Nasecore Vs. Erc. Meralco

PHILIPPINE JURISPRUDENCE – FULL TEXT The Lawphil Project - Arellano Law Foundation G.R. No. 163935 February 6, 2006 NATIONAL ASSOCIATION OF ELECTRICITY CONSUMERS FOR REFORMS (NASECORE), ET AL. VS. ENERGY REGULATORY COMMISSION, ET AL. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 163935

February 2, 2006

NATIONAL ASSOCIATION OF ELECTRICITY CONSUMERS FOR REFORMS (NASECORE), represented by PETRONILO ILAGAN, FEDERATION OF VILLAGE ASSOCIATIONS (FOVA), represented by SIEGFRIEDO VELOSO, and FEDERATION OF LAS PIÑAS HOMEOWNERS ASSOCIATIONS (FOLPHA), represented by BONIFACIO DAZO, Petitioners, vs. ENERGY REGULATORY COMMISSION (ERC) and MANILA ELECTRIC and COMPANY (MERALCO) Respondents. DECISION CALLEJO, SR., J.: Before the Court is the petition for certiorari, prohibition and injunction filed by National Association of Electricity Consumers for Reforms (NASECORE), Federation of Village Associations (FOVA) and Federation of Las Piñas Homeowners Associations (FOLPHA),1 seeking to nullify the Order dated June 2, 2004 of the Energy Regulation Commission (ERC) in ERC Case No. 2004-112. The assailed order approved the increase of respondent Manila Electric Company’s (MERALCO’s) generation charge from P3.1886 per kilowatthour (kWh) to P3.3213 per kWh effective immediately. Factual and Procedural Antecedents Congress enacted Republic Act (RA) No. 9136, known as the Electric Power Industry Reform Act of 2001 (EPIRA) on June 8, 2001. Among others, EPIRA declares as policy of the State the following: … (b) To ensure the quality, reliability, security and affordability of the supply of electric power; (c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market; (d) To enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors; (e) To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry; …

(j) To establish a strong and purely independent regulatory body and system to ensure consumer protection and enhance the competitive operation of the electricity market; …2 The ERC was created under the EPIRA.3 The said regulatory body superseded the Energy Regulatory Board (ERB) which was created under Executive Order (EO) No. 172, as amended.4 The ERC is tasked to promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the restructured electricity industry.5 Towards this end, the ERC is granted, inter alia, the following functions: (a) Enforce the implementing rules and regulations of this Act; (b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a National Grid Code and a Distribution Code which shall include, but not limited to, the following: … (c) Enforce the rules and regulations governing the operations of the electricity spot market and the activities of the spot market operator and other participants in the spot market, for the purpose of ensuring a greater supply and rational pricing of electricity; (d) Determine the level of cross subsidies in the existing retail rate until the same is removed pursuant to Section 74 hereof; (e) Amend or revoke, after due notice and hearing, the authority to operate of any person or entity which fails to comply with the provisions hereof, the IRR or any order or resolution of the ERC. In the event that a divestment is required, the ERC shall allow the affected party sufficient time to remedy the infraction or for an orderly disposal, but in no case exceed twelve (12) months from the issuance of the order; (f) In the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility, taking into account all relevant considerations, including the efficiency or inefficiency of the regulated entities. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably. The ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity. The rates prescribed shall be non-discriminatory. To achieve this objective and to ensure the complete removal of cross subsidies, the cap on the recoverable rate of system losses prescribed in Section 10 of Republic Act No. 7832, is hereby amended and shall be replaced by caps which shall be determined by the ERC based on load density, sales mix, cost of service, delivery voltage and other technical considerations it may promulgate. The ERC shall determine such form of rate-setting methodology, which shall promote efficiency. In case the ratesetting methodology used is RORB, it shall be subject to the following guidelines: … (u) The ERC shall have the original and exclusive jurisdiction over all cases contesting rates, fees, fines and penalties imposed by the ERC in the exercise of the abovementioned powers, functions and responsibilities and over all cases involving disputes between and among participants or players in the energy sector. All notices of hearings to be conducted by the ERC for the purpose of fixing rates or fees shall be published at least twice for two successive weeks in two (2) newspapers of nationwide circulation.6

Section 36 of the EPIRA required every distribution utility to file its revised rates for the approval of the ERC. The said provision reads: Sec. 36. Unbundling of Rates and Functions. – Within six (6) months from the effectivity of this Act, NPC [National Power Corporation] shall file with the ERC its revised rates. The rates of NPC shall be unbundled between transmission and generation rates and the rates shall reflect the respective costs of providing each service. Inter-grid and intra-grid cross subsidies for both the transmission and the generation rates shall be removed in accordance with this Act. Within six (6) months from the effectivity of this Act, each distribution utility shall file its revised rates for the approval by the ERC. The distribution wheeling charge shall be unbundled from the retail rate and the rates shall reflect the respective costs of providing each service. For both the distribution retail wheeling and supplier’s charges, inter-class subsidies shall be removed in accordance with this Act. Within six (6) months from the date of submission of revised rates by NPC and each distribution utility, the ERC shall notify the entities of their approval. Any electric power industry participant shall functionally and structurally unbundle its business activities and rates in accordance with the sectors as identified in Section 5 hereof. The ERC shall ensure full compliance with this provision. On October 30, 2001, pursuant to the above provision, the ERC issued an Order requiring all distribution utilities to file their application for unbundled rates. In compliance therewith, respondent MERALCO filed on December 26, 2001 its application with the ERC for the approval of its unbundled rates and appraisal of its properties. The case was docketed as ERC Case No. 2001-9007 and consolidated with ERC Case No. 2001-646.8 Acting thereon, the ERC issued an Order and a Notice of Public Hearing both dated February 1, 2002 setting the case for initial hearing on March 11 and 12, 2002. In the same order, MERALCO was directed to cause the publication of the notice of public hearing at its own expense twice for two successive weeks in two newspapers of nationwide circulation, the last date of publication to be made not later than two weeks before the scheduled date of initial hearing. The Office of the Solicitor General (OSG), the Commission on Audit and the Committees on Energy of both Houses of Congress were furnished with copies of the order and the notice of public hearing and were requested to have their respective duly authorized representatives present at the said hearing. Likewise, the Offices of the Municipal/City Mayors within MERALCO’s franchise area were furnished with copies of the order and the notice of public hearing for the appropriate posting thereof on their respective bulletin boards. At the initial hearing, representatives of MERALCO were present. Also at the said hearing were a representative from the OSG for the public and oppositors to the application including Mr. Pete Ilagan, representing herein petitioner NASECORE. After a series of hearings, the ERC rendered the Decision dated March 20, 2003, approving MERALCO’s unbundled schedule of rates effective on the next billing cycle. However, in the same decision, the ERC directed MERALCO, among others: a) To discontinue charging the PPA [Purchased Power Adjustment] upon effectivity of the approved unbundled rates; any change in the cost of power purchased shall be reflected as deferred charges or credits which shall be recovered through the Generation Rate Adjustment Mechanism (GRAM) approved by the Commission for implementation per ERC Order effective February 24, 2003;9 In other words, MERALCO was directed to recover the costs of power purchased from the

