Atty. Nino Juan
For about ten years now, the ERC has failed to properly exercise its authority to fix the rates of distribution utilities (DUs) like Meralco. Instead, it devised an AWAT (Actual Weighted Average Tariff) methodology involving a true up and confirmation process of the DUs’ implemented interim distribution charges for the “lapsed period” versus their calculated AWAT. This AWAT methodology is unique to the Philippines and is neither RORB nor PBR. To this, I say – AWAT na. A decade of ERC’s inaction on fixing the DUs’ rates in accordance with law, in my opinion, is SOBRA na. It’s time – ITAMA na.
The DUs’ retail rates are regulated by the ERC. According to EPIRA, the law that established the ERC, the ERC is empowered to set the DUs’ distribution charges using the return on rate base (RORB) method as the default methodology. Nonetheless, the law also allows the adoption by ERC of other INTERNATIONALLY-ACCEPTED rate-setting methods, such as the performance-based rate-setting methodology (PBR) as it is adopted and implemented in foreign jurisdictions.
When setting rates, the ERC functions merely as an agent of Congress. The authority to determine the DUs’ wheeling or distribution rates is inherently legislative and resides with Congress. By creating the ERC through EPIRA, Congress has simply delegated this authority to the ERC. Regarding the delegation to set distribution rates, Congress has confined the ERC’s delegated authority to the use only of the RORB or other internationally recognized rate-setting methodologies. Sections 23 and 25 of the EPIRA must be read in conjunction with Section 43(f), which pertains specifically to the grant of authority to ERC to set the DUs’ distribution rates. Should the ERC exceed the limitation set by Congress and violate the legislative standard or the condition of the delegation to it, its actions and decisions are null. The spring cannot rise above its source. Consequently, these actions and decisions of the ERC can be declared void by the courts with the authority to review its decisions or by the Supreme Court exercising its judicial power vested by the Constitution. These actions and decisions of the ERC do not attain finality and can be challenged indirectly or collaterally. The question of their validity can be raised at any stage in the proceedings.
On December 10, 2004, in accordance with EPIRA, the ERC adopted the PBR for all private DUs by issuing ERC Resolution No. 12-02. Unlike the RORB method, the PBR relies on forecasts of the DU’s operating and capital expenses for the upcoming four-year Regulatory Period. These projections are integral to determining the DU’s allowable revenue requirement and the maximum annual prices (MAP) for each year within the Regulatory Period. This forward-looking approach, along with the performance incentive scheme under PBR, encourages DUs to operate more efficiently or below the projected expenses while meeting the minimum guaranteed service levels mandated by the ERC. The rate reset process begins with the ERC releasing the Issues Paper, followed by consultations, the ERC’s Position Paper, the updated Rules for Setting of Distribution Wheeling Rates (RDWR), the DU’s submission of its rate reset application, public hearings, the ERC’s Draft Determination, consultations on the Draft Determination, and finally, the ERC’s final decision on the rate reset or the Final Determination. Subsequently, based on the ERC’s Final Determination, the DU files its rate translation applications for each subsequent year of the upcoming regulatory period.
Prior to 2015, most private DUs successfully shifted to PBR and completed at least one rate reset process. During this process, the ERC thoroughly examined each component or building block of their approved revenue requirements before implementing their MAPs in the ensuing Regulatory Periods. However, starting in 2015, when Meralco, Cepalco, and Decorp were due for their PBR rate reset for the Fourth Regulatory Period (July 2015 – June 2019), the ERC halted all rate resets. As a result, these DUs were left without approved distribution charges set according to the PBR methodology outlined in the RDWR and adopted pursuant to Section 43(f) of the EPIRA.
Fast forward to 2025, the situation remains unchanged, despite ERC’s attempts to rein in Meralco’s rates. This involved compelling Meralco to file its rate reset application and undergo true up and confirmation process for the lapsed periods when ERC could not