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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 192117

September 18, 2012

ASSOCIATION OF SOUTHERN TAGALOG ELECTRIC COOPERATIVES, INC. (ASTEC),

BATANGAS I ELECTRIC COOPERATIVE, INC. (BATELEC I), QUEZON I ELECTRIC
COOPERATIVE, INC. (QUEZELCO I), and QUEZON II ELECTRIC COOPERATIVE, INC.
(QUEZELCO II), Petitioners,
vs.
ENERGY REGULATORY COMMISSION, Respondent.

x-----------------------x

G.R. No. 192118

CENTRAL LUZON ELECTRIC COOPERATIVES ASSOCIATION, INC. (CLEA) and

PAMPANGA RURAL ELECTRIC SERVICE COOPERATIVE, INC. (PRESCO), Petitioners,

vs.
ENERGY REGULATORY COMMISSION, Respondent.

DECISION

CARPIO, J.:

The Case

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. The
petition assails the 23 December 2008 Decision2 and 26 April 2010 Resolution3 of
the Court of Appeals in the consolidated cases, including CA-G.R. SP Nos. 99249 and
99253.4 The Court of Appeals affirmed the Orders of the Energy Regulatory
Commission (ERC) directing various rural electric cooperatives to refund their overrecoveries arising from the implementation of the Purchased Power Adjustment
(PPA) Clause under Republic Act (R.A.) No. 7832 or the Anti-Electricity and Electric
Transmission Lines/Materials Pilferage Act of 1994.

The Facts

Petitioners Batangas I Electric Cooperative, Inc. (BATELEC I), Quezon I Electric

Cooperative, Inc. (QUEZELCO I), Quezon II Electric Cooperative, Inc. (QUEZELCO II)
and Pampanga Rural Electric Service Cooperative, Inc. (PRESCO) are rural electric
cooperatives established under Presidential Decree (P.D.) No. 269 or the National
Electrification Administration Decree.5 BATELEC I, QUEZELCO I and QUEZELCO II are
members of the Association of Southern Tagalog Electric Cooperatives, Inc. (ASTEC).
PRESCO is a member of the Central Luzon Electric Cooperatives Association, Inc.
(CLECA). Petitioners are engaged in the distribution of electricity "on a non-profit
basis for the mutual benefit of its members and patrons."6

On 8 December 1994, R.A. No. 7832 was enacted. The law imposed a cap on the
recoverable rate of system loss7 that may be charged by rural electric cooperatives
to their consumers. Section 10 of R.A. No. 7832 provides:

Section 10. Rationalization of System Losses by Phasing out Pilferage Losses as

Component Thereof. There is hereby established a cap on the recoverable rate of
system losses as follows:

xxxx

(b) For rural electric cooperatives:

(i) Twenty-two percent (22%) at the end of the first year following the effectivity of
this Act;

(ii) Twenty percent (20%) at the end of the second year following the effectivity of
this Act;

(iii) Eighteen percent (18%) at the end of the third year following the effectivity of
this Act;

(iv) Sixteen percent (16%) at the end of the fourth year following the effectivity of
this Act; and

(v) Fourteen percent (14%) at the end of the fifth year following the effectivity of
this Act.

Provided, That the ERB is hereby authorized to determine at the end of the fifth year
following the effectivity of this Act, and as often as is necessary, taking into account
the viability of rural electric cooperatives and the interest of the consumers,
whether the caps herein or theretofore established shall be reduced further which
shall, in no case, be lower than nine percent (9%) and accordingly fix the date of the
effectivity of the new caps.

xxxx

The Implementing Rules and Regulations (IRR) of R.A. No. 7832 required every rural
electric cooperative to file with the Energy Regulatory Board (ERB), on or before 30
September 1995, an application for approval of an amended PPA Clause
incorporating the cap on the recoverable rate of system loss to be included in its
schedule of rates.8 Section 5, Rule IX of the IRR of R.A. No. 7832 provided for the
following guiding formula for the amended PPA Clause:

Section 5. Automatic Cost Adjustment Formula.

xxxx

The automatic cost adjustment of every electric cooperative shall be guided by the
following formula:

Purchased Power Adjustment Clause

(PPA) =

-E
B-(C + D)
Where:

A=

Cost of electricity purchased and generated for the previous month

B=

Total Kwh purchased and generated for the previous month

C=
The actual system loss but not to exceed the maximum recoverable rate of
system loss in Kwh plus actual company use in Kwhrs but not to exceed 1% of total
Kwhrs purchased and generated

D=

Kwh consumed by subsidized consumers

E=
Applicable base cost of power equal to the amount incorporated into their
basic rate per Kwh

In compliance with the IRR of R.A. No. 7832, various associations of rural electric
cooperatives throughout the Philippines filed on behalf of their members
applications for approval of amended PPA Clauses. On 8 February 1996, ASTEC filed
on behalf of its members (including BATELEC I, QUEZELCO I and QUEZELCO II) a
verified petition for the approval of the amended PPA Clause. The verified petition of
ASTEC was docketed as ERB Case No. 96-35.9 On 9 February 1996, CLECA also filed
on behalf of its members (including PRESCO) a verified petition for the approval of
the amended PPA Clause. The verified petition of CLECA was docketed as ERB Case
No. 96-37.10

The ERB issued Orders on 19 February 199711 and 25 April 199712 provisionally
authorizing the petitioners and the other rural electric cooperatives to use and
implement the following PPA formula, subject to review, verification and
confirmation by the ERB:

(PPA) =

-E
B-(C + CI + D)
Where:

A=
Cost of Electricity purchased and generated for the previous month less
amount recovered from pilferages, if any

B=

Total Kwh purchased and generated for the previous month

C=
Actual system loss but not to exceed themaximum recoverable rate of
system loss in Kwh

C1 =
Actual company use in Kwhrs but not to exceed 1% of total Kwhrs
purchased and generated

D=

Kwh consumed by subsidized consumers

E=
Applicable base cost of power equal to the amount incorporated into their
basic rate per Kwh

The ERB further directed petitioners to submit relevant documents regarding the
monthly implementation of the PPA formula for review, verification and
confirmation. The Orders dated 19 February 1997 and 25 April 1997 commonly
provide:

Accordingly, all electric cooperatives are hereby directed to submit to the Board
within ten (10) days from notice hereof their monthly implementation of the PPA
formula from the February, 1996 to January, 1997 for the Boards review,
verification and confirmation. The submission should include the following
documents:

1. PPA computation following the formula provided above

2. Monthly NPC bill or such other power bill purchased or generated not yet
forwarded to ERB from January 1995 onward

3. Monthly Financial and Statistical Report (MFSRs) not yet forwarded to ERB from
January 1995 onward

4. Sample bills for the month subject to confirmation for different types of
customers.

Thereafter, (from February 1997 and onward) all electric cooperatives are hereby
directed to submit on or before the 20th day of the current month, their
implementation of the PPA formula of the previous month for the same purposes as
indicated above.13

On 8 June 2001, R.A. No. 9136 or the Electric Power Industry Reform Act of 2001
(EPIRA) was enacted. Section 38 of the EPIRA abolished the ERB, and created the
Energy Regulatory Commission (ERC). The ERC is an independent and quasi-judicial
regulatory body mandated to "promote competition, encourage market
development, ensure customer choice and penalize abuse of market power in the
restructured electricity industry."14 The powers and functions of the ERB not
inconsistent with the provisions of the EPIRA were transferred to the ERC, together
with the applicable funds and appropriations, records, equipment, property and
personnel of the ERB.15

