The High Court's instruction in its December 2006 decision over the rate increase of the Manila Electric Co. (Meralco) was clear: the power industry's regulator, the Energy Regulatory Commission (ERC), was to request the Commission on Audit (COA) to examine Meralco's financial books and verify the basis of the 2003 ERC-approved P0.22 per kilowatt hour rate increase.

Sixteen months later, COA has not yet commenced its audit of Meralco.

In January 2007, COA received from the ERC the Supreme Court order. In its order, the SC wrote: "The Energy Regulatory Commission is, thus, directed to request the COA to undertake a complete audit on the books, records and accounts of Meralco relative to its provisionally-approved rate increases and unbundled rates."

By January 2008, or one year after ERC's provisional rate increase renewal, COA should have finished its audit of Meralco's books and should have furnished a report that will confirm or not that the 2003 rate increase was merited.

In a response to abs-cbnNEWS.com/Newsbreak's inquiry on the status of their audit of Meralco, COA's assistant commissioner Arcadio B. Cuenco, Jr. wrote that "This request [by ERC to audit Meralco] was not given due course by the Commission considering that such rate was subsequently adjusted/affected by various ERC decisions issued before the subject request for audit was received."

Cuenco added that "ERC did not request for rate audit of Meralco covering subsequent and recent rate adjustments."

The COA further wrote to abs-cbnNEWS.com/Newsbreak that since EPIRA was enacted in 2001, "the ERC was no longer requesting for the conduct of a rate audit except in this case which was prompted by an instruction from the Supreme Court."

Passive

But even as events have overtaken the rate setting mechanism employed by the ERC in 2003, which was the basis of SC's Order, COA has still to seek clarification from the SC or ERC on how to proceed.

Instead, COA said it will just passively wait for further instructions. In COA's written reply to abs-cbnNEWS.com/Newsbreak, it said that "The audit of Meralco shall be conducted once the ERC includes in its request the audit of subsequent and recent rate adjustments."

COA's decision not to proceed with the audit of Meralco has apparently something to do with a newly implemented mechanism for rate fixing, a follow-up phone interview with COA's management services director, Susan Garcia, showed.

Before the Electric Power Industry Reform Act (EPIRA), which was the law enacted in 2001 as the blueprint for the power industry reforms, rate increases for power distributors like Meralco were based on a computation called return on rate base (RORB).

It is the ratio of net operating income earned by a utility calculated as a percentage of its rate base. Simply put, it is the earnings Meralco should be making out of its investments. Meralco's RORB should at least be eight percent for it to be financially viable.

But under the EPIRA, ERC may adopt alternative forms of internationally-accepted rate setting methodology. In 2007, ERC started implementing a performance-based rating (PBR).

Rate-setting mechanism

Worldwide, regulators have started to use PBR instead of RORB as a rate setting mechanism. It is emerging as a more progressive method, especially when the different components of the electricity charges—generation, transmission, distribution—are unbundled.

PBR is simpler and more effective in promoting efficiency among utility companies. It has a price cap formula wherein the annual growth rate of electricity distribution charges takes into consideration factors like inflation and adjustments for quality of service. It also takes into account costs outside the control of the distribution company such as customer growth and disaster recovery.

In January 2008, Meralco applied for a rate increase under the PBR mechanism for the first time. It proposed marginal increases in the three tariff components to P0.77/kWh, for the distribution charge; P0.24/kWh for the supply charge; and P0.15/kWh for metering charge.

Public interest

The COA is mandated to conduct a regular audit of the financial records of the national government agencies and government-owned and controlled corporations. Its reports show the financial health of these entities.

From time to time, it audits private or semi-private companies, like Meralco, a power distributor, because their business affects public interest. Meralco also holds an exclusive franchise to distribute electricity in Metro Manila and nearby provinces.

Thus, energy utility companies are regulated by a government entity, the ERC, which, among others, approves, disapproves, or limits Meralco's requests for rate increases. In turn, these rate increases dictate how much Meralco would earn.

The precursor of ERC, the Energy Regulatory Board (ERB), was allowed by its mandate to approve rate increases for Meralco even before COA audited Meralco's books. The main requirement of ERB was that Meralco could prove that the rate hike was urgent.

In 1994, 2000 and 2003, Meralco's rate increase applications with the ERC were approved provisionally because of what Meralco said were urgent reasons. These reasons include potential default with creditors when its earnings from assets went below the creditors' required rate of 12 percent.

If there was no rate increase and the creditors declared the company in default, it would have affected Meralco's financial viability and its ability to continue distributing electricity to four million customers, majority of whom are based in Metro Manila.

Significant decision

The 2006 SC decision was significant since it came at a time when the ERB's 1994 decision to increase Meralco's rates by P0.184 per kilowatt hour was considered excessive, resulting in a P28 billion refund to customers.

It was the COA's 1997 audit report on that 1994 provisional rate increase that was used as basis for the refund. In its report, COA questioned an ERB-approved practice of passing on taxes to consumers and an accounting method of booking asset values.

Thus, when the ERC, which replaced ERB, approved a provisional rate increase again in June 2003, concerned groups, such as the Lawyers Against Monopoly and Poverty and the Alliance of Consumers Against Monopoly, and party-list groups Bayan Muna, Alyansang Makabayan, Kilusang Mayo Uno, Gabriela, and Kalipunan ng Damayang Mahihirap, brought ERC to court.

Aside from procedural issues, such as Meralco should have published the rate increase in broadsheets, the main contention of these groups was that ERC should have asked the COA to audit Meralco's books first, before it approved the P0.22 per kilowatt hour additional charges in 2003. The respondents said the COA audit should have been a prerequisite and its audit report an attachment to the rate unbundling application of Meralco.

ERC's powers

The ERC contested this and said that as a quasi-judicial body, it has the powers to determine whether an entity that it oversees deserves a rate increase, especially when the timing of their decision has an impact on the ability of that entity to deliver its service. ERC also stressed that the rate increase was only provisional. It said it conducted at least 25 hearings on the rate increase.

The Court of Appeals favored the consumer, lawyers, and party-list groups in their decision, but the SC overturned it and favored ERC instead. It was a unanimous decision by 15 justices of the SC.

The only compromise in the SC decision was that COA should then proceed to audit Meralco's books.– with research by Fatimah Imam (abs-cbnNEWS.com/Newsbreak)