Triumph of public interest over private profits

In effect, this is what the Supreme Court said as it resolved the case between Meralco and the Energy Regulatory Board (ERB) as well as a group of lawyers known as Lamp (Lawyers Against Monopoly and Poverty), on the basic issue of: "Should public interest prevail over private profits"?

Meralco itself triggered the ruling when it filed with the ERB on December 23, 1993 an application for an average increase of 21 centavos per kilowatthour (kwh) in its distribution charge, with a prayer for the provisional approval of said increase. On January 28, 1994, the ERB granted a provisional increase of 18.4 centavos subject to the condition that if the Commission on Audit finds that Meralco is entitled to a lesser increase in rates, all excess amounts collected from its customers as a result of the provisional increase shall either be refunded to them or credited in their favor for application to electric bills covering future consumptions.

In its report of February 11,1997, the COA recommended to ERB, among others, not to include income taxes paid by Meralco as part of its operating expenses for purposes of rate determination.

Adopting this recommendation, the ERB issued a new order superseding and modifying its previous provisional order of January 28,1994 which granted an increase of 18.4 centavos per kwh. In this new order, ERB authorized Meralco to increase its rate by only 1.7 centavos per kwh effective as of its billing cycles beginning February, 1994; and ordered Meralco to refund to its customers or credit in their favor for future consumption the excess average amount of 16.7 centavos per kwh starting with its billing cycles in February, 1994 until its billing cycles beginning February, 1998.The ERB held that income tax should not be treated as operating expense as this should be "borne by the stockholders who are recipients of the income or profits realized from the operation of their business," hence should not be passed on to the consumers.

Was the ERB correct?

Yes.

The regulation of rates to be charged by public utilities is founded upon the police power of the State to protect the public against arbitrary and excessive rates while maintaining the efficiency and quality of services rendered. The rates prescribed by the State must be one that yields a fair return on the public utility upon the value of the property performing the service and one that is reasonable to the public for services rendered.

In determining whether or not a rate yields a fair return to the utility, the operating expenses of the utility must be considered in order to allow it to recoup the reasonable amount of expenses it has incurred in connection with the services it provides. It does not, however, give the public utility the license to indiscriminately charge any and all types of expenses incurred without regard to the nature thereof; i.e., whether or not the expense is attributable to the production of services by the public utility.

The ERB correctly ruled that income tax should not be included in the computation of operating expenses of a public utility. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, operating expenses are those which are reasonably incurred in connection with the business operations that yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. It should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the service or benefit of customers.

Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received from the State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and no direct contribution is made by the payment of income tax to the operation of a public utility for purposes of generating revenue or profit.

The public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends . . . If a corporation cannot maintain such a facility and earn dividends for stockholders, it is a misfortune for it and them which the Constitution does not require to be remedied by imposing unjust burdens on the public.

Accordingly, the burden of paying income tax should be Meralco’s alone and should not be shifted to the consumers by including the same in the computation of its operating expenses. (RP rep. by ERB vs. Meralco G.R.141314; LAMP etc. vs. Meralco G.R.141369, November 15, 2002).

And so the Supreme Court has spoken – in a manner which cannot be said to be unjust, unfair and unreasonable. The decision indeed reflects a "balancing of the investor and consumer interests". It is not fair to ascribe to the Court an alleged participation in a government plot to takeover Meralco. As the Court aptly declared at the onset of the decision; "in third world countries like the Philippines, equal justice will have a synthetic ring unless the economic rights of the people, especially the poor, are protected with the same resoluteness as their right to liberty".

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