As a result, ERB Case No. 96-35 involving ASTEC and its members (including
BATELEC I, QUEZELCO I and QUEZELCO II) was renamed and renumbered as ERC
Case No. 2001-338.16 ERB Case No. 96-37 involving CLECA and its members
(including PRESCO) was also renamed and renumbered as ERC Case No. 2001340.17 The records further show that these two cases were consolidated, together
with the other cases previously consolidated with then ERB Case No. 96-35.18

Subsequently, the ERC issued an Order dated 17 June 2003. The ERC noted therein
"that the PPA formula which was approved by the ERB was silent on whether the
calculation of the cost of electricity purchased and generated in the formula should
be gross or net of discounts."19 The cost of electricity is computed at "gross" if
the discounts extended by the power supplier to the rural electric cooperative are
not passed on to end-users, while the cost of electricity is computed at "net" if the
discounts are passed on to end-users.20 The ERC ruled:

To attain uniformity in the implementation of the PPA formulae, the Commission has
resolved that:

1. In the confirmation of past PPAs, the power cost shall still be based on "gross";
and

2. In the confirmation of future PPAs, the power cost shall be based on "net".

Relative thereto, petitioners are directed to implement their respective PPA using
the power cost based on net at the next billing cycle upon receipt of this Order until
such time that their respective rates have already been unbundled.

Petitioners are hereby directed to submit to the Commission on or before the 20th
day of the following month, their implementation of the PPA formula for review,
verification and confirmation by the Commission.21

On 29 March 2004, the ERC issued an Order in the consolidated cases resolving the
motions for reconsideration filed by several rural electric cooperatives. In the said
Order, the ERC explained the general framework of the new PPA confirmation
scheme to be adopted by the regulatory body. The ERC stated:

Majority of the issues raised in the motions for reconsideration can be properly
addressed by the new PPA confirmation scheme to be adopted by this Commission.
Under this scheme, the electric cooperatives shall be allowed to collect/refund the
true cost of power due them vis-a-vis the amount already collected from their endusers. In turn, the end-users shall only be charged the true cost of power consumed.

The Commission recognizes that the electric cooperatives implemented their PPA in
the manner by which majority of them were implementing the same. Thus, they had
no alternative but to adopt the most recent available data for the respective billing
months which were based on estimates due to time lag differences. Under the new
scheme, the actual data for the billing month shall be adopted as they are available
at the time the verification is undertaken.

In this regard, all the other issues raised by the electric cooperatives shall be
properly addressed in the confirmation of their respective PPAs.22

Several rural electric cooperatives subsequently filed motions for clarification and/or
reconsideration with respect to the ERCs process of computation and confirmation
of the PPA. The rural electric cooperatives advanced the following allegations:

1. They are non-profit organizations and their rate components do not include any
possible extra revenue except the discounts; and

2. They are burdened with expenses in their continuing expansion programs of rural
electrification to the remotest barangays and sitios of their respective franchise
areas and could not give any benefit or incentive to their employees.23

On 14 January 2005, the ERC issued an Order addressing the motions for
clarification and/or reconsideration filed by the rural electric cooperatives. In the
said Order, the ERC expounded on the general framework of the new PPA
confirmation scheme. The ERC stated that "the new PPA scheme creates a venue
where both the electric cooperatives can recover and the end-users can be charged
the true cost of power."24 The ERC stressed that "the purchased power cost is a
pass through cost to customers and as such, the same should be revenue
neutral."25 In other words, rural electric cooperatives should only recover from their
members and patrons the actual cost of power purchased from power suppliers.26

In the same Order, the ERC clarified certain aspects of the new PPA confirmation
scheme. With respect to the data to be utilized in the confirmation of the PPA, the
ERC stated:

All electric cooperatives were directed to implement the PPA in the manner the then
Energy Regulatory Board (ERB) had prescribed. In calculating their respective PPAs,
the electric cooperatives had no alternative but to adopt the most available data for
the respective billing months, i.e. the previous month, due to time lag differences.
Under the new PPA confirmation scheme, the actual data for the billing month shall
be adopted primarily because they reflect the true cost of power, they are available
at the time the confirmation is undertaken and they have already been charged to
the end-users. Thus, the new PPA scheme creates a venue where both the electric
cooperatives can recover and the end-users can be charged the true cost of power.
There will also be proper matching of revenue and cost.27

As regards the cap on the recoverable rate of system loss, the ERC explained:

The caps on the recoverable system loss provided in R.A. 7832 were established to
encourage distribution utilities to operate efficiently. Since the PPA is merely a cost
recovery mechanism, the electric cooperatives are not supposed to earn revenue
nor suffer losses therefrom. To allow them to adopt the caps even in cases where
the system losses are actually lower would be contrary to the underlying principle of
a recovery mechanism.28

Finally, with respect to the Prompt Payment Discount (PPD) extended by power
suppliers to rural electric cooperatives, the ERC reiterated that rural electric
cooperatives should only recover the actual costs of purchased power.29 Thus, any
discounts extended to rural electric cooperatives must necessarily be extended to
end-users by charging only the "net" cost of purchased power.

In light of the foregoing clarifications, the ERC outlined the following directives in
the said Order:

A. The computation and confirmation of the PPA prior to the Commissions Order
dated June 17, 2003 shall be based on the approved PPA formula;

B. The computation and confirmation of the PPA after the Commissions Order dated
June 17, 2003 shall be based on the power cost "net" of discount; and

C. If the approved PPA formula is silent on the terms of discount, the computation
and confirmation of the PPA shall be based on the power cost at "gross", subject to
the submission of proofs that said discounts are being extended to the end-users.30

Subsequently, the ERC issued the following Orders:

1. 22 March 2006 Order in ERC Case No. 2001-338 regarding the monthly PPA
implementation of BATELEC I;

2. 16 February 2007 Order in ERC Case No. 2001-338 regarding the monthly PPA
implementation of QUEZELCO I;

3. 7 December 2005 Order in ERC Case No. 2001-338 regarding the monthly PPA
implementation of QUEZELCO II; and

4. 27 March 2006 Order in ERC Case No. 2001-340 regarding the monthly PPA
implementation of PRESCO.

In the said Orders, the ERC clarified its policy on the PPA confirmation scheme
previously adopted in its Order dated 14 January 2005. For the distribution utilities
to recover only the actual costs of purchased power, the ERC stated the following
principles governing the treatment of the PPD granted by power suppliers to
distribution utilities including rural electric cooperatives:

I. The over-or-under recovery will be determined by comparing the Allowable Power

Cost with the Distribution Utilitys Actual Revenue (AR) billed to end-users.

II. Calculation of the Allowable Power Cost as prescribed in the PPA Formula:

a. For a Distribution Utility which PPA formula explicitly provides the manner by
which discounts availed from the power supplier/s shall be treated, the allowable
power cost will be computed based on the specific provision of the formula, which
may either be at "net" or "gross"; and

b. For a Distribution Utility which PPA formula is silent in terms of discounts, the
allowable power cost will be computed at "net" of discounts availed from the power
supplier/s, if there is any.