National Power Corporation (NAPOCOR) through a new adjustment mechanism called the Generation Rate Adjustment Mechanism (GRAM). Prior thereto, the said costs were recovered through the Purchased Power Adjustment (PPA) mechanism. It appears that in another proceeding, ERC Case No. 2003-44,10 the ERC issued an Order dated January 29, 2003 setting for public consultation on February 17, 2003 its proposed Implementing Rules for the Recovery of Deferred Fuel and Independent Power Producers Costs (DÉCOR) and Deferred Incremental Currency Exchange Recovery (DICER). The proposed DÉCOR and DICER were formulated by the ERC to replace the PPA and the Currency Exchange Rate Adjustment (CERA), the automatic adjustment mechanisms then in effect, on its view that they (PPA and CERA) did not meet the goal of balancing the need for timely recoveries of costs by the utilities with the ERC’s need to review the reasonableness and prudence of such costs. A notice of the public consultation on the proposed implementing rules for the recovery of DÉCOR and DICER was caused to be published by the ERC in the Philippine Star on February 3, 2003. In the said notice and order, the ERC directed the parties to submit their comments on the proposed implementing rules on or before February 12, 2003. Several distribution utilities and consumer groups, including petitioner NASECORE, filed their respective comments on the said proposed implementing rules for the recovery of DÉCOR and DICER. Most of the utilities manifested their strong objections to the adoption of the DÉCOR and DICER contending that these mechanisms would defeat the purpose of escalator clauses such as the PPA and CERA. For their part, the consumer groups expressed that the ERC should have taken into consideration consumer protection in the drafting of the proposed implementing rules. At the public consultation on February 17, 2003, the distribution utilities and consumer groups appeared with their respective representatives. The consumer groups requested for a separate consultation exclusively for them and the same was granted by the ERC. Another public consultation was set on February 21, 2003 for the consumer groups. At the said consultation, representatives of NASECORE and other consumer groups were present. The ERC explained to these groups the DÉCOR and DICER. On the other hand, MERALCO explained the PPA and the computation thereof. The consumer groups manifested their concerns and these were noted by the ERC. After taking into consideration the positions of the distribution utilities and the consumer groups, the ERC promulgated the Order dated February 24, 2003 in ERC Case No. 2003-44. In the said order, the ERC adopted the Implementing Rules for the Recovery of Fuel and Independent Power Producer Costs: Generation Rate Adjustment Mechanism (GRAM) and the Implementing Rules for the Recovery of the Incremental Currency Exchange Rate Adjustment (ICERA). These implementing rules were all contained or incorporated in the aforesaid order. The GRAM replaced the PPA and the basic differences between these two recovery mechanisms were outlined by the ERC thus:11 ELEMENTS PPA GRAM 1. Review by the regulatory body

1. After the cost had been passed on to the consumers. 1. Before the cost may be passed on to the consumers. 2. Change in rates 2. Monthly 2. Quarterly 3. Change in recovery of fixed costs of generation 3. Automatic but subject to confirmation by the ERC. 3. Only through a petition to adjust generation rate subject to approval by the ERC within a maximum period of forty five (45) days. 4. Transmission 4. Included 4. Excluded 5. System loss and

franchise tax 5. Included 5. Excluded 6. Carrying cost 6. Without carrying cost 6. With carrying cost On the other hand, the ICERA replaced the CERA and the basic differences between these two recovery mechanisms were outlined by the ERC thus:12 ELEMENTS CERA ICERA 1. Review by the regulatory body 1. After the cost had been passed on to the consumers. 1. Before the cost may be passed on to the consumers. 2. Change in rates 2. Monthly 2. Quarterly 3. Carrying cost 3. Without carrying cost

3. With carrying cost The respective effectivity clauses of the implementing rules of the GRAM and the ICERA provided that they shall take effect immediately.13 Thereafter, in consonance with the Decision dated March 20, 2003 in ERC Cases Nos. 2001-646 and 2001-900 and the Order dated February 24, 2003 in ERC Case No. 2003-44, respondent MERALCO filed with the ERC an amended application entitled "In the Matter of the Application for the Recovery of the Independent Power Producer Costs under the Generation Rate Adjustment Mechanism (GRAM)," docketed as ERC Case No. 2004-112. Earlier, acting on respondent MERALCO’s 1st application under the GRAM, the ERC, in the Order dated January 21, 2004 in ERC Case No. 2004-20, approved the generation charge of P3.1886 per kWh, inclusive of the deferred PPA. In the amended application, respondent MERALCO averred that it had recalculated its proposed generation charge aimed at updating the generation charge of P3.1886 per kWh allowed in the January 21, 2004 Order to P3.4664 per kWh inclusive of the following: a. Computed Deferred Accounting Adjustment (DAA) of P0.0028 per kWh inclusive of the remaining balance in the DAA under the first GRAM; b. Deferred PPA of P0.1248 per kWh, increasing by P0.0022 from the P0.1226 previously authorized under ERC Case 2004-20. The increase is to account for the remaining 2 months (December 2003 and January 2004) IPP VAT savings passed on as part of the Mandated Rate Reduction (MRR).14 Among others, respondent MERALCO averred that the proposed generation charge of P3.4664 per kWh was computed in conformity with the generation rate formula in Section 615 of the Implementing Rules for the Recovery of Fuel and Independent Power Producer Costs or the Generation Rate Adjustment Mechanism (GRAM), hereinafter referred to as the GRAM Implementing Rules. It thus prayed that the said proposed generation charge be approved for its implementation. In the assailed Order dated June 2, 2004, the ERC approved the increase of respondent MERALCO’s generation charge albeit only from P3.1886 to P3.3213 per kWh, the same to take effect immediately. The Petitioners’ Case Petitioners NASECORE, et al. forthwith filed with this Court the present petition for certiorari seeking to nullify the said June 2, 2004 ERC Order for lack of requisite publication of respondent MERALCO’s amended application, thereby depriving the petitioners of procedural due process. In addition, they invoke Section 4(e), Rule 3 of the Implementing Rules and Regulations (IRR) of the EPIRA which provides: (e) Any application or petition for rate adjustment or for any relief affecting the consumers must be verified, and accompanied with an acknowledgement of receipt of a copy thereof by the LGU Legislative Body of the locality where the applicant or petitioner principally operates together with the certification of the notice of publication thereof in a newspaper of general circulation in the same locality. The ERC may grant provisionally or deny the relief prayed for not later than seventy-five (75) calendar days from the filing of the application or petition, based on the same and the supporting documents attached thereto and such comments or pleadings the consumers or the LGU

