ERC defies SC ruling on income tax

In the issue of corporate income tax charged to us, the Supreme Court order in LAMP, Lualhati vs Meralco (GR No. 141369) is often cited. The consumers won, but the Energy Regulatory Commission (ERC) ignores this order.

In November 2002 the Supreme Court said: “The ERB (Energy Regulatory Board) correctly ruled that income tax should not be included in the computation of operating expenses of a public utility… operating expense should be a requisite of or necessary in the operation of the utility, recurring, and that it redounds to the service or benefit of the customers… Accordingly, the burden of paying income tax should be Meralco’s alone and should not be shifted to the consumers…”

Denying Meralco’s Motion for Reconsideration in April 2003 the Court said: “We reject Meralco’s insistence that the noninclusion of income tax payments as a legitimate operating expense will deny public utilities a fair return of their investment. This stubborn stance is belied by the report submitted by COA…”

Unequivocal and clear are the language and intent of the Supreme Court order, but the ERC ignores, defies, disregards and, in effect, has overturned the decision of the high tribunal. Adopting the performance based regulation (PBR), the ERC made income tax a “building block for calculating revenue requirements” charged to us. How can the ERC treat the decision of the highest court of the land in such cavalier fashion?

In the Issue Paper for PBR 3rd Regulatory Period, the ERC stated: “The fact that corporate income tax is an allowed recoverable expense is reflected in the use of an after-tax Regulatory WACC (weighted average cost of capital) to determine reasonable return on investments… this building block (corporate income tax) is included in the PBR, based on sound economic principles.” Is the ERC suggesting that the Court order is unsound? It should argue that before the Court.

Water concessionaires claim they get a 9.2-percent return. The ERC gives Meralco a WACC return that ranges from 14 to 16 percent. Under the PBR, Meralco’s return on capital was P23 billion for 2012, P24 billion for 2013, P25 billion for 2014 and P25.8 billion for 2015. The core rate of Meralco was P0.79/kwh under RORB (the rate of return base), P0.96/kwh under rate unbundling, and P1.64/kwh under PBR. The annual earnings of Meralco were P2.7 billion under RORB and P3.1 billion under unbundling; but under PBR—P6.3 billion in 2009; P10.1 billion in 2010; P14.5 billion in 2011; P16.26 billion in 2012. Note that the stockholders’ equity in Meralco stood at P63.7 billion as of 2011.

Meralco’s PBR rates have made our electricity the most expensive in Asia. It made Meralco the most profitable in the country. Justice Reynato Puno wrote: “Rate recovery does not give the public utility license to indiscriminately charge any and all types of expenses incurred…  the public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends.”

Who will help consumers compel the ERC and Meralco to comply with the Supreme Court order? And who will regulate the so-called regulators?

—ROMEO “BUTCH” JUNIA, [email protected]