - - - - - :xNATIONAL ASSOCIATION OFELECTRICITY CONSUMERS FORREFORMS NASECORE) ET AL.,Petitioners,

S l J P f < ~ M ; COUR'fOI?.:TICE O:f fill:. CLEH.J( OF COURTll:N l ANCH E C E l V l ~ n

G. R No. 210245

I

co

- versus - G. R No. 210255

MANILA ELECTRIC COMPANYMERALCO) ET AL., Respondents.

:x - - - - - - - - - - - - - - - - - - - - - - - - - -:x

M NIFEST TION ND MOTION FOR LE VETO DMIT THE TT CHED COMMENT

Public Respondent ENERGY REGULATORY COMMISSION(hereinafter, ERC), through the undersigned Counsels, unto thisHonorable 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), acopy of which was received by the ERC on 07 January 2014, the OSGinvoked the provisions of Section 5, Rule 65 of the Revised Rules of

(1(-1 :.j1


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Court, as amended, alleging that the ERC is only a nominal party to thecase and that it is the duty of the Manila Electric Company (MERALCO)as private respondent to appear and defend the ERC unless the latter isspecifically directed to do by this Honorable Court. The OSG, therefore,prayed to be excused from filing the Comment on behalf of the ERC aswell as the Department of Energy (DOE).

2. Simultaneous with the filing of the aforesaid motion beforethe Honorable Court, the ERC received a letter from the Office of theSolicitor General (OSG) invoking the provisions of Section 5, Rule 65 ofthe Revised Rules of Court, as amended.

3. In response thereto, on 06 January 2014, the Chairman inrepresentation of the Commission, wrote a letter (ANNEX 1 to the OSGstating, in substance, that inasmuch as it agreed with its position, theERC noted that the issues elevated before the Supreme Court areconstitutional in nature and delved on the adjustment mechansimutilized by the ERC in the normal approval of the generation costcomponent of the electricity retail rate. An adverse decision thereonwill have an impact on the ERC s determination and current processesand affect consumers at large who are the ultimate payers of thegeneration charges pertaining to the electricity consumed.

4. To date no response has been received from the Office ofthe Solicitor General. Thus, in the exigency of the circumstances andcognizant of the importance of the issues brought forth before theHonorable Court, the ERC respectfully moves that it be allowed tosubmit the attached Comment in order to fully participate in theproceedings for a clearer understanding of the ERC s regulatoryprocesses for the benefit of the public,

5. It is in this light that the ERC respectfully begs leave ofCourt to submit the attached Comment in the meantime that theManifestation and Motion of the OSG remains under consideration ofthis Honorable Court.WHEREFORE, premises concerned, it is respectfully prayed of thisHonorable Court to admit the attached Comment of Public RespondentEnergy Regulatory Commission (ERC).

Other reliefs just and equitable under the premises are likewiseprayed for.7 January 2014, Pasig City for Manila.

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ENERGY REGULATORY COMMISSIONPublic Respondent16/F Pacific Center Bldg. San Miguel AvenuePasig City Metro Manila

Trunk Line. No.02-6895372

NINO C JUAN. 39610IBP No. 951520 is. Or. 01/06/2014MCLE Compliance No. IV - 0018441

7/03/2013Contact No. 02 6315879Email address: [email protected]

DEBORA AN ll i ~ 0 ~ 1 i 7 : s 9 ~ ~ - IBP Lifetime Membership No. 04302 Q.C.MCLE Compliance No. IV-0019776

5/02/2013Contact No. 02 6315806Email address: [email protected]

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Copy furnished by personal service:

1. SUPREME COURTEn BancPadre Faura, Manila

2. PUBLIC INFORMATION OFFICESupreme Court, Padre Faura, Manila

3. Atty. MARIA CRISTINA P. YAMBOTCounsel for Petitioners in G.R. 21024545 K 7th St., Brgy. West Kamias, Q.C.

4. Atty. RONNIE B. RODILLASCounsel for Petitioners in G.R. No. 210255137 Libis Gochuico St., Circumferential Road 3,Caloocan City

5. DEPARTMENT OF ENERGY DOE)c/o Secretary Carlos Jericho L. PetillaEnergy Center, Rizal Drive BonifacioGlobal City, Taguig City

6. Atty. RENE A.V. SAGUISAGCounsel for Petitioners in G.R. No. 2102554045 Bigasan St., Brgy PalananMakati City

7. Atty. NELSON A. LOYOLACounsel for Petitioners in G.R. No. 210255Suite 201 Carreon Building 2746 Zenaida St.,Brgy. Poblacion, Makati City

B. OFFICE OF THE SOLICITOR GENERAL OSG)Amorsolo St., Makati City9. MANILA ELECTRIC COMPANY

Legal DepartmentLopez Bldg., MERALCO CenterOrtigas Ave., Pasig City

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06 January 2014FR NCIS H J RDELEZSolicitor General134 Amorsolo St., Legaspi Village,Makati City, 1229Re : G.R. Nos. 210245 and 210255Bayan Muna Representatives, et al. vs. Energy RegulatoryCommission, 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 filedbefore the Supreme Court docketed as G.R. Nos. 210245 and 210255. This is inresponse to the request for legal representation made by the Commission in anearlier letter dated 23 December 2013.The OSG has called the attention of the Commission to Section 5, Rule 65 of theRules of Court, where it posited that the Commission is impleaded merely as anominal party and as such is not required to defend the alleged Commissionapproval o rates, much less appear and file its comment on the petitions. The OSGfurther stated that instead of filing a comment on the petition in behalf of theCommission, the OSG deemed it prudent to file a anifestation and otion beforethe Supreme Court praying that the Commission be excused from filing its commenton the petitions and/or participating in the said proceedings.While the Commission agrees with the OSG position, it notes that the issueselevated before the Supreme Court involve the constitutionality of several provisionsof Republic Act No. 9136 and its Implementing Rules and Regulations (IRR) as wellas questions on the adjustment mechanism utilized by the Commission in the normalapproval of the generation cost component of the electricity retail rate. Inasmuch asan adverse decision might gravely impact not only the determinations and currentprocesses of the Commission, but ultimately the public, it respectfully maintains thatthere is an immense need for it to defend its position through participation in theproceedings before the Supreme Court. The Commission further notes that there aretechnical concerns raised in the petitions that are particular only to it and to allow it tofully ventilate its cause before the Court would result in a better appreciation by theSupreme 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 draftComment on the petitions prepared by the Commission for your study andconsideration. This is not intended to pre-empt any position that the OSG mayfurther take on the matter but the copy o the draft Comment is respectfully beingprovided for the guidance of the OSG as the Commission s statutory counsel.


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Meantime the Commission also awaits any action that the Supreme Court may takeon the Manifestation and Motion filed by the OSG.Thank you very much in advance for your cooperation.

Very truly yourst ~ h ; . ~~ E N I D RUZ DUCUTChairperson

2014-A3-E-DD1

Cc: Vida G San VicenteAssistant Solicitor General

Pacific Center Building San Miguel Avenue Ortigas Center Pasig City PhilippinesWebsite: http// www.e rc.gov.ph Email: [email protected] Phone: 68 -372 ERC), , ; rl : : i7ffJflED S ANGELES i


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Republic of the PhilippinesSUPREME COURT

Manila

EN B NC

Bayan Muna RepresentativesNERI JAVIER COLMENARES andCARLOS ISAGANI ZARATEGabriela Women s PartyRepresentatives LUZ ILAGAN andEMMI DE JESUS Act TeachersParty List Representative ANTONIOTINIO and Kabataan Party ListRepresentative TERRY RIDON

Petitioners

-versus-

ENERGY REGULATORY COMMISSIONand MANILA ELECTRIC COMPANY

Respondentsx x

NATIONAL ASSOCIATION OFELECTRICITY CONSUMERS FOR REFORMSrepresented by Petronila L. Ilagan,FEDERATION OF VILLAGEASSOCIATIONS represented bySiegfriedo A. Veloso, FEDERATIONOF LAS PIN-AS HOMEOWNERS ASSOCIATIONrepresented by Bonifacio Daza,

I :;' - . ,., ..._.._

-------- _

W/4,JM1-9I ic,, . 26i

G.R. No. 210245


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G.R. Nos. 210245 and 210255Page 2of7and RODRIGO C. DOMINGO JR.

Petitioners

- versus-

MANILA ELECTRIC COMPANYENERGY REGULATORYCOMMISSIONand DEPARTMENT OF ENERGY

Respondentsx-----------------------------------------------x

PREF TORY ST TEMENT

G.R. No. 210255

One of the landmark pieces of legislation enacted byCongress in recent years is the EPIRA. t established anew policy, legal structure and regulatory framework forthe electric power industry.