concerned may have filed within thirty (30) calendar days from receipt of a copy of the application or petition or from the publication thereof as the case may be. Thereafter, the ERC shall conduct a formal hearing on the application or petition, giving proper notices to all parties concerned, with at least one public hearing in the affected locality, and shall decide the matter on the merits not later than twelve (12) months from the issuance of the aforementioned provisional order. This Section 4(e) shall not apply to those applications or petitions already filed as of 26 December 2001 in compliance with Section 36 of the Act. According to the petitioners, the June 2, 2004 ERC Order is devoid of any basis as respondent MERALCO did not comply with the requisite publication, i.e., its amended application was not published in a newspaper of general circulation. As a result of the omission, petitioners were not able to file their comments on respondent MERALCO’s amended application for the increase of its generation charge. Invoking the Court’s pronouncements in Freedom from Debt Coalition v. ERC and MERALCO,16 petitioners conclude that failure to comply with the publication requirement renders the June 2, 2004 ERC Order null and void. Respondent MERALCO’s Counter-arguments Respondent MERALCO, for its part, urges the Court to uphold the validity of the assailed ERC Order approving the increase of its generation charge. In essence, it contends that its amended application for the increase of its generation charge is excluded and/or exempted from the application of the publication requirement, among others, in Sec. 4(e), Rule 3 of the IRR of the EPIRA. The applicable rules are the GRAM Implementing Rules embodied in the ERC Order dated February 24, 2003. These rules govern any petition for the recovery of fuel and purchased power costs. In support of this contention, respondent MERALCO explains the nature and history of the PPA, later replaced by the GRAM, in this wise: In 1974, respondent MERALCO owned and operated all the power plants it was using. At the time, it charged the basic power rates based on the cost of fuel and exchange rate at the time of the application for approval of the adjusted rates. Some time in 1975, it sold to NAPOCOR its five base load generating power plants.17 As a result of the sale, respondent MERALCO entered into an agreement with NAPOCOR for the latter to supply all the electric power needed by the former to service its customers within its franchise areas. Under the agreement, the electric power and energy purchased by respondent MERALCO from NAPOCOR would be priced at thermal generating cost, subject to fuel cost adjustment by NAPOCOR. The fuel cost adjustment allows the latter to recover the increases in fuel oil over and above a base price. In 1978, respondent MERALCO applied with the Board of Power and Waterworks (BPW) for the approval of Purchased Power Cost Adjustment to cover the increase in the cost of electric power and energy being purchased from NAPOCOR. It (respondent MERALCO) also applied for the approval of a fuel adjustment clause for the three peakload plants over which it retained ownership. In 1980, the Board of Energy (BOE), which took over the functions of the BPW, authorized the PPA clause stating that it was "strictly for the purpose of cost recovery only." In other words, every increase in the cost of fuel oil to NAPOCOR above a base price is reflected in its fuel cost adjustment. NAPOCOR thus increases correspondingly the price of the power sold to respondent MERALCO, which then passes the same to the customers under the authority of the PPA clause. In 1987, under EO No. 172, the Energy Regulatory Board (ERB) was created. It was granted regulatory and adjudicatory powers and functions covering the energy sector. Also enacted was

EO No. 215 opening the business of electric power generation to the private sector and allowed private corporations, cooperatives and similar associations, or the independent power producers (IPPs), to operate electric generating plants within the country. In addition to its various powers and functions, the ERB was mandated to enforce the pertinent provisions of RA No. 7832, otherwise known as the "Anti-Electricity and Electric Transmission Lines/Materials Pilferage Act of 1994." To ensure the viability of private electric utilities, RA No. 7832 allows distribution utilities to pass on to its consumers system losses equivalent to either the actual kilowatt energy lost due to technical and non-technical/pilferage causes, or the cap imposed by law, whichever is lower. Said law provides that in no case shall the system loss cap be lower than 9%.18 Pursuant to RA No. 7832, the ERB adopted a formula to be used in computing the PPA to be charged by respondent MERALCO to its customers. The new PPA formula included among its components the system loss, franchise tax, the automatic cost adjustments and other adjustments of NAPOCOR and other IPPs and the generation cost of electricity. The said PPA formula subsequently underwent several modifications. Each revision was approved by the ERB after service of the notices of public hearing on the respective mayors of the cities and municipalities within respondent MERALCO’s franchise area, posting thereof on the respective bulletin boards of the said local government units, and publication in two newspapers of general circulation. Thereafter, the EPIRA was enacted on June 8, 2001. As stated earlier, among other reforms in the electric power industry, the said law created the ERC. Section 36 of the EPIRA directed all distribution utilities to file with the ERC an application for the approval of their unbundled rates. Respondent MERALCO complied therewith and acting on its application, the ERC, in the Decision dated March 20, 2003 approved its unbundled rates. However, respondent MERALCO was directed to discontinue charging the PPA upon effectivity of the approved unbundled rates. The said order provided that any change in the cost of power purchased shall be reflected as deferred charges or credits which shall be recovered through the GRAM approved by the ERC for implementation per ERC Order dated February 24, 2003 in ERC Case No. 2003-44. According to respondent MERALCO, the GRAM is an adjustment recovery mechanism which replaces the automatic recovery adjustment mechanisms (Fuel and Purchased Power Cost Adjustments) of NAPOCOR and the PPA of the distribution utilities. The GRAM would allow the periodic (quarterly) adjustment of the generation charge to reflect changes in fuel and purchased power costs after review by the ERC and before the costs are passed on to the customers. The authority of the ERC to promulgate the GRAM Implementing Rules is found in Section 43 of the EPIRA which requires the said regulatory body to, among others, "establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility, taking into account all relevant considerations, including the efficiency or inefficiency of the regulated entities. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably..." Respondent MERALCO asserts that Section 4(e), Rule 3 of the IRR of the EPIRA requiring the publication of its application in a newspaper of general circulation and the service of a copy thereof to the concerned local government units is inapplicable. Rather, its amended application for the increase of its generation charge is governed by the GRAM Implementing Rules adopted by ERC in the Order dated February 24, 2003 in ERC Case No. 2003-44. The pertinent portion of the latter rules reads: Sec. 5. Generation Cost Accounting Application

1. A utility shall file a deferred generation cost accounting application setting forth its calculations of the generation rate. For NPC, said filing shall be for a particular grid. The filing shall be made every three (3) months. 2. Applications by NPC shall be grid specific and are not required to be filed concurrently. 3. An application must be filed not later than thirty (30) days after the adjustment date. 4. The proposed generation rate must be based on the volumes and allowable costs for the test period designated by the Commission and calculated in accordance with Section 6 hereof. 5. The Commission shall issue a decision no later than forty-five (45) days from the date the petition is accepted for filing. Should the Commission fail to act within forty-five (45) days the petition is deemed approved in full. Respondent MERALCO opines that to require it to comply with the requirements of Section 4(e), Rule 3 of the IRR of the EPIRA would defeat the reason behind the implementation of the adjustment mechanism which, quoting the ERC, is "to balance the need for timely recoveries of costs by the Utilities with the Commission’s need to review the reasonableness and prudence of such costs." Respondent MERALCO points out that Section 4(e), Rule 3 of the IRR of the EPIRA is inconsistent with the GRAM Implementing Rules specifically with respect to the period within which the ERC is mandated to render its decision on the application. Under the former, the ERC may issue a provisional authority within seventy-five (75) days from the filing of the application or petition and shall decide the matter on the merits not later than twelve (12) months from the issuance of said provisional order. On the other hand, the GRAM Implementing Rules allows the distribution utilities to apply for adjustment quarterly and the ERC must decide the application within forty-five (45) days from receipt thereof, before the costs may be passed on to the consumers. Otherwise, the application shall be deemed approved. Respondent MERALCO notes that the cost recovery mechanism is dictated by the situation whereby the cost of purchased power is unstable due principally to escalating fuel oil prices and fluctuations in the foreign exchange rates. The GRAM Implementing Rules was so promulgated to address this situation and answer the need for timely recoveries of costs by utilities, by allowing them to file every three (3) months an application for the recovery of the fuel and purchased power costs. Respondent MERALCO posits that in formulating the GRAM Implementing Rules, the ERC’s primary objective was the protection of the consumers by ensuring that any application for the fuel and purchased power costs is subject to its review to determine the reasonableness and prudence of such cost, before they are passed on to the consumers. Further, unlike the PPA which is an automatic adjustment and subject to confirmation by the regulatory body only after the costs had been passed on to the consumers, the GRAM Implementing Rules provides for a regulatory lag of six (6) months within which the distribution utilities are authorized to recover their fuel and purchased power costs. The latter is therefore beneficial to the consumers. Respondent MERALCO maintains that the GRAM is a revenue-neutral recovery process, which means that it (respondent MERALCO) pays for the fuel and purchased power costs to its suppliers even before it could fully collect from its customers. And that out of these collections from its customers, not a single centavo is retained by respondent MERALCO, except for the carrying cost, but turned over to NAPOCOR and the other IPPs. It would be allegedly violative of due process to require respondent MERALCO to comply with Section 4(e), Rule 3 of the IRR of the EPIRA and subject it to a long and tedious process of recovering its fuel and purchased power costs. Such would be contrary to the intent and purpose

