Republic v.

MERALCO
Facts:
- In 1993, MERALCO filed with the Energy Regulatory Board (ERB) an application for revision of
rate schedules indicating an average increase of P0.21/kwh in its distribution charge
- the ERB issued an Order granting a provisional increase of P0.184/kwh subject to the condition
that should the ERB, using COA audits, find that MERALCO is entitled to a lesser increase, all
excess amounts charged shall either be refunded or credited to customers
- COA submitted a report with the recommendation that:
o income taxes paid by MERALCO should not be held as part of its operating expenses for
the purposes of rate determination; and
o the net average investment method should be used for the computation of the
proportionate value of the properties used by MERALCO during the test year for the
determination of the rate base
- adopting the above recommendations, the ERB superseded the provisional rates with the new
rate adjustment of P0.017 starting Feb 1994 and ordered MERALCO to refund or credit to its
customers the excess average amounts of P0.167/kwh charged from Feb 1994 to Feb 1998
- CA set aside the ERB decision insofar as the reduction of the rates and the refund of the
supposed excess amount are concerned
Issue:
w/n the income tax paid by MERALCO should be treated as part of its operating expenses for the
purposes of rate determination
w/n the net average investment method should be used for computation of base rate
Held:
1. No, operating expenses are those expense items which contribute or are attributable to the
production of income or revenue; a recurring requisite for operation which redounds to the benefit of
customers. Income tax is imposed on a person as a tax on the privilege of earning income in exchange
for State benefits and/or services. It should be borne by the taxpayer alone, and should not be passed
on to consumers.
The public utility cannot indiscriminately charge any and all types of expenses incurred without regard
to the nature thereof. Likewise, with regard to rate-determination, the government is not bound to
apply any particular method or formula. What constitutes a reasonable return is determined by its
peculiar environmental milieu. Moreover, American law and jurisprudence is unavailing here due to
notable differences such as a different taxation system for public utilities.

2. Yes, the net average investment method, as recommended by COA and used by the ERB, accurately
reflects the real status of the property. This is consistent with the rule in rate regulation that the
determination of the base rate of a public utility entitled to a return must be based on properties and
equipment actually being used or are useful to the operations of the public utility. Furthermore,
MERALCOs claim that immediate recordings of the property and equipment put into service are not
possible is refuted by the COA report.
net average investment method: properties and equipment used in the operation of a public
utility are entitled to a return only on the actual number of months they are in service during
the period;
average investment method: computes the proportionate value of the property by adding the
value of the property at the beginning and at the end of the test year with the resulting sum
divided by two
Another, the second method can be easily manipulated since MERALCO may simply include a highly
capitalized asset even though it was used for a very short period. This inexactitude is subject to abuse by
the public utility.

On police power and public utilities:
The regulation of rates charged by public utilities is part and parcel of the police powers of the State.
When private property is used for a public purpose and is affected with public interest, it ceases to
be juris privati only and becomes subject to regulation. In regulating rates charged by public utilities, the
State protects the public against arbitrary and excessive rates while maintaining the efficiency and
quality of services rendered. However, the power to regulate rates does not give the State the right to
prescribe rates which are so low as to deprive the public utility of a reasonable return on investment.
The fixing of just and reasonable rates involves a balancing of the investor and the consumer interests.
The power to fix rates is a legislative function, whether exercised by the legislature itself or delegated
through an administrative agency, while the determination of whether the rates are reasonable and just
is a purely judicial question and is subject to the review of the courts.
The ERB was created to regulate distribution of energy resources and fix rates with the standard that the
rate be reasonable and just, that is, calling for the exercise of discretion, good sense, and a fair,
enlightened and independent judgment. It must not be so low as confiscatory or so high as to be
oppressive.

On factual findings of specialized governmental agencies:
Factual findings of administrative bodies on technical matters within their area of expertise should be
accorded not only respect but even finality if they are supported by substantial evidence even if not
overwhelming or preponderant

On just and reasonable rates:
Three major factors are considered: (a) rate of return; (b) rate base; and (c) computed returns. The
Court has consistently adopted a 12% rate of return for public utilities.