III. Calculation of the Distribution Utilitys Actual Revenues/Actual Amount Billed to

End-users.

a. On Actual PPA Computed at Net of Discounts Availed from Power Supplier/s:

a.1. If a Distribution Utility bills at net of discounts availed from the power supplier/s
(i.e. Gross power cost minus discounts from power supplier/s) and the Distribution
Utility is not extending discounts to end-users, the actual revenue should be equal
to the allowable power cost; and

a.2. If a Distribution Utility bills at net of discounts availed from the power supplier/s
(i.e. Gross power cost minus discounts from power supplier/s) and the Distribution
Utility is extending discounts to end-users, the discount extended to end-users will
be added back to actual revenue.

b. On Actual PPA Computed at Gross

b.1. If a Distribution Utility bills at gross (i.e. Gross power cost not reduced by
discounts from power supplier/s) and the Distribution Utility is extending discounts
to end-users, the actual revenue will be calculated as: Gross Power Revenue less
Discounts extended to end-users. The result will then be compared to the allowable
power cost; and

b.2. If a Distribution Utility bills at gross (i.e. Gross power cost not reduced by
discounts from power supplier/s) and the distribution utility is not extending
discounts to end-users, the actual revenue will be taken as is which shall be
compared to the allowable power cost.

IV. In calculating the Distribution Utilitys actual revenues, in no case shall the
amount of discounts extended to end-users be higher than the discounts availed by
the Distribution Utility from its power supplier/s.31

The ERC then directed petitioners to refund their respective over-recoveries to endusers arising from the implementation of the PPA Clause under R.A. No. 7832 and its
IRR, as follows:

1. 22 March 2006 Order32

In the Order dated 22 March 2006, the ERC evaluated the monthly PPA
implementation of BATELEC I covering the period from February 1996 to September
2004. The verification and confirmation of the PPA implementation was based on
the monthly implementation reports, documents and information submitted by
BATELEC I in compliance with the Order dated 19 February 1997 issued by the ERB.
The ERC determined that there were over-recoveries amounting to Fifty Nine Million
Twenty One Thousand Nine Hundred Five Pesos (P 59,021,905.00) equivalent to
P0.0532/kWh. The ERC outlined the following bases for the over-recoveries:

1. For the period August 1998 to May 1999, NPC made an erroneous reading on
BATELEC Is meter which resulted to the application of PPA charges at higher sales
volume vis-a-vis those utilized in the PPA computation. The system loss adopted in
the PPA formula was the running average of the preceding twelve (12) months,
which is the period when the erroneous meter reading had not yet occurred. As a
result, the PPA formulas denominator which represents the sales volume was lower
than the actual sales for the period when the PPA was implemented and the impact
of the different "E" (basic charge power cost component) on the said period resulted
to a net over-recovery of PhP 38,317,933.00;

2. For the period July 2003 to August 2004, BATELEC I erroneously added back the
Power Act Reduction amounting to PhP 20,565,981.00 to its total power cost; and

3. The new grossed-up factor mechanism adopted by the Commission which

provided a true-up mechanism that allows the distribution utilities to recover the
actual cost of purchased power.33

The ERC confirmed the PPA of BATELEC I covering the period from February 1996 to
September 2004, and directed BATELEC I "to refund the amount of P0.0532/kWh
starting on the next billing cycle from receipt of this Order until such time that the
full amount shall have been refunded."34

2. 16 February 2007 Order35

In the Order dated 16 February 2007, the ERC evaluated the monthlyPPA
implementation of QUEZELCO I for the period from January 1999 to April 2004.
QUEZELCO I previously submitted its monthly implementation reports, documents
and information for review, verification and confirmation pursuant to the Order
dated 19 February 1997 issued by the ERB. The ERC determined that there were
over-recoveries amounting to Twenty Million Twenty Seven Thousand Five Hundred
Fifty Two Pesos (P 20,027,552.00) equivalent to P0.0486/kWh. The ERC outlined the
following bases for the over-recoveries:

1. For the period July 2003 to April 2004, QUEZELCO Is power cost was not reduced
by the PPD availed from its suppliers resulting to an over-recovery of PhP
8,457,824.00;

2. QUEZELCO I failed to comply with the Implementing Rules and Regulations (IRR)
of Republic Act No. 7832 x x x which provides that the pilferage recoveries should
be deducted from the total purchased power cost used in the PPA computation.
Thus, QUEZELCO Is actual PPA should have been reduced by the pilferage
recoveries amounting to PhP 580,855.00;

3. QUEZELCO I failed to reflect the power cost adjustments on its PPA as a result of
the billing adjustments of NPC under the Credit Memo for the month of June 2003
amounting to PhP 4,210,855.00;

4. QUEZELCO Is power supply agreement with Camarines Norte Electric

Cooperative, Inc. (CANORECO) was not approved by the Commission. Thus, the
Commission pegged CANORECOs power cost at NPCs total average rate which
resulted to an over-recovery of PhP 849,324.00;

5. In computing its PPA, QUEZELCO I included the subsidized consumptions of

2,051,753 kWh which resulted to an over-recovery of PhP 1,611,036.00;

6. The new grossed-up factor mechanism adopted by the Commission which

provides a true-up mechanism to allow the DUs to recover the actual costs of
purchased power.36

The PPA of QUEZELCO I for the period of January 1999 to April 2004 was confirmed
by the ERC. In light of the over-recovery, QUEZELCO I was directed "to refund the
amount of P0.0486/kWh starting the next billing cycle from receipt of this Order
until such time that the full amount shall have been refunded."37

3. 7 December 2005 Order38

In the Order dated 7 December 2005, the ERC reviewed and verified the monthly
PPA implementation of QUEZELCO II covering the period from January 2000 to
November 2003, based on the monthly implementation reports, documents and
information submitted by the rural electric cooperative. The ERC established that
there were over-recoveries amounting to Five Million Two Hundred Forty Eight
Thousand Two Hundred Eighty Two Pesos (P 5,248,282.00) equivalent to
P0.1000/kWh.

The bases of the over-recoveries are as follows:

1. QUEZELCO II treated the penalty on excess/below contracted demand in April

2000 as a discount;

2. For the period May 2000 to November 2000, QUEZELCO II overstated its power
cost due to accounts payable for fuel oil consumption from November 1999 to June
2000;

3. The new grossed-up factor scheme adopted by the Commission which provided a
different result vis-a-vis the originally approved formula; and

4. The Purchased Power Cost was reduced by the Prompt Payment Discount availed
from the power suppliers.39

The ERC confirmed the PPA of QUEZELCO II for the period of January 2000 to
November 2003, and directed QUEZELCO II "to refund the amount of P0.1000/kWh
starting on the next billing cycle from receipt of this Order until such time that the
full amount shall have been refunded."40

4. 27 March 2006 Order41

In the Order dated 27 March 2006, the ERC evaluated the monthly PPA
implementation of PRESCO covering the period of February 1996 to June 2004.
PRESCO previously submitted its monthly PPA implementation reports, documents
and information for review, verification and confirmation pursuant to the Order
dated 25 April 1997 issued by the ERB. The ERC determined that there were overrecoveries amounting to Eighteen Million Four Hundred Thirty Eight Thousand Nine
Hundred Six Pesos (P 18,438,906.00) equivalent to P0.1851/kWh. The overrecoveries were based on the following:

1. In its PPA computation, PRESCO excluded its subsidized consumers in the

components of the kWh sales despite that these consumers where being charged
with PPA;