of the GRAM Implementing Rules. On the other hand, respondent MERALCO refutes the petitioners’ claim of denial of due process. It alleges that the petitioners were given every opportunity to be heard in a public consultation and submit their written comments. Respondent MERALCO quotes the ERC Order dated February 24, 2003 containing the GRAM Implementing Rules which states that the same was issued only after the ERC "has taken into consideration all the documents, data, comments and concerns raised by all the parties concerned who have submitted their respective positions thereon." Respondent MERALCO contends that the petitioners cannot deny any knowledge of the GRAM Implementing Rules particularly on the manner and timeline for filing an application for GRAM and the period within which the ERC must act and decide thereon. Accordingly, even without need of publication, posting and service to the local government units concerned, the petitioners should have allegedly filed their opposition to respondent MERALCO’s amended application to increase its generation charge. Further, they should have filed their comment or opposition thereon within the forty-five (45) day-period within which the ERC was required to render its decision. The petitioners’ omission is allegedly fatal to their present cause of action. Respondent MERALCO observes that the petitioners did not appeal the Order dated February 24, 2003 of the ERC adopting the GRAM Implementing Rules. Neither have they allegedly shown that they were deprived of their right to be heard when the said rules were promulgated. For this lapse, respondent MERALCO stresses that the petitioners have no personality to claim denial of due process and prays that the Court dismiss the present petition. ERC’s Counter-arguments The ERC, through the Office of the Solicitor General (OSG), defends the validity of its June 2, 2004 Order approving the increase of respondent MERALCO’s generation charge from P3.1886 to P3.3213 per kWh effective immediately. According to the ERC, the said order was issued in accordance with the GRAM Implementing Rules it promulgated in the Order dated February 24, 2003 in ERC Case No 2003-44. Prior to the EPIRA, the ERB adopted the Rules and Regulations Implementing RA No. 7832. A provision of the said implementing rules provided for the "automatic cost adjustment formula" applicable to private distribution utilities and electric cooperatives, which became known as the PPA. Under this provision, the distribution utilities were authorized to adopt a restructured rate schedule including its PPA formula, subject to the approval of the ERB. Respondent MERALCO’s rate schedule and PPA, and the subsequent revisions thereon, were approved by the ERB. The ERC now anchors its authority to promulgate the GRAM Implementing Rules on Section 43(f)19 of the EPIRA which, among others, expressly authorizes it to establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility. In relation thereto, Section 25 of the same law also provides that "the retail rates charged by distribution utilities for the supply of electricity in their captive market shall be subject to regulation by the ERC based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency." Section 43(u) thereof is also cited which vests the ERC with "the original and exclusive jurisdiction over all cases contesting rates, fees, fines and penalties imposed by the ERC in the exercise of the abovementioned powers, functions and responsibilities and over all cases involving disputes between and among participants or players in the energy sector." Section 36 thereof directed the distribution utilities to file their revised rates for the approval by the ERC and that the distribution wheeling charges shall be unbundled from the retail rate and the rate shall reflect the respective costs of providing each service.

The ERC explains that it adopted the GRAM Implementing Rules as it noted certain problems with the then existing PPA mechanism. Among these problems were the non-uniform implementation due to the use of different formulas by the distribution utilities; the confirmation process was conducted long after the costs had been recovered from the consumers and; the rates were changed without the order of the ERC. Among others, the GRAM Implementing Rules provides for a uniform formula to arrive at the generation rate of a distribution utility.20 The said implementing rules also provide for a formula for deferred accounting adjustment (DAA) which must be established in an application for deferred generation cost accounting relief. The distribution utilities are allowed to adjust their respective generation rates quarterly upon filing of a petition with the ERC, which shall decide thereon within a maximum period of forty-five (45) days. According to the ERC, respondent MERALCO filed its 1st GRAM application on January 16, 2004 docketed as ERC Case No. 2004-20. In the said application, respondent MERALCO proposed a generation charge of P3.2041 per kWh. The ERC, in its Order dated January 21, 2004, approved the generation charge of P3.1886 per kWh effective immediately. Consistent with the GRAM being an adjustment mechanism which had to be filed every quarter, respondent MERALCO filed on April 19, 2004 its amended application under the GRAM for the increase of its generation charge from P3.1886 to P3.4664 per kWh. The case was docketed as ERC Case No. 2004-112. Resolving the same, the ERC rendered the assailed Order dated June 2, 2004 approving the increase of respondent MERALCO’s generation charge to P3.3212 per kWh effective immediately. The ERC denies having committed any grave abuse of discretion in issuing the assailed order. Like respondent MERALCO, the ERC asserts that the procedure prescribed under the GRAM Implementing Rules, particularly Section 221 and 522 thereof, radically differs from that provided for in Section 4(e), Rule 3 of the IRR of the EPIRA. Specifically, the GRAM Implementing Rules do not require that the application of a distribution utility like respondent MERALCO under the said rules be published or that comments of local government units and the consumers thereon be solicited. The procedure prescribed by the GRAM Implementing Rules is markedly different from that of the IRR of the EPIRA because the GRAM was intended to be an adjustment mechanism and not an independent rate application by itself. Only the latter falls within the contemplation of the IRR of the EPIRA. Explaining the nature and purpose of an adjustment mechanism, the ERC quotes the following disquisition: The fuel and purchased power adjustment clause is a widely used regulatory tool which can avoid the necessity of repeated general rate proceedings, and which can allow for an intense and specialized review of fuel and purchased power costs (Re Arizona Pub. Service Co., 76 PUR 4th 399, 1986). Although the authority to approve automatic fuel adjustment clauses was not granted expressly in the District of Columbia Code, the commission held that the code, under its broad grant of authority to the commission, impliedly permitted the clause (Re Potomac Electric Power Co., 2 DC PSC 391, Formal Case No. 725, Order No. 7428, Dec. 23, 1981). Automatic adjustment clauses have been adopted for the recovery of certain utility costs only under the following limited and well-recognized circumstances: (1) when such costs are extremely volatile, changing rapidly over short periods of time, e.g, the cost of coal or other fuel burned to generate electricity or the cost of natural gas; (2) when such volatile cost changes represent significant portions of total utility operating expenses, and (3) when such volatile cost changes are beyond the ability of the utility to control, e.g., a utility must purchase coal or gas at whatever prices that procedures or pipelines are willing to sell (Re Mountain States Teleph. & Teleg. Co., 78 PUR 4th 287, 1986). The Oregon Public Utility Commission recently described the purpose of an "escalator" clause , which it euphemistically called a "tracker" as follows: "It purports to track a