The new thrust is to tap private capital for the expansionand improvement of the industry as the large governmentdebt and the highly capital-intensive character of theindustry itself have long been acknowledged as thecritical constraints to the program. To attract privateinvestment, largely foreign the jaded structure of theindustry had to be addressed. While the generation andtransmission sectors were centralized and monopolistic,the distribution side was fragmented with over 130utilities, mostly small and uneconomic. The pervasive


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G.R. Nos. 210245 and 210255age 3of7flaws have caused a low utilization of existing generationcapacity; extremely high and uncompetitive power rates;poor quality of service to consumers; dismal toforgettable performance of the government power sector;high system losses; and an inability to develop a clearstrategy for overcoming these shortcomings.

Thus, the EPIRA provides a framework for therestructuring of the industry, including the privatizationof the assets of the National Power Corporation NPC), thetransition to a competitive structure, and the delineationof the roles of various government agencies and theprivate entities. The law ordains the division of theindustry into four 4) distinct sectors, namely:generation, transmission, distribution and supply.

Freedom from ebt Coalition, et al. vs. ERC, at al., G.R.No. 161113, 15 June 2004)

CONSOLID TED COMMENT

Respondent Energy Regulatory Commission ERC), by counsel,1n compliance with this Honorable Court's Order dated 23December 2013,1 respectfully states:

N TURE OF THE CONSOLID TED PETITIONS

These are Petitions for Certiorari filed under Rule 65 of the1997 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


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G.R. Nos. 210245 and 210255Page 4of7hereinafter ayan una Petition for brevity), the petitioners therein

seek to nullify the act of Respondent ERC in approving the proposalof Manila Electric Company MERALCO) to pass on to consumersthe increase in the generation cost for November 2013 as containedin a letter dated 09 December 20132 and to declare Sections 6 and29 of Republic Act R.A.) No. 9136 or the Electric Power IndustryReform Act EPIRA) as unconstitutional. The petitioners therein alsoprayed for the issuance a Temporary Restraining Order TRO)and/or Preliminary Injunction to restrain Respondents fromimplementing the rate hike during the pendency of the case.

On the other hand, in the Petition filed by National Associationof Electric Consumers for Reforms et al hereinafter NASECOREPetition for brevity), the petitioners therein seek the nullification ofthe amendment of Section 4 e), Rule 3 of the EPIRA IRR, and theERC Resolutions and Orders pertaining to automatic adjustmentsor increases imposed by MERALCO in its generation charges forallegedly having been issued with grave abuse of discretionamounting to lack or excess of jurisdiction. Specifically, theResolutions being assailed are Resolution 10-01,3 Resolution 10-04,4 both of Series 2004, and the aforementioned letter dated 09December 2013. 5 The petitioners therein also prayed for theissuance of a TRO enjoining Respondents from implementing,executing, and carrying out the execution of the above-mentionedERC Resolutions, and the 09 December 2013 ERC letter toRespondent MERALCO. The petitioners further prayed for theissuance of a Writ of Prohibitory Preliminary Injunction restraining

2 Annex 5 of the Comment3 Annex 3-A of the Comment4 Annex 3-B of the Comments Supra Note 2


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G.R. Nos. 210245 and 210255Page 5of7the Respondents from implementing the said Resolutions and ERCletter after due notice and hearing.

ST TEMENT O THE F CTS ND O THE C SE

In a letter dated 05 December 2013 addressed to ERCChairperson Zenaida G. Cruz-Ducut, Respondent MERALCO,through the First Vice President and Head of its RegulatoryManagement Office, Ivanna G. Dela Pena, sought clearance fromthe ERC to implement its proposed staggered collection of itsgeneration costs for the November 2013 supply month, invokingArticle VIII, Section 1 of the Automatic Generation Rate AdjustmentAGRA) Rules, which provides that ERC may allow an exception

from any provisions of these Guidelines, i such exception is foundto be in the public interest and is not contrary to law or any otherrelated rules and regulations. Particularly, it requested clearancefrom the ERC to 1. collect a generation charge of Php7.90/kWh inits December 2013 billings to its customers; and 2. defer toFebruary 2014 the recovery of Php 3 Billion, representing a portionof the generation costs for the supply month of November 2013 notpassed on to customers in December 2013, subject to inclusion ofthe appropriate carrying charge.6

For the easy reference of this Honorable Court, the reasons forthe proposed staggered collection of the increased generation costsis explained by MERALCO in the same letter as follows:

Last 10 October 2013, MERALCO representativessought an audience with the Honorable Commission topresent the projected impact of the SPEX-Malampaya

6 Attached hereto as Annex 4


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G.R. Nos. 210245 and 210255age 6o f7shutdown on MERALCO s blended generation charge.The shutdown will affect the supply of natural gas to theIlijan, San Lorenzo and Santa Rita plants, which supplyan aggregate capacity of 2700MW to MERALCO sfranchise area. In addition, for the supply month ofNovember, the shutdown will coincide with the scheduledmaintenance of Pagbilao 2 and Sual 1. These plantscollectively contribute over 950MW to MERALCO srequiremen s.

MERALCO yesterday received the actual November2013 power bills from its suppliers. Total cost ofgeneration to be passed on to captive customers stood atP22.64 billion, translating into a generation charge forDecember 2013 billing of P9 .1070 per kwh. This is anincrease of P3.44 per kwh from the PS.67 per kwh thatwas billed to customers last month and higher by Pl.25per kwh from the P7.86 per kwh that was presented lastOctober 10. Furthermore, since the generation chargeimpacts other bill components, such as the system losscharge, VAT and the local franchise tax, the resultingeffective total increase to a 200 kw h residential customeris P4.15 per kwh.

Under Article III, Section 2 of the Guidelines for theAutomatic Adjustment of Generation Rate and SystemLoss Rates by Distribution Utilities ( AGRA Rules),MERALCO is authorized to automatically reflect the fullgeneration cost of P22.64 billion in its December 2013billing to its customers, as calculated in accordance with


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G.R. Nos. 210245 and 210255age 7of7

the adjustment formula laid down in Article III Section 1of the same Rules. While MERALCO is prepared to reflectthe true cost of generation in its billings to customersthis December it is cognizant of the financial burdensuch rate spike will place on its customers during theChristmas season and considering further that the pricesof other basic commodities have already registeredsubstantial increases.

To mitigate the effects of the abrupt increase 1ngeneration cost MERALCO proposes that instead ofreflecting the actual generation charge of Php9.1070 perkWh in its December 2013 billing it be allowed toimplement a lower generation charge of PhP7.90 perkWh a mere four centavos higher than the P7.86 perkWh generation charge estimate presented to theCommission last October 10. This would mean howeverthat of the total generation cost of P22.64 billion incurredin November 2013 P3 billion will have to be collected at alater period. With the expectation that the generationcharge will normalize in February 2014 MERALCOproposes to include the deferred amount of P3 billion inthe computation of the generation charge for February2014 billing.

In response thereto Respondent ERC in a letter addressed toMs. Dela Pena and dated 09 December 2013 granted MERALCOthe clearance to stagger the implementation of its generation costrecovery by way of an exception to the AGRA Rules. In part theletter states:


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G.R. Nos. 210245 and 210255age 8o f7Accordingly, MERALCO is authorized to implement

a generation charge of PhP7.67 /kWh in its December2013 billing and add to its calculated generation chargefor February 2014 billing the generation rate ofPhPl.00/kWh. The balance on the deferred generationamount without any carrying costs shall be included inMERALCO s generation charge for March 2014. ShouldMERALCO seek to recover its carrying costs on the entiredeferred amount, it shall file a formal application for this.

The foregoing should not in any way be construedas confirmation of MERALCO s generation costs incurredin November 2013, which shall remain subject of theconfirmation and post-verification proceedings 1naccordance with the applicable ERC resolution on thematter.

Finding the rate hike to be adverse to their interests assubscribers and electricity consumers of Respondent MERALCOand believing that the shutdown of the concerned power plants asrelated in MERALCO s request-letter dated 05 December 2013),which increased MERALCO s generation costs, constitutes an anticompetitive behavior, the above-named petitioners filed the presentPetitions, praying for the afore-stated reliefs.

On 23 December 2013, this Honorable Court issued an Ordergranting a TRO effective immediately and for a period of sixty (60)days, enjoining Respondent ERC from implementing its 09December 2013 and acting further on Respondent MERALCO sletter-request dated 05 December 2013, and Respondent MERALCOfrom increasing the rates it charges to its consumers based on thematters raised in its 05 December 2013 letter. The Order also


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G.R. Nos. 210245 and 210255age 9of7

required the consolidation of the Petitions and directedRespondents to submit their respective comments on or before 08January 2013.

On 07 January 2014 respondent ERC received a copy of theManifestation and Motion filed by the OSG stating that publicrespondents ERC and DOE which are merely impleaded as nominalparties in these cases need not pro se or by the OSG submit theirrespective Comments.