2. Since PRESCO sources its power from the National Power Corporation (NPC) and
Angeles Power Incorporated (API), the Commission used PRESCOs actual power
cost from API for the years 1998, 1999 (except August), 2000, 2001 and 2002
(January to April only) being lower than NPCs rate. However, for the years 2002
(May to December), 2003 and 2004, the Commission applied NPCs rate being lower
than API. x x x x

3. For the period February 1996 to April 1999, PRESCO utilized the 1.4 multiplier
scheme which is roughly equivalent to 29% system loss which resulted to an overrecovery of PhP 5,701,173.00; and

4. The Commission computed PRESCOs allowable power cost at "net" of the Power
Factor Discount (PFD) and Prompt Payment Discount (PPD) availed from NPC at PhP

2,185,812.00. PRESCO did not extend the discounts to the end users. Thus, the
Commission considered PRESCOs actual revenue.42

The ERC confirmed the PPA of PRESCO for the period of February 1996 to June 2004,
and directed PRESCO "to refund the amount of P0.1851/kWh starting the next billing
cycle from receipt of this Order until such time that the full amount shall have been
refunded."43

Petitioners thereafter filed their respective motions for reconsideration of the

foregoing Orders. On 9 May 2007, the ERC issued Orders denying the motions for
reconsideration filed by the petitioners.44

On 28 June 2007, BATELEC I, QUEZELCO I and QUEZELCO II filed with the Court of
Appeals a Petition for Review under Rule 43 of the Rules of Court, assailing the 22
March 2006 Order, 16 February 2007 Order and 7 December 2005 Order of the ERC
directing the rural electric cooperatives to refund their respective over-recoveries.
The petition also assailed the 9 May 2007 Orders of the ERC denying the motions for
reconsideration of BATELEC I, QUEZELCO I and QUEZELCO II. The case was docketed
as CA-G.R. SP No. 99249. On the same date, PRESCO also filed with the Court of
Appeals a Petition for Review under Rule 43 of the Rules of Court, assailing the 27
March 2006 Order of the ERC directing the rural electric cooperative to refund its
over-recoveries. The petition likewise assailed the 9 May 2007 Order of the ERC
denying the motion for reconsideration of PRESCO. The case was docketed as CAG.R. SP No. 99253. The Court of Appeals subsequently consolidated these cases
with the petitions filed by other rural electric cooperatives and their associations in
relation to the refund of their respective over-recoveries. The consolidated cases
include CA-G.R. SP Nos. 99249, 99250,45 99251,46 99252,47 99253, 99267,48
99269,49 99270,50 99271,51 99272,52 99273,53 99323,54 99462,55 99782,56
100671,57 and 100822.58

The rural electric cooperatives similarly raised the following issues in the
consolidated cases:

1. Whether the system loss caps prescribed under Section 10 of R.A. 7832 are
arbitrary and violative of the non-impairment clause, therefore, invalid and
unconstitutional;

2. Whether the system loss caps should still be imposed even after the effectivity of
R.A. 9136;

3. Whether the ERC may validly issue rules and regulations for the implementation
of the provisions of R.A. No. 7832 by way of Orders or Decisions with retroactive
effect;

4. Whether petitioners were denied due process of law by the non-disclosure and
non-issuance of guidelines or rules in the implementation of the alleged "Gross Up
Factor Mechanism" in the "confirmation process";

5. Whether the ERC observed the proper issuance of orders and resolutions;

6. Whether the denial of petitioners motions for reconsideration of the assailed

Orders with only one Commissioner affixing his signature thereto is valid;

7. Whether the ERC has legal and factual bases to charge petitioners with overrecoveries and to order the refund thereof for having (1) implemented an "E" that is
different from that imposed in the ERB formula and (2) used the multiplier scheme
originally approved by the NEA;

8. Whether the prompt payment discount and other discounts extended to

petitioners by their power supplier, the NPC, may validly be refunded to the
consumers;

9. Whether the alleged over-recoveries were arrived at without giving petitioners

the opportunity to be heard.59

The Ruling of the Court of Appeals

In its 23 December 2008 Decision, the Court of Appeals denied the petitions for
review of the rural electric cooperatives, and affirmed the Orders of the ERC
directing the various rural electric cooperatives to refund their respective overrecoveries. At the outset, the Court of Appeals stated that "to the extent that the
administrative agency has not been arbitrary or capricious in the exercise of its
power, the time-honored principle is that courts should not interfere."60

With respect to the constitutionality of Section 10 of R.A. No. 7832, the Court of
Appeals ruled that the challenge amounts to a collateral attack that is prohibited by
public policy.61

With regard to the imposition of the system loss caps after the effectivity of the
EPIRA, the Court of Appeals recognized the amendment to Section 10 of R.A. No.
7832. Section 43 (f) of the EPIRA provides that "the cap on the recoverable rate of
system losses prescribed in Section 10 of Republic Act No. 7832, is hereby amended
and shall be replaced by caps which shall be determined by the ERC based on load
density, sales mix, cost of service, delivery voltage and other technical
considerations it may promulgate." The Court of Appeals, however, stated:

While the EPIRA had already specifically amended the system loss caps mandated
under Section 10 of R.A. No. 7832, respondent ERC still had to go through the
tedious process of determining the technical considerations in order to come up
with the rate-setting methodology that shall promote the efficiency of distribution
utilities as envisioned by the law. Before they could be replaced, however, the caps
used in the ERB formula remain, as asserted by the OSG. For this reason, petitioners
cannot insist that the reinforcement of said system loss caps be discontinued after
the passage of the EPIRA on June 8, 2001. In fact, as already stated, it was only in
October, 2004 that respondent ERC was able to promulgate the AGRA or the
Automatic Adjustment of Generation Rates and System Loss Rates by Distribution
Utilities, which could effectively replace the PPA. Thus, for the periods covered by
the ERC confirmation (February 1996 to September 2004), respondent ERC did not
abuse its discretion in using the system loss caps in the ERB formula.62

The Court of Appeals likewise rejected the contention of petitioners that the ERC
issued rules and regulations for the implementation of the provisions of R.A. No.
7832 by way of orders or decisions with retroactive effect. According to the Court of
Appeals, the confirmation process of the ERC encompassed PPA implementation
periods after the effectivity of R.A. No. 7832, particularly from February 1996 to

September 2004.63 Thus, the Court of Appeals concluded that there was no
retroactive application of the law.

The Court of Appeals further rejected the claim of denial of due process. The Court
of Appeals ruled:

Petitioners likewise failed to show to Our satisfaction that the guidelines contained
in the assailed Orders of respondent ERC went beyond merely providing for the
means that can facilitate or render less cumbersome the implementation of the law.
Interpretative rules give no real consequence more than what the law itself has
already prescribed, and are designed merely to provide guidelines to the law which
the administrative agency is in charge of enforcing.64

As regards the validity of the denial of petitioners motions for reconsideration, the
Court of Appeals noted that the Orders specifically indicated that the signature of
the Commissioner was "FOR AND BY AUTHORITY OF THE COMMISSION."65 The
Court of Appeals stated that the ERC examined the motions for reconsideration as a
collegial body.66 It further emphasized that the interests of substantial justice
prevail over the strict application of technical rules.67

The Court of Appeals further ruled that the ERC had legal and factual bases in
charging petitioners with over-recoveries. The Court of Appeals stated:

Prior to the enactment of R.A. No. 7832, petitioners used the Multiplier Scheme
implemented by the NEA [National Electrification Administration] to recover
incremental costs in the power purchased from NPC the sole agency authorized to
generate electric power before the enactment of the EPIRA and consequent
system losses that are not included in their respective approved basic rates. With
the use of multipliers ranging from 1.2 to 1.4, depending on their actual system
losses, petitioners were allowed to automatically adjust their rates when cost of
power purchased from NPC changes, thus:

1.2 Multiplier For ECs with system loss of 15% and below;

1.3 Multiplier For ECs with system loss ranging from 16% to 22%; and

1.4 Multiplier For ECs with system loss ranging from 23% and above.

The NEA likewise approved the inclusion in the basic rates of a separate item for
Loss Levy Charge for those electric cooperatives (ECs) whose loan covenants with
financial institutions such as the Asian Development Bank (ADB) limit their
recoverable system loss to 15%.