particular cost, increasing or decreasing revenues just enough to offset the alleged change in cost. The isolated cost is ordinarily one over which the utility has no influence and about which there is little likelihood of dispute" (Re Portland General Electric Co., 104 PUR 4th 266, 268, Or. P.U.C., 1989). It is clear from the foregoing that "escalator" or "tracker" or any other similar automatic adjustment clauses are merely cost recovery or cost "flow-through" mechanisms; that what they purport to cover are operating costs only which are very volatile and unstable in nature and over which the utility has no control; and that the use of the said clauses is deemed necessary to enable the utility to make the consequent adjustments on the billings to its customers so that ultimately its rate of return would not be quickly eroded by the escalations in said costs of operation. The total of all rate adjustments should not operate to increase overall rate of return for a particular utility company above the basic rates approved in the last previous rate case (Re Adjustment Clause in Telephone Rate Schedules, 3 PUR 4th 298, N.J. Bd. of Pub. Util.Comm’rs., 1973. Affirmed 66 N.J. 476, 33 A.2d 4, 8 PUR 4th 36, N.J.,1975).23 The ERC stresses that the GRAM Implementing Rules set forth in its Order dated February 24, 2003 was duly published and submitted for exhaustive public consultation. The ERC points out that, as recounted in the said order, the following procedural steps were taken leading to the adoption of the GRAM and ICERA Implementing Rules: On January 29, 2003, the Commission issued an Order setting for public consultation its proposed Implementing Rules for the Recovery of Deferred Fuel and Independent Power Producer Costs (DÉCOR) and the Deferred Incremental Currency Exchange Recovery (DICER) on February 17, 2003. Likewise, a Notice of the same tenor as the above mentioned Order was published by the Commission in the Philippine Star on February 3, 2003. In the aforesaid Order and Notice, interested parties were directed to submit their written comments on the said proposed implementing rules on or before February 12, 2003. In compliance therewith, the following parties filed their respective comments on various dates: 1. Manila Electric Company (MERALCO); 2. Dagupan Electric Corporation (DECORP); 3. National Power Corporation (NPC); 4. First Gas Holdings Corporation (FGHC); 5. Angeles Electric Corporation (AEC); 6. National Power Corporation (NPC); 7. Small Power Utilities Group – NPC (NPC-SPUG); 8. Cotabato Light Company (COLIGHT); 9. Iligan Light Power Incorporated (ILPI); 10. Visayan Electric Company (VECO); 11. Tarlac Electric Incorporated (TEI); 12.Cagayan Electric Power and Light Company, Inc. (CEPALCO);

13. Davao Light and Power Company, Inc. (DLPC); 14. People Opposed Against Warrantless Electricity Rates (POWER); 15. National Association of Electricity Consumers for Reforms (NASECORE); and 16. Mr. Genaro Lualhati. As culled from their comments, most of the Utilities manifested their strong objections to the adoption of the DÉCOR and DICER. In general, they alleged that the adoption of said mechanisms would defeat the purpose of escalator clauses such as the Purchased Power Adjustment (PPA) and Currency Exchange Rate Adjustment (CERA) clauses. More particularly, their common primary concerns, among others, were: a) the regulatory lag; b) the carrying charge; and c) the recovery period. … At the scheduled public consultation on February 17, 2003, representatives of the various distribution utilities appeared and were given opportunities to present their submitted written comments. They were, likewise, allowed to manifest their additional comments. On the other hand, the consumer sector was represented in the said public consultation by the following: 1) Mr. Pete Ilagan from NASECORE; 2) Mr. Mike Ocampo, from the Consumers Union of the Philippines (CUP); 3) Atty. Jose T. Baldonado; 4) Mr. Genaro Lualhati; and 5) Mr. Renato Reyes from POWER. The primary concerns of the consumer sector were: a) the Commission should have involved the public as early as in the drafting of the proposed implementing rules; b) the Commission should have taken into consideration consumer protection in the drafting of the proposed implementing rules; c) the Commission should not change the term Purchase Power Adjustment (PPA) into DÉCOR as it may confuse the consumers into assuming that the PPA will no longer be a part of their electric bill, when in fact, it still is; d) the Commission should first decide whether the electric power that is going to be recovered is actually used by the consumers; e) the Recovery of IPP contract costs through the PPA, and now through the DÉCOR, had been consistently objected to by the consumers as these are the result of private commercial contracts between distribution utilities and their IPPs, thus, should not bind the consumers; and f) the PPA for the "undelivered" power should be reflected separately from the PPA for the delivered ones. During the same public consultation, representatives from the consumer sector requested that a separate consultation be conducted exclusively for the consumers to enable them to fully understand the nature and effects of the DÉCOR and the DICER. Said request was granted by the Commission. Accordingly, another consultation for the consumers was set on February 21, 2003. At the February 21, 2003 consultation, representatives from various consumer groups headed by NASECORE, CUP and POWER appeared. In the same consultation, the Commission presented and explained the DÉCOR and the DICER. Moreover, MERALCO representatives likewise presented their explanation of the PPA and the computation thereof. Consumer representatives then manifested their various concerns, which were noted by the Commission.24 As can be gleaned, the DÉCOR and the DICER were eventually discarded and, instead, the GRAM and ICERA Implementing Rules were adopted. It is underscored by the ERC that a number of distribution utilities and consumer groups were present at the public consultation and

submitted their comments on the said implementing rules. In fact, petitioner NASECORE’s representative, Mr. Ilagan, was present at the public consultation, participated therein and submitted petitioner NASECORE’s comment. If they had any objections to the GRAM Implementing Rules, they should have appealed the ERC Order dated February 24, 2003. Petitioners did not do so. Neither did they complain when respondent MERALCO’s 1st GRAM application resulted in the reduction of the generation charge per ERC Order dated in January 21, 2004 in ERC Case No. 2004-20. Hence, petitioners cannot now claim denial of due process due to the non-publication of respondent MERALCO’s amended application. The ERC contends that it resolved the same in accordance with the GRAM Implementing Rules which, unlike the PPA, allowed the ERC to validate the costs associated in generating electricity before they are passed on to the consumers. Consequently, respondent ERC did not commit grave abuse of discretion when it issued the Order dated June 2, 2004 in ERC Case No. 2004-112 approving respondent MERALCO’s revised generation charge at P3.3213 per kWh in accordance with the GRAM Implementing Rules set forth in its February 24, 2003 Order in ERC Case No. 2003-44. Finally, the ERC informs the Court that the GRAM Implementing Rules have been superseded with the promulgation by the ERC on October 13, 2004 of the Guidelines for the Automatic Adjustment of Generation Rates and System Loss Rates by Distribution Utilities (AGRA).25 The AGRA allows distribution utilities to calculate their monthly generation rates by summing up the net generation costs from the previous month over total kilowatt-hours purchased for the previous month to automatically implement, subject to a post verification audit by the ERC, the corresponding adjustment in generation charges. Issue The issue raised by the parties is whether the ERC committed grave abuse of discretion in issuing the Order dated June 2, 2004 in ERC Case No. 2004-112 which approved the increase of respondent MERALCO’s generation charge from P3.1886 to P3.3213 per kWh effective immediately without publication of the latter’s amended application. The Court’s Ruling The petition is granted. Contrary to the stance taken by the respondents, the amended application of respondent MERALCO for the increase of its generation charge is covered by Section 4(e), Rule 3 of the IRR of the EPIRA. For clarity, the said provision is quoted anew: (e) Any application or petition for rate adjustment or for any relief affecting the consumers must be verified, and accompanied with an acknowledgement of receipt of a copy thereof by the LGU Legislative Body of the locality where the applicant or petitioner principally operates together with the certification of the notice of publication thereof in a newspaper of general circulation in the same locality. The ERC may grant provisionally or deny the relief prayed for not later than seventy-five (75) calendar days from the filing of the application or petition, based on the same and the supporting documents attached thereto and such comments or pleadings the consumers or the LGU concerned may have filed within thirty (30) calendar days from receipt of a copy of the application or petition or from the publication thereof as the case may be. Thereafter, the ERC shall conduct a formal hearing on the application or petition, giving proper notices to all parties concerned, with at least one public hearing in the affected locality, and shall decide the matter on the merits not later than twelve (12) months from the issuance of the aforementioned provisional order.

