Enhancing credibility of rate-fixing for public utilities

Anything that concerns public interest should be everybody’s business.

Public utilities, such as those providing electricity, water, communication and transportation services, among others, charge fees that they adjust from time to time either upward or downward. Since some of them enjoy monopoly, consumers sometimes have to endure the imposition of unreasonable fees. The State must therefore regulate and control these monopolies’ right to profit in order to protect consumers by fixing a reasonable rate.

What is reasonable may depend on different factors. Can the reasonable rate of return for public utilities be legislated? I don’t think so. How then does one determine what is reasonable? Should the rate be reasonable to the consumers or to the utility owners or to both? Undoubtedly, the public utility deserves to receive a reasonable return on its investment in the same way that its consumers deserve to get a good service from it and to pay a reasonable amount for it. How do you now balance the two?

In the case of PLDT vs. Medina, L-24340, July 18, 1967, the Supreme Court said that “a just rate must be founded upon conditions which are fair and reasonable both to the public utility and the public itself.” Because of the very delicate nature of the power granted to public utilities, the State has to control and oversee their operation as it is definitely endowed with public interest. Given this background, Commonwealth Act No. 146 was passed on November 7, 1936 creating the Public Service Commission. It was authorized, among others, “to fix and determine the individual or joint rates, toll, charges, classifications, or schedules thereof which shall be imposed, observed and followed thereafter by any public service.”

If the utility was found to be earning in excess of the allowable rate, the Public Service Commission would reduce the rate. On the other hand, if the utility was found to be earning less than the allowable rate, the PSC would increase its rates upon application.

To help the then Public Service Commission, Commonwealth Act No. 325 was passed on June 18, 1938 transferring the audit of the books and accounts of public utilities to the General Auditing Office. Since then, it is the GAO (later the Commission on Audit) that audits public utilities for rate-fixing purposes, such audit intended to show whether or not the audited public utility is earning within the allowable rate of return.

With the passage of Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001, it is now the Energy Regulatory Commission (ERC) that determines, fixes and approves the rate to be imposed on all electricity end-users. According to this law, the rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base. The ERC has adopted a Performance Based Rate-Making methodology. Under this scheme, a distribution utility is allowed a price cap to compensate it for the services it provides to the consuming public.

The calculation of the price cap involves the review of the utility’s expenditure forecasts. This review is critical to the determination of the revenue to which the utility is entitled. This will also provide the basis for establishing the price cap. To enhance the credibility of rate-fixing for public utilities, another independent body has to be involved in the process.

The matter of rate-fixing is so delicate and endowed with so much public interest that the same cannot be entrusted to only one entity. Such function must be shared by at least two independent entities with one taking the lead role and the other playing a supportive role to provide a system of check and balance. This assures the consuming public that the process involved is beyond reproach and will not be vulnerable to abuse or even error.

In one audit conducted by the Commission on Audit (COA) on the books and accounts of a public utility, it was discovered that the public utility was earning more than the allowable rate of return. As a consequence, the then Energy Regulatory Board (ERB) ordered the public utility to refund to its consumers more than P29 billion worth of excess charges. The soundness of this decision was upheld by the Supreme Court. Given this very unfortunate case, Congress may seriously consider passing a law requiring COA to audit public utilities to assist the regulatory bodies in the discharge of their functions. The law should be amended to make the COA audit mandatory, not just discretionary on the part of the ERC. This congressional gesture will ensure that the rates that public utilities charge are indeed reasonable and beyond reproach.

How will this move affect the ordinary people? If the public utilities overcharge their customers, the amount may look insignificant, but when broken down into cents and dimes, for the common ‘tao,’ it can mean one less piece of fish on the table.

Public utilities must remember the Lord’s reminder: “Ye shall do no unrighteousness in judgment, in measures of length, of weight, or of quantity. Just balances, just weights, a just ephah, and a just hin, shall ye have: I am Jehovah your God, who brought you out of the land of Egypt” (Leviticus 19:35-36).