Thus, petitioners charged their consumers "System Loss Levy" for system losses in
excess of 15%.

Petitioners admitted having continued to use the pricing mechanisms authorized by

the NEA even after the passage of R.A. No. 7832, which repealed the same.
Needless to say, the use of said mechanisms allowed the recovery of system losses
beyond the caps set by the said law. Petitioners cannot, therefore, successfully
argue that respondent ERC had no basis in charging them of over-recoveries as a
result of their failure to comply with the law.68

With respect to the PPD and other discounts extended by power suppliers, the Court
of Appeals emphasized that rural electric cooperatives may only recover the actual
cost of purchased power. The Court of Appeals stated:

No error can likewise be attributed to respondent ERC in directing the

implementation of the respective PPA of the petitioners using the power cost net of
discounts. As held in the case of National Power Corporation vs. Philippine Electric
Plant Owners Associaton (PEPOA), Inc., discounts are not amounts paid or charged
for the sale of electricity, but are reductions in rates. Moreover, We emphasized
here that rate fixing calls for a technical examination and specialized review of
specific details which the courts are ill-equipped to enter, hence, such matters are
primarily entrusted to the administrative or regulating authority. Towards this end,
the administrative agency, respondent ERC in this case, possesses the power to
issue rules and regulations to implement the statute which it is tasked to enforce,
and whatever is incidentally necessary to a full implementation of the legislative
intent should be upheld as germane to the law. Respondent ERC is mandated to
prescribe a rate-setting methodology "in the public interest" and "to promote

efficiency", hence its goal of fixing purchased power at actual cost should be
upheld.69

The Court of Appeals further rejected the claim that petitioners were deprived of the
opportunity to be heard. The Court of Appeals gave credence to the assertion of the
Office of the Solicitor General that "petitioners were allowed to justify their PPA
charges through the documents that they were required to file; that the technical
staff of the ERC conducted exit conferences with petitioners representatives to
discuss preliminary figures and they were authorized to go over the working papers
to check out inaccuracies; and that petitioners were allowed to file their respective
motions for reconsideration after the issuance of the PPA confirmation Orders."70

The rural electric cooperatives thereafter filed their respective motions for
reconsideration of the 23 December 2008 Decision of the Court of Appeals. In its 26
April 2010 Resolution, the Court of Appeals denied the motions for reconsideration.
The Court of Appeals observed that the issues raised in the motions for
reconsideration were "mere reiterations" of the issues addressed in the 23
December 2008 Decision.71 The Court of Appeals further stated:

Nonetheless, We find that the following disquisition of the Office of the Solicitor
General amply supports the affirmance of the assailed Decision, thus:

"12. Notably, respondent did not impose rules to set new rates, rather, it merely
confirmed whether petitioners have faithfully complied with the requirements of
recoveries under the provisionally approved PPA formula. There is therefore nothing
new or novel about the confirmation policies of respondent as to give any occasion
to retroactivity.

13. Equally significant, it should be underscored that from the beginning,

petitioners authority to recover their losses based on the PPA formula were
PROVISIONAL, that is, the authority granted to petitioners for recoveries and the
mode of its implementation is subject to further reconfirmation by respondent ERC.
The erstwhile ERB earlier allowed electric cooperatives to implement their PPA
based on the PPA formula that the ERB provisionally approved. As spelled out in the
Order of approval, however, such authorization was provisional and temporary, that
is, it is subject to regulation and post hoc review, verification and confirmation by
the ERB.

xxx

14. By its very nature, the PPA confirmation process is a post hoc review of charges
already implemented. It is therefore crystal clear from the approval of the
application of the PPA that such authorization was conditioned on subsequent
review by the regulating body. Thus, the Order did not only approve the
implementation of the PPA but also (a) directed the electric cooperatives to submit
their monthly implementation of the PPA formula for the boards review, verification
and confirmation; and (b) directed the Commission on Audit to cause an audit of all
the accounts and other records of all the electric cooperatives to aid the Board in
the determination of rates.

15. That the electric cooperatives were allowed to implement their PPA after the
provisional approval of the PPA formula did not divest the regulator of the power to
determine the reasonableness of the said charges or the electric cooperatives
entitlement thereto. Such power necessarily includes the power to adopt such
policies as would assist the regulator in its determination of the reasonableness of
such PPA charges implemented by electric cooperatives. The implementation was
provisionally approved and subject to the changes that the regulator can make, in
the exercise of its rate-setting authority and subject to the reasonableness
standard under the law x x x."

Suffice to state that with regard to rate-determination, the government is not

hidebound to apply any particular method or formula. What is a just and reasonable
rate cannot be fixed by any immutable method or formula. In other words, no public
utility has the vested right to any particular method of valuation. The administrative
agency is not duty bound to apply any one particular formula or method simply
because the same method has been previously used and applied.

The issues on the alleged retroactive application and denial of due process had
been adequately addressed in the Decision dated December 23, 2008. We reiterate
that the periods covered by the ERC confirmation subject of the petitions, spanning
from February 1996 to September 2004, fell after the effectivity of R.A. No. 7832,
the constitutionality of which petitioners continue, albeit erroneously, to assail in
the instant motions. With respect to the alleged lack of trial-type hearing, it is
settled that the essence of due process in administrative proceedings is merely the
opportunity to explain ones side or to seek reconsideration of the action or ruling

complained of. Where an opportunity to be heard is accorded, as in this case, there

is no denial of due process. Neither was there a need for the assailed Orders of the
ERC to be published as petitioners so adamantly insist. As pointed out by the OSG,
said Orders did not create a new obligation, impose a new duty, or attach a new
disability on the electric cooperatives. They merely clarified the policy guidelines
adopted in the implementation of the PPA. As We have said, interpretative rules give
no real consequence more than what the law itself has already prescribed.72

Hence, this instant petition filed by BATELEC I, QUEZELCO I, QUEZELCO II and

PRESCO.

The Issues

Petitioners raise the following issues:

1. Whether the policy guidelines issued by the ERC on the treatment of discounts
extended by power suppliers are ineffective and invalid for lack of publication, nonsubmission to the University of the Philippines (U.P.) Law Center, and their
retroactive application; and

2. Whether the grossed-up factor mechanism implemented by the ERC in the

computation of the over-recoveries is ineffective and invalid for lack of publication,
non-submission to the U.P. Law Center, and its retroactive application.

The Ruling of the Court

The petition is partly meritorious.

I.