This Section 4(e) shall not apply to those applications or petitions already filed as of 26 December 2001 in compliance with Section 36 of the Act. The respondents contend that this provision applies only to independent rate applications and not to adjustment mechanisms like the GRAM; hence, respondent MERALCO’s amended application for the increase of its generation charge is excluded and/or exempted from the application of the requirements of the above-quoted provision. This contention is erroneous. Section 4(e), Rule 3 of the IRR of the EPIRA could not be any clearer with respect to its coverage as it refers to "any application or petition for rate adjustment or for any relief affecting the consumers." In this connection, the EPIRA’s definition of "retail rate" is instructive: (ss) "Retail Rate" refers to the total price paid by the end-users consisting of the charges for generation, transmission and related ancillary services, distribution, supply and other related charges for electric service.26 Section 4(e), Rule 3 of the IRR of the EPIRA speaks of "any application or petition for rate adjustment" without making any distinctions. Hence, any application or petition that would result in the adjustment or change in the total price (retail rate) paid by the end-users, whether this change or adjustment is occasioned by the adjustment or change in the charges for generation, transmission, distribution, supply, etc., falls within its contemplation. In any case, that respondent MERALCO’s amended application is covered by the said provision is mandated by the fact that the relief prayed for therein clearly affects the consumers as it results in the increase of the costs of their electricity consumption. In Freedom from Debt Coalition v. ERC,27 the Court outlined the requirements of Section 4(e), Rule 3 of the IRR of the EPIRA as follows: (1) The applicant must file with the ERC a verified application/petition for rate adjustment. It must indicate that a copy thereof was received by the legislative body of the LGU concerned. It must also include a certification of the notice of publication thereof in a newspaper of general circulation in the same locality. (2) Within 30 days from receipt of the application/petition or the publication thereof, any consumer affected by the proposed rate adjustment or the LGU concerned may file its comment on the application/petition, as well as on the motion for provisional rate adjustment. (3) If such comment is filed, the ERC must consider it in its action on the motion for provisional rate adjustment, together with the documents submitted by the applicant in support of its application/petition. If no such comment is filed within the 30-day period, then and only then may the ERC resolve the provisional rate adjustment on the basis of the documents submitted by the applicant. (4) However, the ERC need not conduct a hearing on the motion for provisional rate adjustment. It is sufficient that it consider the written comment, if there is any. (5) The ERC must resolve the motion for provisional rate adjustment within 75 days from the filing of the application/petition. (6) Thereafter, the ERC must conduct a full-blown hearing on the application/petition not later than 30 days from the date of issuance of the provisional order. Effectively, this provision limits the lifetime of the provisional order to only 12 months.28 Among the important requirements introduced under the foregoing process are: first, the

publication of the application itself, not merely the notice of hearing issued by the ERC, in a newspaper of general circulation in the locality where the applicant operates and; second, the need for the ERC to consider the comments or pleadings of the customers and LGU concerned in its action on the application or motion for provisional rate adjustment.29 The Court reasoned that the publication and comment requirements are in keeping with the avowed policies of the EPIRA, to wit: …[T]o protect the public interest vis-à-vis the rates and services of electric utilities and other providers of electric power, to ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability for greater operational and economic efficiency, to enhance the competitiveness of Philippine products in the global market, and to balance the interests of the consumers and the public utilities providing electric power through the fair and non-discriminatory treatment of the two sectors. Clearly, therefore, although the new requirements are procedural in character, they represent significant reforms in public utility regulation as they engender substantial benefits to the consumers. It is in this light that the new requirements should be appreciated and their observance enforced.30 The lack of publication of respondent MERALCO’s amended application for the increase of its generation charge is thus fatal. By this omission, the consumers were deprived of the right to file their comments thereon. Consequently, the assailed Order dated June 2, 2004 issued by the ERC, approving the increase of respondent MERALCO’s generation charge from P3.1886 to P3.3213 per kWh effective immediately, was made without giving the consumers any opportunity to file their comments thereon in violation of Section 4(e), Rule 3 of the IRR of the EPIRA. Indeed, the basic postulate of due process ordains that the consumers be notified of any application, and be apprised of its contents, that would result in compounding their economic burden. In this case, the consumers have the right to be informed of the bases of respondent MERALCO’s amended application for the increase of its generation charge in order to, if they so desire, effectively contest the same. The following pronouncements are quite apropos: Obviously, the new requirements are aimed at protecting the consumers and diminishing the disparity or imbalance between the utility and the consumers. The publication requirement gives them enhanced opportunity to consciously weigh the application in terms of the additional financial burden which the proposed rate increase entails and the basis for the application. With the publication of the application itself, the consumers would right from the start be equipped with the needed information to determine for themselves whether to contest the application or not and if they so decide, to take the needed further steps to repulse the application. On the other hand, the imposition on the ERC to consider the comments of the customers and the LGUs concerned extends the comforting assurance that their interest will be taken into account. Indeed, the requirements address the right of the consuming public to due process at the same time advance the cause of people empowerment which is also a policy goal of the EPIRA along with consumer protection.31 It has also been stated that: The requirement of due process is not some favor or grace that the ERC may dole out on a bout of whim or on occasion of charity. Rather, it is a statutory right to which the consuming public is entitled. … The requirement of publication in applications for rate adjustment is not without reason or purpose. It is ancillary to the due process requirement of notice and hearing. Its purpose is not

merely to inform the consumers that an application for rate adjustment has been filed by the public utility. It is to adequately inform them that an application has been made for the adjustment of the rates being implemented by the public utility in order to afford them the opportunity to be heard and submit their stand as to the propriety and reasonableness of the of the rates within the period allowed by the Rule. Without the publication of the application, the consumers are left to second-guess the substance and merits of the application.32 At this point, it should be stated that the Court is not convinced by respondent MERALCO’s argument that to require it to comply with Section 4(e), Rule 3 of the IRR of the EPIRA would be a violation of its right to due process because it would be subjected to a long and tedious process of recovering its fuel and purchased power costs. In Freedom from Debt Coalition, the Court categorically upheld the ERC’s power to grant provisional adjustments or power of interim rateregulation. Such power is intended precisely for the ERC to, as Mr. Justice Reynato S. Puno in his Concurring and Dissenting Opinion succinctly put it, "be able to swiftly and flexibly respond to the exigencies of the times."33 He elucidated further on the raison d’etre of the power of interim rate-regulation particularly in the context of our country’s economic history: …Our economic history teaches us that the Philippines is vulnerable to the rapid fluctuations in the exchange rate. In recent years, we saw how numerous industries failed to survive the Asian financial crises fueled by the uncertainties of exchange rates. All these have had adverse financial impact on public utilities such as Meralco in terms of skyrocketing costs of debt servicing, and maintenance and operating expenses. A regulator such as the ERC should have sufficient power to respond in real time to changes wrought by multifarious factors affecting public utilities.34 Thus, respondent MERALCO’s apprehension of being subjected to a long and tedious process with respect to the recovery of its fuel and purchased power costs is, in fact, addressed by the power of the ERC to grant provisional rate adjustments. The ERC is not, of course, precluded from promulgating rules, guidelines or methodology, such as the GRAM, for the recovery by the distribution utilities of their fuel and purchased power costs. However, these rules, guidelines or methodology so adopted should conform to the requirements of pertinent laws, including Section 4(e), Rule 3 of the IRR of the EPIRA.35 There is another compelling reason why reliance by respondent MERALCO and the ERC on the GRAM Implementing Rules is unavailing. To recall, they advance the view that the June 2, 2004 ERC Order is valid, notwithstanding the fact that respondent MERALCO’s amended application was not published in a newspaper of general circulation, because the same was issued in accordance with the GRAM Implementing Rules which does not require such publication. It does not appear from the records, however, that the GRAM Implementing Rules, as set forth in the ERC Order dated February 24, 2003 in ERC Case No. 2003-44, has been published in the Official Gazette or in a newspaper of general circulation. Executive Order No. 200, which repealed Article 2 of the Civil Code, provides that "laws shall take after fifteen days following the completion of their publication either in the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise provided." The basic requirement of publication of statutes was explained in Tañada v. Tuvera36 as follows: We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature. Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative powers whenever the same are validly delegated by the legislature, or at present, directly conferred by the Constitution. Administrative rules and regulations must