In its Manifestation and Motion for Leave to Admit Commentfiled on 08 January 2014 the ERC respectfully submits the needfor it to participate in the proceedings and defend its position toprovide clarification to the Honorable Court of its regulatoryprocesses and framework.

Hence this Comment.

RGUMENTS ND ISSUES R ISED N THE PETITIONS

The arguments raised 1n the Bayan Muna Petition may besummarized as follows:

a.) Respondent ERC committed grave abuse of discretion inapproving the staggered power rate increases on the basis only ofRespondent MERALCO s unverified letter and disregarding dueprocess of law. The ERC should have complied with Section 4 (e),Rule 3 of the IRR of the EPIRA as outlined by this Honorable Courtin the earlier case of N SECORE v ER

7 G.R. No 163935 02 February 2006


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G.R. Nos. 210245 and 210255Page 1 o f71

b.) Respondent ERC committed grave abuse of discretion inapproving MERALCO s proposal to pass on to consumers theincrease in the generation cost for November 2013 as it violates itsmandate under the EPIRA to protect the consumers from anti-competitive practices and abuse of market behaviour of industry. tapproved the rate increase with haste and without exercising therequired regulatory role which constitutes grave abuse ofdiscretion.

c.) Sections 6 and 29 of the EPIRA are unconstitutional. Thespecific constitutional provisions violated are:

i. Section 6 Article XII which provides that the useof property bears a social function and all economicagents shall contribute to the common good. Individualsand private groups including corporations cooperativesand similar collective organizations shall have the rightto own establish and operate economic enterprisessubject to the duty of the State to promote distributivejustice and to intervene when the common good sodemands.

This is violated by Sections 6 and 29 of the EPIRAbecause the said provisions abandon the power of theState to regulate the excessive impositions of powergenerators and suppliers and resultantly this is not forthe common good of the Filipino people the consumersparticularly.

ii.) Section 1, Article III which provides that noperson shall be deprived of life, liberty and propertywithout due process of law.


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G.R. Nos. 210245 and 210255Page of7

Sections 6 and 29 the EPIRA violate the due processclause because they prohibit the regulation of pricescharged by generation companies and suppliers. This hasresulted in depriving the consumers of their hard earnedincome in order to pay high electricity rates.

iii. Section 9 Article which states that the Stateshall promote a just and dynamic social order that willensure the prosperity and independence of the nationand free the people from poverty through policies thatprovide adequate social services promote fullemployment a rising standard of living, and an improvedquality of life for all.

The said EPIRA provisions violate this constitutionalprovision because they condemn the people to povertyinstead of freeing them from poverty caused by high costsof electricity.

d. Sections 6 and 29 should also be struck down because thegeneration sector has escaped accountability by virtue thereof asthey dictate that this sector is beyond the regulating power of theERC. Due to these provisions the generation and supply sectorespecially since they are not considered public utilities areemboldened in manipulating the market and colluding with oneanother in order to hike up electricity rates. The ERC on the basisof these provisions is also emboldened in approving rate increasesin highly irregular and unjust rate cases.

Petitioners in the ayan Muna Petition argue that the nature ofan entity as to whether or not it is a public utility is a judicial


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G.R. Nos. 210245 and 210255Page 12 of 71function and not a legislative one citing the case of North NegrosSugar Co. v. Hidalgo.s

The NASECORE Petition on the other hand poses thefollowing contentions:

a.) Respondent ERC acted with grave abuse of discretionamounting to lack or excess of jurisdiction when it gave clearanceto MERALCO to collect the generation costs without first publishingit as required by law and without due process of law.

b.) The amendment made in Section 4 e), Rule 3 of the IRR ofthe EPIRA, which provides that Section 4 e) shall not apply toGeneration Rate Adjustment Mechanism GRAM), IncrementalCurrency Exchange Recovery Adjustment ICERA), TransmissionRate Adjustment Mechanism Transmission True-up MechanismSystem Loss Rate Adjustment Mechanism Lifeline Rate RecoveryMechanism Cross-Subsidy Mechanism Local Franchise TaxMechanism Business Tax Recovery Mechanism AutomaticGeneration Rate Adjustment Mechanism VAT RecoveryMechanism Incremental Generation Cost Adjustment Mechanismand Recovery of Deferred Accounting Adjustment for Fuel Cost andPower Producers by NPC and NPC-SPUG Provided that suchadjustments shall be subject to subsequent verification by the ERCto avoid over/under recovery of charges is illegal for being violativeof due process as it dispenses with the requirement of publication.

c.) The said amendment is also void for being violative of thedeclared state policy under Section 2 c) of the EPIRA, whichprovides that the State shall ensure transparent and reasonable

s G.R. No. L-42334 31 October 1936


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G.R. Nos. 210245 and 210255Page 3of7prices of electricity in a regime of free and fair competition and fullpublic accountability to achieve greater operational and economicefficiency and enhance the competitiveness of Philippine productsin the global market.

This declared state policy can be accomplished throughpublication as it ensures transparent and reasonable prices ofelectricity.

Since the amendment on the IRR is illegal, all othersubsequent issuances made on the basis thereof, particularly ERCResolution Nos. 10-01 and 10-04, both of Series 2004, as well asthe 09 December 2013 clearance letter are null and void.

d. Publication of the generation adjustments 1s alsonecessitated by the commitments made by Respondent MERALCOunder its franchise law, R.A. 9209.

Particularly, Section 4 thereof provides that MERALCO shallsupply electricity to its captive market in the least cost manner. Inthe interest of the public good and as far as feasible and wheneverrequired by the ERC, the grantee shall modify, improve or changeits facilities, poles, lines, systems and equipment for the purpose ofproviding efficient and reliable service and reduced electricity costs.The grantee shall charge reasonable, just and competitive powerrates for its services to all types of consumers within its franchisedarea in order that business and industries shall be able to compete.The grantee shall have the obligation to provide open and nondiscriminatory access to its distribution system and services for anyend-user within its franchise area consistent with Republic Act No.9136, otherwise known as the Electric Power Industry Reform Actof 200 l . The grantee shall not engage in any activity that will


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G.R. Nos. 210245 and 210255Page 4of7constitute an abuse of market power such as but not limited to,unfair trade practices, monopolistic schemes and any otheractivities that will hinder competitiveness or business andindustries.

Section 5, also of R.A. 9209, states that the retail rates to itscaptive market and charges for the distribution of electric power bythe grantee to its end-users shall be regulated by and subject to theapproval of the ERC. The grantee shall identify and segregate in itsbill to the end-users the components of the retail rate pursuant toRepublic Act No. 9136, unless otherwise amended. Such ratescharged by the grantee to the end-users shall be made public andtransparent. The grantee shall implement lifeline rate tomarginalized end-users as mandated under Republic Act No. 9136.

The above-stated commitments can only be done throughpublication of its application for rate adjustments or increases andby encouraging public participation in the process of its approvalrather than embedding it automatically in its consumers billing.

d. Even with the amendment made under Section 4 e) of theEPIRA IRR, Respondents ERC and MERALCO are not freed fromtheir obligations under the law to publish and conduct publichearings or consultations thereon because of due process. t hasbeen ruled by this Honorable Court that due process is deemedwritten into every statute, contract or undertaking.

e. Automatic electricity rate adjustments or increases ofMERALCO are not only violative of due process but also amount to


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G.R. Nos. 210245 and 210255Page 15 of 71regulatory failure on the part of ERC an abject surrender of itsregulatory functions in violation of Section 25 of the EPIRA.9

When ERC cleared and allowed MERALCO to automaticallyadjust and increase its rate given the assailed Resolutions andletter Respondent ERC practically surrendered and delegated itsregulatory authority to MERALCO.

Moreover its act of allowing an automatic rate adjustment orincrease amounts to delegation of its authority and regulatoryfunctions which is violative of the principle that delegated authoritycannot be further delegated-potestas deleg te non delegare potest

f. Since the automatic rate adjustments made and imposed byMERALCO are void for being violative of the due process clause arefund of all amounts collected by MERALCO should be orderedreckoned from 2004 which is the year when the Resolutionsbecame effective.

In fine the issues may be summed up as follows:

IWhether or not Respondent ERC committedgrave abuse of discretion when it grantedRespondent MER LCO the clearance toimplement the staggered collection of the

9 Section 25 Distribution Retail Supply Rate The rates charged by distribution utilities forthe supply of electricity in their captive market shall be subject to regulation by the ERC basedon the principle of full recovery of prudent and reasonable economic costs incurred or suchother 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 ofthe distribution retail supply rate as defined in this Act.