Petitioners assail the validity of the 22 March 2006 Order,73 16 February 2007
Order,74 7 December 2005 Order,75 and 27 March 2006 Order76 of the ERC
directing the refund of over-recoveries for having been issued pursuant to
ineffective and invalid policy guidelines. Petitioners assert that the policy guidelines
on the treatment of discounts extended by power suppliers are ineffective and
invalid for lack of publication, non-submission to the U.P. Law Center, and their
retroactive application.

Publication is a basic postulate of procedural due process. The purpose of

publication is to duly inform the public of the contents of the laws which govern
them and regulate their activities.77 Article 2 of the Civil Code, as amended by
Section 1 of Executive Order No. 200, states that "laws shall take effect after fifteen
days following the completion of their publication either in the Official Gazette or in
a newspaper of general circulation in the Philippines, unless it is otherwise
provided." Section 18, Chapter 5, Book I of Executive Order No. 292 or the
Administrative Code of 1987 similarly provides that "[l]aws shall take effect after
fifteen (15) days following the completion of their publication in the Official Gazette
or in a newspaper of general circulation, unless it is otherwise provided."

Procedural due process demands that administrative rules and regulations be

published in order to be effective.78 In Taada v. Tuvera, this Court articulated the
fundamental requirement of publication, thus:

We hold therefore that all statutes, including those of local application and private
laws, shall be published as a condition for their effectivity, which shall begin fifteen
days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by
the President in the exercise of legislative powers whenever the same are validly
delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing law pursuant also to a valid delegation.79 (Boldfacing
supplied)

There are, however, several exceptions to the requirement of publication. First, an

interpretative regulation does not require publication in order to be effective.80 The
applicability of an interpretative regulation "needs nothing further than its bare

issuance for it gives no real consequence more than what the law itself has already
prescribed."81 It "adds nothing to the law" and "does not affect the substantial
rights of any person."82 Second, a regulation that is merely internal in nature does
not require publication for its effectivity.83 It seeks to regulate only the personnel of
the administrative agency and not the general public.84 Third, a letter of instruction
issued by an administrative agency concerning rules or guidelines to be followed by
subordinates in the performance of their duties does not require publication in order
to be effective.85

The policy guidelines of the ERC on the treatment of discounts extended by power
suppliers are interpretative regulations. The policy guidelines merely interpret R.A.
No. 7832 and its IRR, particularly on the computation of the cost of purchased
power. The policy guidelines did not modify, amend or supplant the IRR.

The policy guidelines were first enunciated by the ERC in its 17 June 2003 Order. In
the said Order, the ERC explained that the cost of electricity purchased and
generated is computed at "gross" if the discounts extended by the power supplier
are not passed on to end-users, while the cost of electricity is computed at "net" if
the discounts are passed on to end-users.86

The ERC subsequently issued its 14 January 2005 Order. It emphasized therein that
rural electric cooperatives should only recover the actual costs of purchased
power.87 Any discounts extended to rural electric cooperatives must therefore be
extended to end-users by charging only the "net" cost of purchased power. The ERC
issued the following directives in the said Order:

A. The computation and confirmation of the PPA prior to the Commissions Order
dated June 17, 2003 shall be based on the approved PPA formula;

B. The computation and confirmation of the PPA after the Commissions Order dated
June 17, 2003 shall be based on the power cost "net" of discount; and

C. If the approved PPA formula is silent on the terms of discount, the computation
and confirmation of the PPA shall be based on the power cost at "gross", subject to
the submission of proofs that said discounts are being extended to the end-users.88

The ERC thereafter clarified its policy guidelines in the 22 March 2006 Order, 16
February 2007 Order, 7 December 2005 Order and 27 March 2006 Order. The ERC
outlined the following principles governing the treatment of the PPD extended by
power suppliers to distribution utilities including rural electric cooperatives:

I. The over-or-under recovery will be determined by comparing the Allowable Power

Cost with the Distribution Utilitys Actual Revenue (AR) billed to end-users.

II. Calculation of the Allowable Power Cost as prescribed in the PPA Formula:

a. For a Distribution Utility which PPA formula explicitly provides the manner by
which discounts availed from the power supplier/s shall be treated, the allowable
power cost will be computed based on the specific provision of the formula, which
may either be at "net" or "gross"; and

b. For a Distribution Utility which PPA formula is silent in terms of discounts, the
allowable power cost will be computed at "net" of discounts availed from the power
supplier/s, if there is any.

III. Calculation of the Distribution Utilitys Actual Revenues/Actual Amount Billed to

End-users.

a. On Actual PPA Computed at Net of Discounts Availed from Power Supplier/s:

a.1. If a Distribution Utility bills at net of discounts availed from the power supplier/s
(i.e. Gross power cost minus discounts from power supplier/s) and the distribution
utility is not extending discounts to end-users, the actual revenue should be equal
to the allowable power cost; and

a.2. If a Distribution Utility bills at net of discounts availed from the power supplier/s
(i.e. Gross power cost minus discounts from power supplier/s) and the distribution

utility is extending discounts to end-users, the discount extended to end-users will

be added back to actual revenue.

b. On Actual PPA Computed at Gross

b.1. If a Distribution Utility bills at gross (i.e. Gross power cost not reduced by
discounts from power supplier/s) and the distribution utility is extending discounts
to end-users, the actual revenue will be calculated as: Gross Power Revenue less
Discounts extended to end-users. The result will then be compared to the allowable
power cost; and

b.2. If a Distribution Utility bills at gross (i.e. Gross power cost not reduced by
discounts from power supplier/s) and the distribution utility is not extending
discounts to end-users, the actual revenue will be taken as is which shall be
compared to the allowable power cost.

IV. In calculating the Distribution Utilitys actual revenues, in no case shall the
amount of discounts extended to end-users be higher than the discounts availed by
the Distribution Utility from its power supplier/s.89

The above-stated policy guidelines of the ERC on the treatment of discounts merely
interpret the cost of purchased power as a component of the PPA formula provided
in Section 5, Rule IX of the IRR of R.A. No. 7832. The cost of purchased power is
denominated as the variable "A" in the numerator of the PPA formula, particularly:

Section 5. Automatic Cost Adjustment Formula.

xxxx

The automatic cost adjustment of every electric cooperative shall be guided by the
following formula:

Purchased Power Adjustment Clause

(PPA) =

-E
B-(C + D)
Where:

A=

Cost of electricity purchased and generated for the previous month

B=

Total Kwh purchased and generated for the previous month

C=
The actual system loss but not to exceed the maximum recoverable rate of
system loss in Kwh plus actual company use in Kwhrs but not to exceed 1% of total
Kwhrs purchased and generated

D=

Kwh consumed by subsidized consumers

E=
Applicable base cost of power equal to the amount incorporated into their
basic rate per Kwh (Boldfacing supplied)

The cost of purchased power expressed as the variable "A" in the numerator of the
PPA formula is plain and unambiguous. Websters Third New International Dictionary
defines the term "cost" as "an item of outlay incurred in the operation of a business
enterprise (as for the purchase of raw materials, labor, services, supplies) including
the depreciation and amortization of capital assets."90 Blacks Law Dictionary
defines the term "cost" as "the amount paid or charged for something; price or
expenditure."91 When the policy guidelines of the ERC directed the exclusion of
discounts extended by power suppliers in the computation of the cost of purchased
power, the guidelines merely affirmed the plain and unambiguous meaning of "cost"
in Section 5, Rule IX of the IRR of R.A. No. 7832. "Cost" is an item of outlay, and
must therefore exclude discounts since these are "not amounts paid or charged for
the sale of electricity, but are reductions in rates."92