also be published if their purpose is to enforce or implement existing law pursuant also to a valid delegation. Interpretative regulations and those merely internal in nature, that is, regulating only the personnel of the administrative agency and not the public, need not be published. Neither is publication required of the so-called letters of instructions issued by administrative superiors concerning the rules or guidelines to be followed by their subordinates in the performance of their duties.37 A careful review of the procedural steps undertaken by the ERC leading to its issuance of the Order dated February 24, 2003 in ERC Case No. 2003-44, which set forth the GRAM Implementing Rules, as well as the Order dated June 2, 2004 in ERC Case No. 2004-112, which approved the increase of respondent MERALCO’s generation charge purportedly in accordance with the GRAM Implementing Rules, shows that there was no publication of the same in the Official Gazette or in a newspaper of general circulation. The procedural antecedents leading to the adoption of the GRAM Implementing Rules and the approval of respondent MERALCO’s generation charge are outlined below based on the ERC’s own account thereof: q On January 29, 2003, the ERC issued an Order setting for public consultation its proposed Implementing Rules for the Recovery of Deferred Fuel and Independent Power Producer Costs (DÉCOR) and Deferred Incremental Currency Exchange Recovery (DICER) on February 17, 2003; q Notice of the said public consultation was published in the Philippine Star on February 3, 2003; q In the said notice and order, interested parties were directed to submit their written comments on the proposed Implementing Rules for the Recovery of the DÉCOR and DICER on or before February 12, 2003; q In compliance therewith, several distribution utilities like respondent MERALCO and consumer groups like petitioner NASECORE submitted their written comments. The distribution utilities manifested their objections to the adoption of the DÉCOR and DICER while the consumer groups expressed that the ERC should have taken into consideration consumer protection when it drafted the proposed rules; q On February 17, 2003, the public consultation took place where representatives of various distribution utilities and consumer groups were present; q Upon the request of the consumer groups, another public consultation was held for them on February 21, 2003; q On February 24, 2003, the ERC promulgated the Order setting forth the GRAM and ICERA Implementing Rules. The said implementing rules provide that they shall take effect immediately; q On January 16, 2004 respondent MERALCO filed an application entitled In the Matter of the Application for the Recovery of the Independent Power Producer Costs under the Generation Rate Adjustment Mechanism (GRAM), docketed as ERC Case No. 2004-20. In the said application, respondent MERALCO proposed that a generation charge of P3.2041 per kWh be approved; q On January 21, 2004, the ERC approved respondent MERALCO’s generation charge of P3.1886 per kWh effective immediately; q On April 19, 2004, respondent MERALCO filed an amended application under the GRAM for

the approval of its proposed generation charge of P3.4664 per kWh, docketed as ERC Case No. 2004-12. q On June 2, 2004, the ERC promulgated the assailed Order approving respondent MERALCO’s generation charge of P3.213 per kWh effective immediately. Nowhere from the above narration does it show that the GRAM Implementing Rules was published in the Official Gazette or in a newspaper of general circulation. Significantly, the effectivity clauses of both the GRAM and ICERA Implementing Rules uniformly provide that they "shall take effect immediately." These clauses made no mention of their publication in either the Official Gazette or in a newspaper of general circulation. Moreover, per the Certification dated January 11, 2006 of the Office of the National Administrative Register (ONAR), the said implementing rules and regulations were not likewise filed with the said office in contravention of the Administrative Code of 1987.38 Applying the doctrine enunciated in Tañada, the Court has previously declared as having no force and effect the following administrative issuances: (1) Rules and Regulations issued by the Joint Ministry of Health-Ministry of Labor and Employment Accreditation Committee regarding the accreditation of hospitals, medical clinics and laboratories;39 (2) Letter of Instruction No. 1416 ordering the suspension of payments due and payable by distressed copper mining companies to the national government;40 (3) Memorandum Circulars issued by the Philippine Overseas Employment Administration regulating the recruitment of domestic helpers to Hong Kong;41 (4) Administrative Order No. SOCPEC 89-08-01 issued by the Philippine International Trading Corporation regulating applications for importation from the People’s Republic of China;42 (5) Corporation Compensation Circular No. 10 issued by the Department of Budget and Management discontinuing the payment of other allowances and fringe benefits to government officials and employees;43 and (6) POEA Memorandum Circular No. 2 Series of 1983 which provided for the schedule of placement and documentation fees for private employment agencies or authority holders.44 In all these cited cases, the administrative issuances questioned therein were uniformly struck down as they were not published or filed with the National Administrative Register. On the other hand, in Republic v. Express Telecommunications Co., Inc.,45 the Court declared that the 1993 Revised Rules of the National Telecommunications Commission had not become effective despite the fact that it was filed with the National Administrative Register because the same had not been published at the time. The Court emphasized therein that "publication in the Official Gazette or a newspaper of general circulation is a condition sine qua non before statutes, rules or regulations can take effect."46 In this case, the GRAM Implementing Rules must be declared ineffective as the same was never published or filed with the National Administrative Register. To show that there was compliance with the publication requirement, respondents MERALCO and the ERC dwell lengthily on the fact that the parties, particularly the distribution utilities and consumer groups, were duly notified of the public consultation on the ERC’s proposed implementing rules. These parties participated in the said public consultation and even submitted their comments thereon. However, the fact that the parties participated in the public consultation and submitted their respective comments is not compliance with the fundamental rule that the GRAM Implementing Rules, or any administrative rules whose purpose is to enforce or implement existing law, must be published in the Official Gazette or in a newspaper of general circulation. The requirement of publication of implementing rules of statutes is mandatory and may not be dispensed with altogether even if, as in this case, there was public consultation and submission by the parties of their comments. The public consultation and submission by the parties of their comments were procedures prior to the adoption of the GRAM Implementing Rules. In fact, at the time, the ERC’s proposed

implementing rules were denominated Implementing Rules for the Recovery of DÉCOR and DICER. These procedural steps (public consultation and submission of comments) are entirely different from the publication of statutes mandated by law, which occurs after their promulgation or adoption. The obvious purpose of the preliminary procedures of public consultation and submission of comments is to give the parties the opportunity to air their views and express their concerns on particular subject matters before legislative measures or implementing rules and regulations addressing these matters are promulgated. On the other hand, the avowed rationale for the requirement of publication of statutes is to apprise the public of the contents of the laws or rules and regulations that have already been promulgated or adopted. As the Court ratiocinated in Tañada: It is not correct to say that under the disputed clause publication may be dispensed with altogether. The reason is that such omission would offend due process insofar as it would deny the public knowledge of the laws that are supposed to govern it. Surely, if the legislature could validly provide that a law shall become effective immediately upon its approval notwithstanding the lack of publication (or after an unreasonably short period after publication), it is not unlikely that persons not aware of it would be prejudiced as a result; and they would be so not because of a failure to comply with it simply because they did not know of its existence. Significantly, this is not true only of penal laws as is commonly supposed. One can think of many non-penal measures, like a law on prescription, which must also be communicated to the persons they may affect before they began to operate.47 The Court likewise emphasized therein that the Bill of Rights recognizes "the right of the people to information on matters of public concern."48 With respect to the GRAM Implementing Rules, its publication in the Official Gazette or in a newspaper of general circulation is mandated by the fact that these rules seek to implement key provisions of the EPIRA. More importantly, the GRAM Implementing Rules, insofar as it lays down the procedure by which generation costs of distribution utilities are recovered, affect ultimately the public as consumers of electricity and who pay the charges therefor. Clearly, the GRAM Implementing Rules affects the public inasmuch as it determines the costs of electricity consumption. The public, not only the parties to the cases before the ERC, has the right to be apprised of the contents of the GRAM Implementing Rules by publication of the same in the Official Gazette or in a newspaper of general circulation in the Philippines – to the end that it be given amplest opportunity to voice out whatever opposition it may have, and to ventilate its stance on the matter.49 In light of the foregoing disquisition, the assailed ERC Order dated June 2, 2004 in ERC Case No. 2004-112 approving the increase of respondent MERALCO’s generation charge from P3.1886 to P3.3213 per kWh effective immediately is nullified for having been issued with grave abuse of discretion. WHEREFORE, premises considered, the petition is GRANTED. The assailed ERC Order dated June 2, 2004 in ERC Case No. 2004-112 is DECLARED VOID and accordingly SET ASIDE. SO ORDERED. ROMEO J. CALLEJO, SR. Associate Justice WE CONCUR: ARTEMIO V. PANGANIBAN

Chief Justice REYNATO S. PUNO Associate Justice LEONARDO A. QUISUMBING Asscociate Justice CONSUELO YNARES-SANTIAGO Associate Justice ANGELINA SANDOVAL-GUTIERREZ Asscociate Justice ANTONIO T. CARPIO Associate Justice MA. ALICIA AUSTRIA-MARTINEZ Asscociate Justice RENATO C. CORONA Associate Justice CONCHITA CARPIO MORALES Asscociate Justice ADOLFO S. AZCUNA Associate Justice DANTE O. TINGA Asscociate Justice MINITA V. CHICO-NAZARIO Associate Justice CANCIO C. GARCIA Asscociate Justice C E RTI F I CATI O N Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ARTEMIO V. PANGANIBAN Chief Justice Footnotes 1 As represented by the following: Petronilo Ilagan (NASECORE), Siegfriedo Veloso (FOVA) and Bonifacio Dazo (FOLPHA). 2 Section 2. 3 Section 38. 4 Id. 5 Section 43. 6 Section 43. 7 Entitled IN THE MATTER OF THE APPLICATION FOR APPROVAL OF REVISED RATE SCHEDULES IN COMPLIANCE WITH SECTION 36 OF REPUBLIC ACT NO. 9136 AND ERC ORDER DATED OCTOBER 30, 2001, AND FOR APPROVAL OF APPRAISAL OF PROPERTIES WITH PRAYER FOR PROVISIONAL AUTHORITY. 8 Entitled IN THE MATTER OF THE APPLICATION FOR APPROVAL OF REVISION OF RATE SCHEDULES AND APPRAISAL OF PROPERTIES WITH PROVISIONAL AUTHORITY. This case was originally docketed as ERB Case No. 2000-57 pending before the then Energy Regulatory Board. It involved MERALCO’s application, filed on April 14, 2000, for approval of revision of rates schedules and appraisal of properties with prayer for provisional relief, resulting in an increase in its Basic Charge by about thirty centavos per kilowatthour (P0.30kWh).

9 Rollo, p. 219. 10 Entitled IN THE MATTER OF THE ADOPTION OF THE GENERATION RATE ADJUSTMENT MECHANISM (GRAM) AND INCREMENTAL CURRENCY EXCHANGE RECOVERY ADJUSTMENT (ICERA). 11 Rollo, p. 229. 12 Id. at 232. 13 Section 13 of the GRAM and Section 12 of the ICERA as contained in the Order dated February 24, 2003 in ERC Case No. 2003-04. 14 Rollo, p. 26. 15 GR = Generation Rate for test period i BR = Base Rate per Grid based on CY 2000 costs FC = Fuel costs (if applicable) as approved by the ERC subject to heat rate cap. PP = Purchased power costs as approved by the ERC DDA = Deferred accounting adjustment GR = BR + FC period i + PP period i KWh sales period i + DAA 16 Penned by Justice Dante O. Tinga. G.R. No. 161113, 15 June 2004 (432 SCRA 157). In gist, in the said case, the Court ruled that the ERC has the authority to grant provisional rate adjustments. However, such grant must comply with the requirement of publication, among others, as embodied in Section 4 (e), Rule 3 of the IRR of the EPIRA. 17 The sale was pursuant to Presidential Decree No. 40 which established the basic power policy of the Republic of the Philippines. 18 Section 10, RA No. 7832. This was later amended by RA 9136 which replaced the system loss cap under Sec. 10 of RA No. 7832 with caps to be determined by the ERC based on load density, sales mix, cost of service, delivery voltage and other technical considerations it may promulgate. 19 Supra. 20 Supra, note 15. 21 The provision reads: Sec. 2. Scope. The provisions of this Rule shall provide for the procedure to be followed for the recovery of Deferred Energy Cost incurred by the NPC and any distribution utility that purchases energy from a source other than or in addition to NPC after the effective date of the Utility’s unbundled rates. … 22 Supra. 23 Memorandum of the ERC, pp. 24-25; rollo, pp. 593-594.

24 Rollo, pp. 47-51. 25 Memorandum, pp.31-32; Rollo, pp. 600-601. 26 Section 4 (ss). 27 Supra. 28 Id. at 190-191. 29 Id. at 193. 30 Id. at 195. 31 Id. 32 Concurring and Dissenting Opinion of Justice Alicia Austria-Martinez, id. at 266-267. 33 Concurring and Dissenting Opinion, id. at 234. 34 Id. at 235. 35 The Court stated in Freedom from Debt Coalition that "[s]ince the IRR was issued pursuant to the EPIRA, Section 4(e) of Rule 3 as part of the IRR has the force and effect of law." ; Id. at 199. 36 230 Phil. 528 (1986). 37 Id. at 535. Underscoring ours. 38 Book VII, Chapter 2, Section 3 thereof states: Filing. – (1) Every agency shall file with the University of the Philippines Law Center three (3) certified copies of every rule adopted by it. Rules in force on the date of effectivity of this Code which are not filed within three (3) months from the date shall not thereafter be the basis of any sanction against any party or persons. (2) The records officer of the agency, or his equivalent functionary, shall carry out the requirements of this section under pain or disciplinary action. (3) A permanent register of all rules shall be kept by the issuing agency and shall be open to public inspection. 39 Joint Ministry of Health-Ministry of Labor and Employment Accreditation Committee v. CA, G.R. No. 78254, 25 April 1991, 196 SCRA 263. 40 Caltex Phils., Inc. v. CA, G.R. No. 92585, 8 May 1992, 208 SCRA 726. 41 Philippine Association of Service Exporters v. Torres, G.R. No. 101279, 6 August 1992, 212 SCRA 298. 42 Philippine International Trading Corp. v. Angeles, 331 Phil. 723 (1996). 43 De Jesus v. Commission on Audit, G.R. No. 109023, 12 August 1998, 294 SCRA 152. 44 Philsa International Placement and Services Corp. v. Secretary of Labor and Employment,

G.R. No. 103144, 4 April 2001, 356 SCRA 174. 45 424 Phil. 372 (2002). 46 Id. at 393. 47 Supra at note 24, p. 534. 48 Section 7, Article III of the Constitution. 49 See De Jesus v. Commission on Audit, G.R. No. 109023, 12 August 1998, 294 SCRA 152. The Lawphil Project - Arellano Law Foundation