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G.R. Nos. 210245 and 210255Page 16 of 71

generation costs for November 2013 ascontained in its 09 December 2013clearance letter

IIWhether or not Sections 6 and 29 areunconstitutional

IIIWhether or not the amendment made inSection 4 e), Rule 3 of the EPIRA IRR isvoid for being violative of the due processclause and of the EPIRA particularlySection 2 c) thereof

Illa.If the amendment made in Section 4 e),Rule 3 of the EPIRA IRR is void whether ornot ERC Resolution Nos. 10-01 10-04 bothof series 2004 and the 09 December 2013clearance letter are also corollarily void

IVWhether or not the automatic electricityrate adjustments or increases ofRespondent MERALCO amounts toregulatory failure on the part of ERC

IV.a.Whether or not the automatic electricityrate adjustments or increases ofRespondent MERALCO amounts to


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G R Nos 210245 and 210255Page 17of71

delegation of regulatory power in violationof the principle that delegated powercannot further be delegated

ARGUMENTS AND DISCUSSION

I Respondent ERC did notcommit Grave Abuse ofDiscretion in GrantingRespondent MERALCO theclearance to implement thestaggered collection of itsgeneration costs forNovember 2013.

I.a. Respondent ERC didnot commit grave abuse ofdiscretion when i t grantedMERALCO the clearance toimplement the staggeredcollection because suchgranting had a legal basiswhich is the AGRA Rules. Itmust be noted tha t the AGRARules not having beenjudicially set aside withfinality stand as good andvalid law upon which ERCcan lawfully anchor i tsaction of giving suchclearance to MERALCO


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G.R. Nos. 210245 and 210255Page 8of7

In a litany of cases, this Honorable Court has defined the termgrave abuse of discretion as a capricious and whimsical exercise

of judgment so patent and gross as to amount to an evasion of apositive duty or a virtual refusal to perform a duty enjoined by law,as where the power is exercised in an arbitrary and despoticmanner because of passion or hostility. lo

In Tan v Matsuura 11 the Highest Tribunal also held that there1s grave abuse of discretion when the respondent acts in acapricious, whimsical, arbitrary or despotic manner in the exerciseof his judgment, as when the assailed order is bereft of anyfactual and legal justification

In the present case, it cannot be said that Respondent ERCcommitted grave abuse of discretion when it granted RespondentMERALCO the clearance to implement the staggered collection of itsgeneration cost because t h d the leg l b sis to do so

Pursuant to Section 43 t), the Guidelines for the AutomaticAdjustment of Generation Rate AGRA) and System Loss Rates byDistribution Utilities or the consolidated AGRA Rules, werepromulgated.10 Tan v Spouses Antazo, G.R. No. 187208 23 February 2011); Office of the Ombudsman vMagno G.R. No. 178923, 27 November 2008, 572 SCRA 272, 286-287 citing MicrosoftCorporation v Best Deal Computer Center Corporation 438 Phil. 408, 414 2002); Suliguin vCommission on Elections G.R. No. 166046, 23 March 2006, 485 SCRA 219, 233; NataliaRealty Inc. v Court of Appeals 440 Phil. 1, 19-20 2002); Philippine Rabbit Bus Lines Inc. vGoimco Sr. 512 Phil. 729, 733-734 2005) citing Land Bank of the Philippines v Court ofAppeals 456 Phil. 755, 786 2003); Duero v Court of Appeals 424 Phil. 12, 20 2002) citingCuison v Court ofAppeals 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 RibbonCommittee v Hon. Majaducon, 455 Phil. 61, 71 (2003), citing Flores v Office of theOmbudsman, 437 Phil. 684, 691 2002).


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G.R. Nos. 210245 and 210255Page 9of7

Under Article III, Section 2 of the Guidelines for the utomaticdjustment of Generation Rate AGRA) and System Loss Rates by

Distribution Utilities or the consolidated AGRA Rules, 2 distributionutilities, such as Respondent MERALCO, are authorized toautomatically reflect their generation cost for a particular supplymonth in the subsequent month's billing.13

Hence, when Respondent ERC gave clearance to MERALCO toimplement the collection of its November generation cost in astaggered manner, it did not act whimsically, capriciously, orarbitrarily do so as it had legal basis to grant such clearance.

Moreover, it must be noted that the when ERC granted theclearance to MERALCO in its 09 December 2013 letter, the AGRARules, upon which such granting was anchored, stood as a goodand valid law as the same has not been judicially set aside. In thisregard, it is important to reiterate the constant ruling of thisHonorable Court that -

a]dministrative regulations enacted byadministrative agencies to implement and interpret thelaw which they are entrusted to enforce have the force oflaw and are entitled to respect. Such rules andregulations partake of the nature of a statute and arejust 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 theAutomatic Adjustment of Generation Rates and System Loss Rates by Distribution Utilities.13 Section 2. Billing of New Generation Rate - The Distribution Utilities shall bill theircustomers the Generation Rates calculated in accordance with the immediately precedingSection effective on the tenth (10th) day of each month.


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G.R. Nos. 210245 and 210255Page 2 of71

itself. As such, they have the force and effect of lawand enjoy the presumption of constitutionality andlegality until they are set aside with finality in anappropriate case y a competent court.14

In the instant case, the consolidated AGRA Rules have notbeen set aside with finality by a competent court at the time the 09December 2013 clearance letter was issued. This being the case, theAGRA Rules thus enjoys the legal presumption of validity andlegality and constitutes valid legal basis for Respondent ERC toissue the said clearance letter.

I.b. In view of theamendment of Section e),Rule 3 of the EPIRA IRR, 15which excluded theGeneration Rate AdjustmentMechanism GRAM) andAGRA from its coverage therequirements thereunder arenot applicable in the instantcase.

The allegation of the petitioner in the ayan una Petition thatthe ERC should have complied with the publication requirementsunder Section 4 e), Rule 3 of the IRR of the EPIRA as outlined in14 Abakada Guro Party List v Purisima, G.R. No. 166715 14 August 2008 ; ee lso Eslao vCommission on Audit, G.R. No. 108310, 01 September 1994, 236 SCRA 161; Sierra MadreTrust v Secretary of Agriculture and Natural Resources, 206 Phil. 310 1983 ; and People vMaceren, 169 Phil. 437 1977).

s Amendments to Rule 3, Section 4 e) and Rule 18, Section 7 of the EPIRA IRR as agreedduring the JCPC hearing on 07 June 2007.


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G.R. Nos. 210245 and 210255Page 21of71the earlier case of N SECORE v ERC16 is misplaced because thesaid provision has already been amended on 07 June 2007, whichcarved out the GRAM and AGRA from the ambit of Section 4 e),Rule 3 of the IRR. This amendment has been duly approved by theJoint Congressional Power Committee hereinafter JCPC). Suchbeing the case, coupled with the fact that the consolidated AGRARules remain a good and valid law because the same have not beenjudicially struck down to be illegal, Respondent ERC did not commitgrave abuse of discretion amounting to lack of jurisdiction w hen itgave due course to the prayer of MERALCO that it be allowed tostagger the collection of its November generation cost.

I.e. Respondent ERC didnot act with grave abuse ofdiscretion w hen it granted toMERALCO the clearance tocarry out the collection of itsgeneration costsstaggered manner

in awithout

prior publication as itsaction had legal basis whichis the mendment to Section4 e), Rule 3 of the EPIRAIRR.

Petitioners in the N SECORE Petition also attribute graveabuse of discretion against Respondent ERC for the reason that itgave MERALCO the go signal to execute the staggered collection ofits generation cost without prior publication.

16 Supra note


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G.R. Nos. 210245 and 210255Page 22of7

However measured g i n ~ t the definition of grave abuse ofdiscretion as stated above Respondent ERC cannot be deemed tohave committed grave abuse of discretion in doing so becauseagain it had the legal justification upon which its action wasgrounded which was the amendment to Section 4 e), Rule 3 of theEPIRA IRR.

Similarly it bears stressibg that at the time that the ERCissued the 09 December 2013 letter granting MERALCO the greenlight to carry out the collection of its generation cost in a staggeredfashion the subject amendment has not been judicially set asidewith finality for being contrary to the law it seeks to implement or tothe Constitution. Hence it enjoys the legal presumption of legalityand forms a concrete lawful basis for the act of ERC in proceedingwith giving MERALCO the clearance to collect its generation cost instaggered with the prior publication requirements of Section 4 e),Rule 3 of the IRR.

At this juncture it bodes well to emphasize that theassumption of the petitioners in the N SECORE Petition that thepassing on of the generation cost to the consumers of MERALCO, orny distribution utility for that matter is immediate and automatic

and does not go through an evaluative process and publication atall is erroneous.

As will be discussed in detail below the generation costscharged by generation companies which are ultimately passed onto the consumers with distribution utilities acting as the collectingagents are in truth and in fact subjected to evaluation and hearingby the ERC in two stages. In both instances the ERC sends out a


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G.R. Nos. 210245 and 210255age 23 of 71notice of hearing to all interested parties 1n compliance withsubstantive and procedural du e process.

All these taken together, Respondent ERC cannot thus bedeemed to have acted with grave abuse of discretion amounting tolack or in excess of jurisdiction, co ntrary to petitioners' allegations.

I I Constitutionality ofSections and 29 of theEPIRA

II.a. Theconstitutionality of Sections

and 9 of the EPIRA is notripe for judicialdetermination

Jurisprudence enumerates the legal requisites for judicialinquiry, namely

1. Actual case or controversy calling for the exercise ofjudicial power;

2. The person challenging the act must have standingto challenge; he must have a personal andsubstantial interest in the case such that he hassustained, or will sustain, direct injury as a result ofits enforcement;

3. The question of constitutionality must be raised atthe earliest possible opportunity; and


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G.R. Nos. 210245 and 210255Page 24of7

4. The issue of constitutionality must be the V:ery lismo a of the case 17

The constitutionality of Sections 6 and 9 of the EPIRA is notthe very Zis mo a of the case.

As a precondition to judicial review, lis mota meaP.s that theIICourt will not pass upon a question of unconstitutionality, althoughIproperly presented, i the case can be disposed of on some otherI

ground, such as the application of the statute or the general law. ItIis essential for the petitioner to establish that the c s ~ cannot beI

legally resolved unless the constitutional question 1 raised isdetermined. 18

The alleged unconstitutionality of Sections 6 and 29 of theII

EPIRA is merely ancillary to petitioners' argument that ~ R gravelyIabused its discretion when it issued the assailed l e t t ~ r dated 09IDecember 2013. In Francisco et al vs. The House of

Representatives 9 the Honorable Court reiterated the well-settledmaxim of adjudication that an issue assailing the constitutionalityof a governmental act should be avoided whenever possible.Adhering thereto, the Supreme Court ruled:

Thus, in the case of Sotto vs. Commission on Elections theCourt 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


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G.R. Nos. 210245 and 210255age 25of7x x x It is a well-established rule that a courtshould not pass upon a constitutional questionand decide a law t be unconstitutional or invalid,unless such question is raised by the parties andthat when it is raised, if the record also presentssome other ground upon which the court may restits judgment, that course will be adopted and theconstitutional question will be left forconsideration until a case arises in which adecision upon such question will be unavoidable.Underscoring supplied)

The same principle was applied in Luz Farms vs. Secretaryof Agrarian Reform where this Court invalidated Sections13 and 32 of Republic Act No. 6657 for being confiscatoryand violative of due process, to wit:

It has been established that this Court willassume jurisdiction over a constitutional questiononly if it is shown that the essential requsites of ajudicial inquiry into such a question are firstsatisfied. x x x the resolution of the question isunavoidably necessary to the decision of the caseitself. 20

Succinctly put, courts will not touch the issue ofconstitutionality unless it is truly unavoidable and is thevery lis mot or crux of the controversy. Underscoringsupplied)

20 Citing Association of Small Land Owners in the Philippines, Inc. vs. Secretary of AgrarianReform, 175 SCRA 343 1989)


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G.R. Nos. 210245 and 210255age 26of7

The policies enunciated in Sections 6 and 29 of the EPIRAwhich are to declare generation and supply as open for competitionand outside of ERC s rate regulation and to declare them not aspublic utility operations, are not the lis mota of the case.

t must be noted that the petitioners in the ayan una Petitionseek to have Sections 6 and 29 of the EPIRA nullified for beingunconstitutional so as to place the generation sector within theregulatory authority of the State in order to prevent the alleged anticompetitive behaviour among the generation companies,particularly pertaining to collusion.

However, the declaration of Sections 6 and 29 asunconstitutional is not the only legal remedy available to addressthe alleged anti-competitive behaviour committed by the generationcompanies.

The ERC, under Section 45 has been vested with the authorityto monitor and penalize any market power abuse C r anticompetitive or discriminatory act or behaviour by ny participant inthe electric power industry.

In fact, towards this end, Respondent ERC is now conductingits investigation of the possible anti-competitive behaviour in thewholesale electricity spot market based on the ERC CompetitionRules and Complaint Procedures.

Hence, the declaration of the nullity and constitutionality ofSections 6 and 29 will not provide the requisite redress petitionersare seeking for.


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G.R. Nos. 210245 and 210255Page 27of7

Needless to state trifling with the regulatory framework thathas been put in place by EPIRA for the past ten 10) years mayresult to severe consequences both from the macro and microperspective of the whole industry considering that the overallframework of EPIRA encompasses the interest not only of theconsumers but also of those who will be responsible for the creationof capital in a developing economy like the Philippines.

Towards this end it has been the declaration of policy of theState to ensure a transparent and reasonable prices of electricity ina regime of free and fair competition and full public accountabilityto achieve greater operational and economic efficiency and enhancethe competitiveness of Philippine products in the global market21and to ensure fair and non-discriminatory treatment of public andprivate sector entities in the process of restructuring the electricpower industry.

A full and complete determination of the issues on the validityof MERALCO s generation charge for its December 2 13 billing canbe solved independently from the issue of the purportedconstitutional infirmity of Sections 6 and 29.

The wisdom or propriety of a policyadopted by the Legislature cannot beadjudicated

In Garcia vs. Corona et. al. 22 the Honorable Court spurned theprayer to declare unconstitutional a prov1s1on of the Oil

21 Section 2 c) of the EPIRA22 G.R. No. 132451 17 December 1999


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G.R. Nos. 210245 and 210255Page 28 of 71Deregulation Law by according respect to the wisdom of Congress.The Honorable Court ratiocinated in this wise:

For this Court to declare unconstitutional the keyi

provision around which the law s anti-trust measures areclustered would mean constitutionally interdicteddistrust of the wisdom of Congress and of thedetermined exercise of executive power.

Having decided that deregulation is the policy tofollow Congress and the President have the u t ~ toset up the proper and effective machinery to ensurethat it works. This is something which cannot beadjudicated into existence. This Court is only an umpireof last resort whenever the Constitution or a law appearsto have been violated. There is no showing of aconstitutional violation in this case. [Emphasis supplied]

In Garcia vs. The Executive Secretary t az.,23 involving thesame Oil Deregulation Law, the Honorable Court rejected the prayerfor it to resolve the constitutionality of the said law, as follows -

An actual case or controversy is one that involves aconflict of legal rights, an assertion of opposite legal claimssusceptible of judicial resolution; the case must not bemoot or academic or based on extra- legal or other similarconsiderations not cognizable by a court of justice. Statedotherwise it is not the mere existence of conflict orcontroversy that will authorize the exercise by thecourts of its power of review; more importantly the

23Q.R. No. 157584, 02 April 2009


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G.R. Nos. 210245 and 210255Page 29of71issue involved must be susceptible of judicialdetermination. Excluded from these are questions ofpolicy or wisdom otherwise referred to as politicalquestions:

As Tafiada v Cuenca puts it political questionsrefer to those questions which, under theConstitution, are to be decided by the people intheir sovereign capacity, or in regard to which fulldiscretionary authority has been delegated to thelegislative or executive branch of government.Thus, i an issue is clearly identified by thetext o the Constitution as matters fordiscretionary action by particular branch ofgovernment or to the people themselves then i tis held to be political question In the classicformulation of Justice Brennan in aker v Carr,[p]rominent on the surface of any case held to

involve a political question is found a textuallydemonstrable constitutional commitment of theissue to a coordinate political department; orlack o judicially discoverable andmanageable standards for resolving it; or theimpossibility of deciding without an initialpolicy determination o kind clearly for non-judicial discretion; or the impossibility of acourt's undertaking independent resolutionwithout expressing lack of the respect duecoordinate branches of government; or anunusual need for unquestioning adherence to apolitical decision already made; or the potentialityof embarrassment from multifarious


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G.R. Nos. 210245 and 210255Page 30 of 71

pronouncements by various departments on theone question. 24 [Emphasis supplied]

Further, in the Garcia s case, the Honorable Court declined topass upon the policy of full deregulation of the oil industry, byruling that

Stripped to its core, what petitioner Garcia raises asan issue is the propriety of immediately and fullyderegulating the oil industry. Such determinationessentially dwells on the soundness or wisdom of thetiming and manner of the deregulation Congress wants toimplement through R.A. No. 8497. Quite clearly theissue is not or us to resolve; we cannot rule on whenand to what extent deregulation should take placewithout passing upon the wisdom of the policy ofderegulation that Congress has decided upon.

The foregoing rulings apply squarely to this case. TheHonorable Court cannot adjudicate the constitutional issue raisedby petitioners without violating the doctrine of separation of powersenshrined in the Constitution.

11 b Sections and 9cannot be considered asunconstitutional on theground that they violate thedue process clause ascontained under Section 1

24 Citing Integrated Bar of the Philippines vs. Zamora, G.R. No. 141284, 15 August 2000, 338SCA 81, citing Tafiada vs. Cuenca, 103 Phil. 1051 and Baker vs. Carr, 369 U.S. 186

s G.R. No. 157584, 02 April 2009


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G.R. Nos. 210245 and 210255Page 3 of7Article ofConstitution

the

Petitioners in the ayan Muna Petition posit that Sections 6and 29 of the EPIRA are unconstitutional for being violative of thedue process clause. They contend that by removing generationcompanies and suppliers within the ambit of the regulatory powerof the ERC the consumers are deprived of their hard earned incomein order to pay high electricity rates.

With utmost respect this particular argument of thepetitioners in the ayan Muna Petition comes from an erroneousassumption that the generation companies particularly withrespect to the rates they charge are fully outside the regulatoryjurisdiction of the ERC.

While it is true that Sections 6 and 29 of the EPIRA declare thegeneration industry to be deregulated as of date deregulation isnot to be appreciated from a strict point of view. Firstly when itcomes to the imposition of retail rates which includes thegeneration charge that will be passed on to a consumer in a captivemarket the ERC evaluates the same in a meticulous process ofapproving power supply agreements entered into by distributionutilities and their supplier-power generators as will be discussed indetail below. Secondly it cannot be said that the generation sectoris already fully deregulated because the power of choice has not yetdescended to the household level under the Retail Competition andOpen Access regime. Open access is only available as of date tothe contestable customers consuming at least one 1 megawattMW).


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G R Nos. 210245 and 210255age 32of71For energy procured from the wholesale electricity spot

market the ERC before its operation has approved the PriceDetermination Methodology PDM) pursuant to Section 30 of theEPIRA.2626 SEC. 30. Wholesale Electricity Spot Market. - Within one 1) year from the effectivity of thisAct the DOE shall establish a wholesale electricity spot market composed of the wholesaleelectricity spot market participants. The market shall provide the mechanism for identifyingand setting the price of actual variations from the quantities transacted under contractsbetween sellers and purchasers of electricity.

Jointly with the electric power industry participants the DOE shall formulate the detailed ru lesfor the wholesale electricity spot market. Said rules shall provide the mechanism fordetermining the price of electricity not covered by bilateral contracts between sellers andpurchasers of electricity users. The price determination methodology contained in said rulesshall be subject to the approval of ERC. Said rules shall also reflect accepted economicprinciples and provide a level playing field to all electric power industry participants. The rulesshall 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 themarket which includes security or performance bond requirements voting rights of theparticipants surveillance and assurance of compliance of the participants with the rules andthe 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 accordancewith the wholesale electricity spot market rules. The market operator shall be an autonomousgroup to be constituted by DOE with equitable representation from electric power industryparticipants initially under the administrative supervision of the TRANSCO. The marketoperator shall undertake the preparatory work and initial operation of the wholesale electricityspot market. Not later than one 1) year after the implementation of the wholesale electricityspot market an independent entity shall be formed and the functions assets and liabilities ofthe market operator shall be transferred to such entity with the joint endorsement of the DOEand the electric power industry participants. Thereafter the administrative supervision of theTRANSCO over such entity shall cease.


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G.R. Nos. 210245 and 210255Page 33of7

I t is to be noted that the objectives of the PDM are: 1. toprovide the market participants with the specific principles bywhich energy in the WESM will be priced; and 2. to provide thespecific computational formula that will enable the marketparticipants to verify the correctness of the charges being imposed.

Thus with the approval of the PDM, the ERC has exercised itsregulatory mandate to ensure the correctness of the charges thatwill have to be imposed on the power bill that will be paid for by thedistribution utility which will in turn be collected from theconsumer as part of its generation charge.

Moreover with utmost respect this particular argument of thepetitioners in the ayan Muna etition loses sight of the basicprinciple in constitutional law that the Bill of Rights are intended tobe safeguards against the State and cannot be invoked against aprivate individual or entity unless so provided under a statute. Asheld in the case of eople v. Hipoz 21 the Constitutional proscriptionenshrined in the Bill of Rights does not concern itself with therelation between a private individual and another individual. I tgoverns the relationship between the individual and the State andSubject to the compliance with the membership criteria all generating companies distributionutilities suppliers bulk consumers/end-users and other similar entities authorized by theERC 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 orindirectly of the wholesale electricity spot market. All generating companies distributionutilities suppliers bulk consumers/end-users and other sin:iilar entities authorized by theERC whether direct or indirect members of the wholesale electricity spot market shall bebound by the wholesale electricity spot market shall be bound by the wholesale electricity spotmarket rules with respect to transactions in that market.

21 G.R. No. 140549 22 July 2003.


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G.R. Nos. 210245 and 210255Page 34of7its agents. The Bill of Rights only tempers governmental power andprotects the individual against any aggression and unwarrantedinterference by any department of government and its agencies.

Thus, in the instant scenario, assuming arguendo that indeedthe consumers are deprived of their hard earned income, dueprocess cannot be violated because it does not apply and cannot beinvoked against a generation company, which is a private entity.

Even i the due process clause finds relevance in thisparticular case, jurisprudence requires that for substantive dueprocess to have been transgressed, the deprivation must be soarbitrary, unduly oppressive and without reason.2s

In this case, the supposed deprivation of the consumers hardearned income, if at all it is indeed tantamount to deprivation,cannot be said to be arbitrary because the taking of their hardearned income is but a legal, reasonable, and valid consequence oftheir consumption of their electricity.

Verily, there has been an exchange of money for servicesrendered, which is the provision of electricity service.

While provision of electricity is a social and political good, itcannot be divorced from the fact that for it to be provided, there is acost attached to it which is being measured in accordance with theprinciple of full recovery of prudent and reasonable economic costsincurred.29

8 Social Justice Society v Atienza, G.R. No. 156052 13 February 2008)29 Section 25 of the EPIRA


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G.R. Nos. 210245 and 210255Page 35o f7

For these reasons Sections 6 and 29 are not unconstitutionalon the ground that they run counter to the constitutionallyguaranteed right to due process.

11 c Sections 6 and 29 arenot violative of Section 6Article XII of theConstitution. The same istrue with the allegedviolation of Section 9 ArticleII of the Constitution.

The petitioners in the ayan Muna Petition asseverate thatSections 6 and 29 of the EPIRA violate Section 6 Article XII of theConstitution because they abandoned the power of the State toregulate the excessive impositions of power generators andsuppliers and thus defeat its goal to promote the common good ofthe Filipino people particularly the consumers.

To achieve the aspiration of promoting the common good of theFilipino people regulation has put in place the mechanics to ensurethat what is passed on to the consumers is prudent and reasonable.

Under pain of being repetitious the State through the ERChas not abandoned its right to regulate the generation sectorparticularly with respect to the generation supply provided to thecaptive market. Also while the prices at the spot market aremarket-driven these market-driven rates are guided by the PDMwhich the ERC has approved prior to its operation. Be that as itmay while at first blush it may seem that a laissez faire systemhas been put in place because prices are market-driven the same isnot necessarily accurate considering that prior to the operations of


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G.R. Nos. 210245 and 210255Page 36of7the WESM, there has been an approval of the PDM and cognizantthat there may be possible anti-competitive behaviour which mayoccur in the market and in the energy industry, the ERC haspromulgated the ERC Competition Rules and Procedures pursuantto Section 45 of the EPIRA. oo 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-competitivebehavior including, but not limited to, cross-subsidization, price or market manipulation, orother unfair trade practices detrimental to the encouragement and protection of contestablemarkets.

No generation company, distribution utility, or its respective subsidiary or affiliate orstockholder or official of a generation company or distribution utility, or other entity engaged ingenerating and supplying electricity specified by ERC within the fourth civil degree ofconsanguinity or affinity, shall be allowed to hold any interest, directly or indirectly, inTRANSCO or its concessionaire. Likewise, the TRANSCO, or its concessionaire or any of itsstockholders or officials or any of their relatives within the fourth civil degree of consanguinityor affinity, shall not hold any interest, whether directly or indirectly, in any generationcompany or distribution utility. Except for ex officio government-appointed representatives, noperson who is an officer or director of the TRANSCO or its concessionaire shall be an officer ordirector of any generation company, distribution utility or supplier.

An affiliate means any person which, alone or together with any other person, directly orindirectly, through one or more intermediaries, controls, is controlled by, or is under commoncontrol with another person. As used herein, control shall mean the power to direct or causethe 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%) ofthe installed generating capacity of a grid and/ or twenty-five percent (25%) of the nationalinstalled generating capacity. Related group includes a person's business interests, includingits subsidiaries, affiliates, directors or officers or any of their relatives by consanguinity oraffinity, legitimate or common law, within the fourth civil degree;

b) Distribution utilities may enter into bilateral power supply contracts subject to review bythe ERC: Provided, That such review shall only be required for distribution utilities whosemarkets have not reached household demand level. For the purpose of preventing marketpower abuse between associated firms engaged in generation and distribution, no distributionutility 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,


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G.R. Nos. 210245 and 210255Page 37of7

however shall not prejudice contracts entered into prior to the effectivity of this Act. Anassociated firm with respect to another entity refers to any person which alone or togetherwith any other person directly or indirectly through one or more intermediaries controls iscontrolled by or is under common control with such entity; andc) 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 frombilateral power supply contracts.

For purposes of this Section the grid basis shall consist of three 3) separate grids namelyLuzon Visayas and Mindanao. The ERC shall have the authority to modify or amend thisdefinition of a grid when two or more of the three separate grids become sufficientlyinterconnected 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 tothe high voltage transmission system. Except as otherwise provided for in this Section anyrestriction on ownership and/ or control between or within sectors of the electricity industrymay be imposed by ERC only insofar as the enforcement of the provisions of this Section isconcerned.

The ERC shall within one 1) year from the effectivity of this Act., promulgate rules andregulations to ensure and promote competition encourage market development and customerchoice and discourage/penalize abuse of market power cartelization and any anti-competitiveor discriminatory behavior in order to further the intent of this Act and protect the publicinterest. Such rules and regulations shall define the following:

a) the relevant markets for purposes of establishing abuse or misuse of monopoly or marketposition;

b) areas of isolated grids; and

c) the periodic reportorial requirements of electric power industry participants as may benecessary to enforce the provisions of this Section.

The ERC shall motu proprio monitor and penalize any market power abuse or anticompetitive 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 shallstop and redress the same. Such remedies shall without limitation include the imposition ofprice controls issuance of injunctions requirement of divestment or disgorgement of excessprofits 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 andregulations providing for a complaint procedure that without limitation provides the accusedparty with notice and an opportunity to be heard.


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G.R. Nos. 210245 and 210255age 38of7

SEC. 46. Fines and Penalties. - The fines and penalties that shall be imposed by the ERC forany violation of or non-compliance with this Act or the IRR shall range from a minimum of fiftythousand 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 hereofshall suffer the penalty of prision mayor and fine ranging from Ten thousand pesosPl0,000.00) 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 inthe generation companies, the distribution utilities, the TRANSCO or its concessionaire orsupplier who violate the provisions of this Act may be fined by an amount not exceeding doublethe 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 Boardwho knowingly or by neglect allows the commission or omission under the law.

f the offender is a government official or employee, he shall, in addition, be dismissed from thegovernment service with prejudice to reinstatement and with perpetual or temporarydisqualification from holding any elective or appointive office.

f the offender is an alien, he may, in addition to the penalties prescribed, be deported withoutfurther proceedings after service of sentence.

Any case which involves question of fact shall be appealable to the Court of Appeals and thosewhich 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 thefiling of a criminal action, if warranted.

To ensure compliance with this Act the penalty of prision correccional or a fine ranging fromFive thousand pesos PS,000.00) to Five million pesos PS,000,000.00), or both, at thediscretion of the court, shall be imposed on any person, including but not limited to thepresident, member of the Board, Chief Executive Officer or Chief Operating Officer of thecorporation, partnership, or any other entity involved found guilty of violating or refusing tocomply 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 ERCconditionally or otherwise, for a consented decree, voluntary compliance or desistance andother settlement of the case. The offer and any or all of the ultimate facts upon which the offeris based shall be considered for settlement purposes only and shall not be used as evidenceagainst any party for any other purpose and shall not constitute an admission by the partymaking the offer of any violation of the laws, rules, regulations, orders and resolutions of theERC nor as a waiver to file any warranted criminal actions.


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G.R. Nos. 210245 and 210255age 39of7

To illustrate, the EPIRA law has provided under Section 25that:

Retail Rate The retail rates charged bydistribution utilities for the supply of electricity in theircaptive m rket sh ll be subject to regulation by the ERCb sed on the principle of full recovery of prudent ndreasonable economic costs incurred or such otherprinciples th t will promote efficiency s m y bedetermined by the ERC.

While Section 25 prescribes the standard by which the DUs'retail rates or the different components thereof shall be regulated byERC, i.e. full recovery of prudent and reasonable economic costs,it does not specify the manner or procedure by which such recoveryshall be effected.

Section 24 may have contemplated or required filing and priorapproval by ERC as the appropriate manner, but the samespecifically applies only to the DUs' distribution wheelingcharges.31

Insofar as the pass through of the DUs' energy costs, theEPIRA requires only that for electricity supply coming from NPC, therate shall not exceed the transition supply contract rates, as

In addition, Congress may, upon recommendation of the DOE and/or ERC, revoke suchfranchise 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 ERCfor the use of a distribution system and/ or the availment of related services;


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G.R. Nos. 210245 and 210255Page 40 of 71updated monthly 32 and that for those coming from othergeneration companies, the DUs' bilateral power supply contractswith 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 theeffectivity of this Act, NPC shall file with the ERC for its approval a transition supply contractduly negotiated with the distribution utilities containing the terms and conditions of supplyand a corresponding schedule of rates, consistent with the provisions h ~ r e o f includingadjustments and/ or indexation formulas which shall apply to the term of s u ~ contracts. Theterm of the transition supply contracts shall not extend beyond one 1) :year from theintroduction of open access. Such contracts shall be based on the projected demand of suchutilities less any of their currently committed quantities under eligible IPP contracts as definedin Section 33 hereof: Provided, That the total generation capacity of such si$ned transitionsupply contracts shall not exceed the level of NPC owned, controlled or committed capacity asof the effectivity of this Act. Such transition supply contracts shall be assignable to the NPCsuccessor generating companies.

Within six 6) months from the date of submission of the transition supply contract by NPC, theERC 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, theERC shall update monthly, the rates using the appropriate adjustment and/or indexationformula.

Notwithstanding the provisions of Section 25 hereof, the rates charged by a distribution utilityfor the generation component of the supply of electricity in their distribution retail supply rateshall, for the term of the transition supply contracts, not exceed the transition supply contractrates, as updated monthly. The recovery of costs incurred by a distribution utility for anygeneration component in excess of the transition supply contract rates shall be disallowed bythe ERC, except for eligible contracts as defined under Section 33 hereof: Provided, That suchlimitation on the recovery of generation comp onent costs by a distribution utility shall applyonly to the equivalent quality and quantity of electricity still available to the distribution utilityfrom NPC.

33 Sec. 45 (b): Distribution utilities may enter into bilateral power supply contracts subject toreview by the ERC: Provided, That such review shall only be required for distribution utilitieswhose markets have not reached household demand level. For the purpose of preventingmarket power abuse between associated firms engaged in generation and distribution, nodistribution utility shall be allowed to source from bilateral power supply contracts more thanfifty percent (50%) of its total demand from an associated firm engaged in generation but suchlimitation, 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 togetherwith any other person, directly or indirectly, through one or more intermediaries, controls, iscontrolled by, or is under common control with, such entity;


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G.R. Nos. 210245 and 210255age 4 of7

energy procured from WESM, the prices are determined based onthe price determination methodology as incorporated in the WESMRules, which was subject to ERC approval. 4

Guided by the foregoing EPIRA provisions, on 25 March 2004,the ERC promulgated the Guidelines for th Recovery of Costs for thGeneration Component of th Distribution Utilities Rates, a copy ofwhich is hereto attached as nnex 1 .

The Guidelines (Annex l ) operationalize Section 67 of EPIRAregarding the execution by NPC of transition supply contracts(hereinafter, TSCs) with DUs, the recovery by the DUs of theirgeneration costs under these TSCs equivalent to the ERC-approvedTSC rates of NPC and the limitation imposed on the DUsrecoverable generation costs for the energy under bilateral powersupply contracts when NPC still has excess power to sell to theDUs.

The Guidelines (Annex 1 ) also incorporate the reviewrequirement under Section 45[b] of EPIRA for the bilateral supplycontracts entered into by the DUs for the supply to the captivemarket prior to the inclusion of the costs associated with suchcontracts in the calculation of the DUs generation charges and theuse by the DUs of the cost adjustment mechanism then in force toensure full recovery of prudent and reasonable economic costs asguaranteed by Section 25 of EPIRA.

At that time, the cost adjustment mechanisms in place werethe Generation Rate Adjustment Mechanism and IncrementalCurrency Exchange Rate Adjustment Mechanism (GRAM and

34 Chapter 3, WESM Rules; Decision ERC Case No. 2006-007RC, 20 June 2006


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G.R. Nos. 210245 and 210255age 42of7ICERA). As alleged in the NASECORE Petition, the Honorable Courthas had the opportunity to pass upon the validity of the GRAM andICERA in G. R. No. 163935, entitled NASECORE vs. ERC andMERALCO.

In its Decision dated February 2, 2006 in G. R. No. 163935,the Honorable Court recognized the ERC s authority to adopt amethodology similar to GRAM for the DUs recovery of theirpurchased power costs as long as the requirements of pertinentlaws and of Section 4 e), Rule 3 of the IRR of the EPIRA, which itruled is applicable to both general rate proceedings and costadjustment mechanisms, are observed-

Section 4 e), Rule 3 of the IRR of the EPIRA could not beany clearer with respect to its coverage as it refers to anyapplication or petition for rate adjustment or for any reliefaffecting the consumers.

The ERC is not, of course, precluded from promulgatingrules, guidelines or methodology, such as the GRAM, forthe recovery by the distribution utilities of their fuel andpurchased power costs. However, these rules, guidelinesor methodology so adopted should conform to therequirements 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 theAutomatic Adjustment of Generation Rate and System Loss Rates byDistribution Utilities (hereinafter, AGRA Guidelines). Someamendments were subsequently issued to further refine the costadjustment mechanism prescribed therein, which was intended tosupersede GRAM and ICERA as cost adjustment mechanisms


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'applicable to the DUs. The AGRA Guidelines and its 8jmendmentsare hereto attached as nnex 2 .

'The AGRA prescribes, among others, a straightfprward andtransparent methodology to calculate the DUs monthl)f generation

Icharge. t is premised on the immutable fact t ~ t the DUsigeneration costs vary monthly depending on the actual quantitiesIthey procure from their various generation sources, including'

WESM, which started commercial operations in June 2006.

The allowable generation costs, which the DUs rhay recoverunder their approved TSCs and bilateral power supply contracts,

Iare also affected by the fluctuating costs of fuel, indexation andadjustment formulas embedded in the supply contractsJ the level of

I

utilization by the DU s of their contracted generation caJacities, andseveral other factors and contractual stipulations. For 1WESM, the

Iprices therein, being market-driven, vary not just monthly, butI

hourly, hence the DUs generation cost associated with their WESMpurchases also vary depending, among others, on thJ volume ofenergy they procured from the market and the timing thbreof.

IGiven that there are about 140 DU s whose retail rates requireIIupward or downward adjustments as often as monthly to effect the1

recovery of actual generation and other pass-through costs, theERC resorted to the AGRA, a mechanism similar to the PurchasedPower Adjustment (PPA) Mechanism, which was put in place by theERC s predecessor, the Energy Regulatory Board.

Under the AGRA mechanism, the DUs calculate thdir allowableIIgeneration rate (AGR) for the current billing month usipg previousImonth s data on their actual allowable generation costs from all


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G.R. Nos. 210245 and 210255Page 44 of 71their generation sources (GC i ...n and their total kWh purchasedand generated (in case of own generation).

These data are to be duly supported by the DUs' monthlyreportorial submissions as required under the AGRA Guidelines,among them, the invoices from power suppliers, sample bills toend-users, and official receipts of payment of power supplier1nvo1ces.

These allowable generation costs assume that they are basedon the ERC approved NP rate for NPC supply, ERC approvedbilateral power supply contract for supply from generationcompanies under bilateral supply contract, and the applicableWESM market prices for energy procured from WESM.

The table below illustrates how the AGRA formula is applied -

Particulars Previous Month sData (December)GC1 n (Net o TOU, SPL CUST, S4R)PP (90:: :) p 22,033,845

WESM (10%) p 3A75,994Total (100%) 25,509,839

Total kWh Purchased Generated (TPG couRPP - PhP4.2345/kWh 5,203,411

WESM - PhP6.0122/ kWh 578,157Blended Rate PhP4.41227/kWh 5,781,568

50% Net PPD p -PCR (Pilferage Cost Recoverv) 0Other Generat ion Adjustment (OGA) 0

GCr n - ( 50% Net PPD + PCRAGR= Total kWh Purchased Generated 4.41227

Gen. Rate for January billing= PhP4.41227/kWh

Cognizant of the Honorable Court's Decision dated 02February 2006 in G. R. No. 163935 and its far-reaching effects not


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G.R. Nos. 210245 and 210255age 45of7

just on MERALCO but on all the DUs, the Secretary of theDepartment of Energy approved the amendment of Section 4[e],Rule 3 of the EPIRA IRR by taking out of its purview the costadjustment mechanisms put in place to allow timely recovery of theDUs' pass-through costs. The Joint Congressional Power Committee(hereinafter, JCPC)35 subsequently approved the amendment, whichreads -

35 SEC. 62. Joint Congressional Power Commission. - Upon the effectivity of this Act, acongressional commission, hereinafter referred to as the Power Commission , is herebyconstituted. The Power Commission shall be composed of fourteen 14) members with thechairmen of the Committee on Energy of the Senate and the House of Representatives and six6) 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 ratarepresentation 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 implementationof this Act;

b) Endorse the initial privatization plan within one 1) month from submission of such plan tothe Power Commission by PSALM Corp. for approval by the President of the Philippines;

c) To ensure transparency, require the submission of reports from government agenciesconcerned on the conduct of public bidding procedures regarding privatization of NPCgeneration and transmission assets;

d) Review and evaluate the performance of the industry participants in relation to theobjectives and timelines set forth in this Act;

e) Approve the budget for the programs of the Power Commission and all disbursementstherefrom, 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 orexecutive measures; and

h) Perform such other duties and functions as may be necessary to attain its objectives.


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G R Nos 21 245 and 21 255Page 46 of 71

This Section 4(e) shall not apply to Generation RateAdjustment Mechanism (GRAM), Incremental CurrencyExchange Recovery Adjustment ( CERA}, Transmission RateAdjustment Mechanism, Transmission True-up Mechanism,System Loss Rate Adjustment Mechanism, Lifeline RateRecovery Mechanism, Cross Subsidy Mechanism, LocalFranchise Tax Recovery Mechanism, Business Tax RecoveryMechanism, Automatic Generation Rate AdjustmentMechanism, VAT Recovery Mechanism, IncrementalGeneration Cost Adjustment Mechanism, and Recovery ofDeferred Accounting Adjustment for Fuel Cost and PowerProducers 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 powerindustry participants to submit reports and all pertinent data and information relating to theperformance of their respective functions in the industry. Any person who willfully anddeliberately refuses without just cause to extend the support and assistance required by thePower Commission to effectively attain its objectives shall, upon conviction, be punished byimprisonment of not less than one 1) year but not more than six 6) years or a fine of not lessthan Fifty thousand pesos PS0,000.00) but not more than Five hundred thousand pesosPS00,000.00) or both at the discretion of the court.

The Power Commission shall adopt its internal rules of procedures; conduct hearings andreceive testimonies, reports and technical advice; invite or summon by subpoena adtestificandum any public official, private citizen or any other person to testify before it, orrequire 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 necessaryto attain the purposes for which it is created. The Power Commission shall be assisted by asecretariat to be composed of personnel who may be seconded from the Senate and the Houseof Representatives and may retain consultants. The secretariat shall be headed by an executivedirector who has sufficient background and competence on the policies and issues relating toelectricity industry reforms as provided in this Act. To carry out its powers and functions, theinitial sum of twenty- five million pesos P25,000,000.00) shall be charged against the currentappropriations of the Senate. Thereafter, such amount necessary for its continued operationshall 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 andmay be extended by a joint concurrent resolution.


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G.R. Nos. 210245 and 210255Page 47 of 71

adjustments shall be subject t subsequent verification bythe ERC to avoid over under recovery of charges.

On 13 July 2009, the ERC adopted the Rules Governing theAutomatic Cost Adjustment and True-Up Mechanisms andCorresponding Confirmation Process for Distribution Utilities, a copyis attached hereto as nnex 3 . The said Rules were intended toconsolidate all cost adjustment mechanisms adopted by the ERCunder previous issuances and provide for a uniform and systematicconfirmation process for all the DUs pass-through charges todetermine any over- or under-recoveries in their implementation.

All the foregoing actions taken by the regulator acting for theState is a testament of how it has developed a methodology that willguarantee that what is passed on the consumer passes the test ofprudence and reasonableness because these are tools employed bythe State in the promotion of the common good.

Next, petitioners assert that these provisions are anti-poor andcondemn the people to poverty in contravention of Section 9, Article2 of the Constitution because, as a result of the deregulation, thegeneration companies have an unfettered ability to raise their pricesat whim.

t bodes well to recollect that generation, although notconsidered a public utility, is still imbued with public interest underthe law, which goes to show that it has not been acquitted from theregulatory ambit of the State through the ERC. As earlier pointedout, the evaluation of the generation component goes through therigorous process of being approved initially on the generation costas culled and evaluated from the data provided in the power supplyagreements (PSA) submitted to the ERC for its approval. Thereafter,


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G.R. Nos. 210245 and 210255Page 48of7the DUs passing on of these generation charges which are revenueneutral as they are not at all allowed to earn from these issubmitted for confirmation process wh

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