Furthermore, the policy guidelines of the ERC uphold and preserve the nature of the
PPA formula. The nature of the PPA formula precludes an interpretation that includes
discounts in the computation of the cost of purchased power. The PPA formula is an
adjustment mechanism the purpose of which is purely for the recovery of cost. In
National Association of Electricity Consumers for Reforms (NASECORE) v. Energy
Regulatory Commission,93 this Court noted the explanation of the ERC on the
nature and purpose of an adjustment mechanism:

It is clear from the foregoing that "escalator" or "tracker" or any other similar
automatic adjustment clauses are merely cost recovery or cost "flow-through"
mechanisms; that what they purport to cover are operating costs only which are
very volatile and unstable in nature and over which the utility has no control; and
that the use of the said clauses is deemed necessary to enable the utility to make
the consequent adjustments on the billings to its customers so that ultimately its
rate of return would not be quickly eroded by the escalations in said costs of
operation. The total of all rate adjustments should not operate to increase overall
rate of return for a particular utility company above the basic rates approved in the
last previous rate case (Re Adjustment Clause in Telephone Rate Schedules, 3 PUR
4th 298, N.J. Bd. of Pub. Util.Commrs., 1973. Affirmed 66 N.J. 476, 33 A.2d 4, 8 PUR
4th 36, N.J.,1975).94

Rural electric cooperatives cannot therefore incorporate in the PPA formula costs
that they did not incur. Consumers must not shoulder the gross cost of purchased
power; otherwise, rural electric cooperatives will unjustly profit from discounts
extended to them by power suppliers. In the Consolidated Comment of the ERC, the
Solicitor General correctly pointed out:

34.4. Second, the ERCs PPA confirmation policies were in consonance with the rule
that electric cooperatives may only recover costs to the extent of the amount they
actually incurred in the purchase of electricity. The PPA remained to be the
difference between the electric cooperatives actual allowable power costs as
translated to PhP/kWh and the electric cooperatives approved Basic Rate. This was
also how the Cost Adjustment Formula was defined in the IRR of R.A. No. 7832.

34.5. Contrary to petitioners assertions, therefore, the policy did not deviate from
the ERBs provisionally-approved PPA formula but merely implemented the policy
set out in R.A. No. 7832, that is, it is strictly for the purpose of cost recovery only.

Obviously, if the PPA is computed without factoring the discounts given by power
suppliers to electric cooperatives, electric cooperatives will impermissibly retain or
even earn from the implementation of the PPA.95

Thus, the policy guidelines of the ERC on the treatment of discounts extended by
power suppliers "give no real consequence more than what the law itself has
already prescribed."96 Publication is not necessary for the effectivity of the policy
guidelines.

As interpretative regulations, the policy guidelines of the ERC on the treatment of

discounts extended by power suppliers are also not required to be filed with the U.P.
Law Center in order to be effective. Section 4, Chapter 2, Book VII of the
Administrative Code of 1987 requires every rule adopted by an agency to be filed
with the U.P. Law Center to be effective. However, in Board of Trustees of the
Government Service Insurance System v. Velasco,97 this Court pronounced that
"not all rules and regulations adopted by every government agency are to be filed
with the UP Law Center."98 Interpretative regulations and those merely internal in
nature are not required to be filed with the U.P. Law Center.99 Paragraph 9 (a) of the
Guidelines for Receiving and Publication of Rules and Regulations Filed with the U.P.
Law Center100 states:

9. Rules and Regulations which need not be filed with the U.P. Law Center, shall,
among others, include but not be limited to, the following:

a. Those which are interpretative regulations and those merely internal in nature,
that is, regulating only the personnel of the Administrative agency and not the
public.

Petitioners further assert that the policy guidelines are invalid for having been
applied retroactively. According to petitioners, the ERC applied the policy guidelines
to periods of PPA implementation prior to the issuance of its 14 January 2005
Order.101 In Republic v. Sandiganbayan,102 this Court recognized the basic rule
"that no statute, decree, ordinance, rule or regulation (or even policy) shall be given
retrospective effect unless explicitly stated so."103 A law is retrospective if it "takes
away or impairs vested rights acquired under existing laws, or creates a new
obligation and imposes a new duty, or attaches a new disability, in respect of
transactions or consideration already past."104

The policy guidelines of the ERC on the treatment of discounts extended by power
suppliers are not retrospective. The policy guidelines did not take away or impair
any vested rights of the rural electric cooperatives. The usage and implementation
of the PPA formula were provisionally approved by the ERB in its Orders dated 19
February 1997105 and 25 April 1997.106 The said Orders specifically stated that
the provisional approval of the PPA formula was subject to review, verification and
confirmation by the ERB. Thus, the rural electric cooperatives did not acquire any
vested rights in the usage and implementation of the provisionally approved PPA
formula.

Furthermore, the policy guidelines of the ERC did not create a new obligation and
impose a new duty, nor did it attach a new disability. As previously discussed, the
policy guidelines merely interpret R.A. No. 7832 and its IRR, particularly on the
computation of the cost of purchased power.The policy guidelines did not modify,
amend or supplant the IRR.

II.

Petitioners further assail the validity of the 22 March 2006 Order, 16 February 2007
Order, 7 December 2005 Order and 27 March 2006 Order of the ERC directing the
refund of over-recoveries for having been issued pursuant to an ineffective and
invalid grossed-up factor mechanism. Petitioners claim that the grossed-up factor
mechanism implemented by the

ERC in the review, verification and confirmation of the PPA is ineffective and invalid
for lack of publication, non-submission to the U.P. Law Center, and its retroactive
application.

It does not appear from the records that the grossed-up factor mechanism was
published or submitted to the U.P. Law Center. The ERC did not dispute the claim of
petitioners that the grossed-up factor mechanism was not published, nor did the
ERC dispute the claim that the grossed-up factor mechanism was not disclosed to
the rural electric cooperatives prior to the review, verification and confirmation of
the PPA.107 The 22 March 2006 Order and 16 February 2007 Order merely stated
that one of the bases of the over-recoveries was "the new grossed-up factor

mechanism adopted by the Commission which provided a true-up mechanism that

allows the distribution utilities to recover the actual cost of purchased power."108
The 7 December 2005 Order similarly stated that one of the bases of the overrecoveries was "the new grossed-up factor scheme adopted by the Commission
which provided a different result vis-a-vis the originally approved formula."109 The
ERC did not explain or disclose in the said Orders any details regarding the grossedup factor mechanism.

Based on the records, the first instance wherein the ERC disclosed the details of the
grossed-up factor mechanism was in its comments filed with the Court of Appeals in
CA-G.R. SP Nos. 99249 and 99253 on 1 August 2008 and 9 October 2007,
respectively.110 The ERC reiterated the details of the grossed-up factor mechanism
in its Consolidated Comment filed with this Court on 28 February 2011.111 The ERC
illustrated the application of the grossed-up factor mechanism in the following
manner:

Given:

Kwh Purchased 100,000 Kwh

Cost of Purchased Power PhP 300,000.00

Kwh Sales 89,000 Kwh

Coop Use 1,000 Kwh

System Loss 10% or 10,000 Kwh

Gross-Up Factor = Kwh Sales + Coop Use

Kwh Purchased (1-% System Loss)
Gross-up Factor = 89,000+1,000

100,000 (1-10%)
Gross-up Factor = 90,000
=1
90,000
The Gross-up Factor, which in this illustration is equivalent to 1, will be used in
determining the recoverable power cost of an electric cooperative, such that:

Recoverable Cost = Gross-Up Factor x Cost of Purchased Power

Recoverable Cost = 1 x PhP 300,000.00 = PhP 300,000.00112

(Boldfacing supplied)

In its Consolidated Comment, the ERC stated that the PPA "captures the incremental
cost in purchased and generated electricity plus recoverable system loss in excess
of what had already been included as power cost component in the electric
cooperatives basic rates."113 On the other hand, the grossed-up factor mechanism
is a "mathematical calculation that ensures that the electric cooperatives are able
to recover costs incurred from electricity purchased and generated plus system loss
components within allowable limits."114 The ERC proceeded to explain the
relationship between the PPA and the grossed-up factor mechanism thus:

20.2 This gross-up factor mechanism did not modify the PPA formula or state how
the PPA is to be computed. The recoverable amount derived from applying the
gross-up factor is still the maximum allowable cost to be recovered from the electric
cooperatives customers for a given month. If the PPA collected exceeded the
recoverable cost, the difference should be refunded back to the consumers.115

This Court agrees with the ERC that the grossed-up factor mechanism "did not
modify the PPA formula or state how the PPA is to be computed."116 However, the
grossed-up factor mechanism amends the IRR of R.A. No. 7832 as it serves as an
additional numerical standard that must be observed and applied by rural electric
cooperatives in the implementation of the PPA. While the IRR explains, and
stipulates, the PPA formula, the IRR neither explains nor stipulates the grossed-up
factor mechanism. The reason is that the grossed-up factor mechanism is

admittedly "new" and provides a "different result," having been formulated only
after the issuance of the IRR.

The grossed-up factor mechanism is not the same as the PPA formula provided in
the IRR of R.A. No. 7832. Neither is the grossed-up factor mechanism subsumed in
any of the five variables of the PPA formula. Although both the grossed-up factor
mechanism and the PPA formula account for system loss and use of electricity by
cooperatives, they serve different quantitative purposes.

The grossed-up factor mechanism serves as a threshold amount to which the PPA
formula is to be compared. According to the ERC, any amount collected under the
PPA that exceeds the Recoverable Cost computed under the grossed-up factor
mechanism shall be refunded to the consumers.117 The Recoverable Cost
computed under the grossed-up factor mechanism is "the maximum allowable cost
to be recovered from the electric cooperatives customers for a given month."118 In
effect, the PPA alone does not serve as the variable rate to be collected from the
consumers. The PPA formula and the grossed-up factor mechanism will both have to
be observed and applied in the implementation of the PPA.

Furthermore, the grossed-up factor mechanism accounts for a variable that is not
included in the five variables of the PPA formula. In particular, the grossed-up factor
mechanism accounts for the amount of power sold in proportion to the amount of
power purchased by a rural electric cooperative, expressed as the Gross-Up Factor.
It appears that the Gross-Up Factor limits the Recoverable Cost by allowing recovery
of the Cost of Purchased Power only in proportion to the amount of power sold. This
is shown by integrating the formula of the Gross-Up Factor with the formula of the
Recoverable Cost, thus:

The grossed-up factor mechanism consists of the following formulas:

Gross-Up Factor = Kwh Sales + Coop Use

Kwh Purchased (1-% System Loss)
Recoverable Cost = Gross-Up Factor x Cost of Purchased Power

Integrating the above-stated formulas will result in the following formula:

Recoverable Cost =

Kwh Sales + Coop Use

x Cost of Purchased
Power
Kwh Purchased (1-% System Loss)
On the other hand, the PPA formula provided in the IRR of R.A. No. 7832 does not
account for the amount of power sold. It accounts for the amount of power
purchased and generated, expressed as the variable "B" in the following PPA
formula:

Purchased Power Adjustment Clause

(PPA) =

-E
B-(C + D)
Where:

A=

Cost of electricity purchased and generated for the previous month

B=

Total Kwh purchased and generated for the previous month

C=
The actual system loss but not to exceed the maximum recoverable rate of
system loss in Kwh plus actual company use in Kwhrs but not to exceed 1% of total
Kwhrs purchased and generated

D=

Kwh consumed by subsidized consumers

E=
Applicable base cost of power equal to the amount incorporated into their
basic rate per Kwh119 (Boldfacing supplied)

In light of these, the grossed-up factor mechanism does not merely interpret R.A.
No. 7832 or its IRR.1wphi1 It is also not merely internal in nature. The grossed-up
factor mechanism amends the IRR by providing an additional numerical standard
that must be observed and applied in the implementation of the PPA. The grossedup factor mechanism is therefore an administrative rule that should be published
and submitted to the U.P. Law Center in order to be effective.

As previously stated, it does not appear from the records that the grossed-up factor
mechanism was published and submitted to the U.P. Law Center. Thus, it is
ineffective and may not serve as a basis for the computation of over-recoveries. The
portions of the over-recoveries arising from the application of the mechanism are
therefore invalid.

Furthermore, the application of the grossed-up factor mechanism to periods of PPA

implementation prior to its publication and disclosure renders the said mechanism
invalid for having been applied retroactively. The grossed-up factor mechanism
imposes an additional numerical standard that clearly "creates a new obligation and
imposes a new duty x x x in respect of transactions or consideration already
past."120

Rural electric cooperatives cannot be reasonably expected to comply with and

observe the grossed-up factor mechanism without its publication. This Court
recognizes that the mechanism aims to reflect the actual cost of purchased power
for the benefit of consumers. However, this objective must at all times be balanced
with the viability of rural electric cooperatives. The ERB itself made the following
observation regarding the operational and economic condition of rural electric
cooperatives in its Order dated 19 February 1997:

Electric cooperatives are created under Presidential Decree No. 269 in the nature of
non-profit organizations. Thus, they do not have the funds they can dispose of to
meet their future emergency obligations and operational needs. They are not
entitled return on their investment as their rates are based on cash flow
methodology. Hence, if the appropriate rate level x x x to keep them going or viable,
shall not be provided, the finances and operations of the said cooperatives will be

jeopardized which ultimately will result in inefficient electric service to their

respective customers or worse shut down when they fail to pay the sources of their
electricity like (National Power Corporation) and their loans to the NEA.121

Administrative compliance with due process requirements cultivates a regulatory

environment characterized by predictability and stability. These characteristics
ensure that rural electric cooperatives are given the opportunity to achieve
efficiency, and that ultimately, consumers have access to reliable services and
affordable electric rates.

WHEREFORE, we PARTY GRANT the petition and rule that the grossed-up factor
mechanism is INEFFECTIVE and INVALID. We further rule that the portions of the
over-recoveries that may have arisen from the application of the grossed-up factor
mechanism in the 22 March 2006 Order, 16 February 2007 Order, 7 December 2005
Order and 27 March 2006 Order of the Energy Regulatory Commission are INVALID.
Respondent Energy Regulatory Commission is DIRECTED to compute the portions of
the over-recoveries arising from the application of the grossed-up factor mechanism
and to implement the collection of any amount previously refunded by petitioner to
their respective consumers on the basis of the grossed-up factor mechanism. The
23 December 2008 Decision and 26 April 2010 Resolution of the Court of Appeals
are hereby MODIFIED accordingly.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR: