;i'

..,,. 1,, ,;, ' .~~.J.r,,~_,;.,~ 1.~.~;'-1!~1"' .I l1' !: ~~{;JEn.11::1J

REPUBLIC OF THE PHILIPPINli}~ JAN -9 AM 8: 4 I SUPREME COURT Manila

EN BANC

Bayan Muna Representatives NERI JAVIER COLMENARES and CARLOS ISAGANI ZARATE, Gabriela Women's Party Representatives LUZ ILAGAN and EMMI DE JESUS, Act Teachers Party-List Representative ANTONIO TINIO, and Kabataan Party-List Representative TERRY RIDON,

Petitioners,

--- versus ---

ENERGY COMMISSION ELECTRIC (MERALCO),

REGULATORY and MANILA

COMPANY

Respondents, x-----------------------------------------------x

NATIONAL ASSOCIATION OF ELECTRICITY CONSUMERS FOR REFORMS, represented by Petronila L. Ilagan, FEDERATION OF VILLAGE ASSOCIATIONS, represented by Siegfriedo A. Veloso, FEDERATION OF LAS PINAS HOMEOWNERS ASSOCIATIONS represented by Bonifacio Daza, and RODRIGO C. DOMINGO, JR.,

Petitioners, --- versus ---

MANILA ELECTRIC COMPANY ENERGY REGULATORY COMMISSION, and DEPARTMENT OF ENERGY,

Respondents. x------------------------------------------------x

G.R. No. 210245

G.R. No. 210255

MANIFESTATION

Respondent MANILA ELECTRIC COMP ANY ("MERALCO"), by counsel, respectfully states:

1. On 8 January 2014, due to the substantial number of parties to serve, time constraints, the volume of the pleading to be filed, and compliance with this Honorable Court's E-Filing Rule, MERALCO was constrained to file its Consolidated Comment/Opposition with Counter-Petition dated 8 January 2014 ("Consolidated Comment") by registered mail. For the information of this Honorable Court, MERALCO attempted to personally file the Consolidated Comment. Unfortunately, undersigned counsel's messenger arrived at this Honorable Court's receiving section around 5:05p.m.

2. To ensure that this Honorable Court receives the Consolidated Comment promptly, attached hereto as Annex "1" is a copy of the said Consolidated Comment with proof of filing by registered mail.

RESPECTFULLY SUBMITTED.

City of Taguig for Manila, 8 January 2014.

ANGARA ABELLO CONCEPCION REGALA & CRUZ Counsel for Respondent Manila Electric Company, Inc.

22nd Floor, ACCRALAW Tower 2nd A venue comer 30th Street

Crescent Park West Bonifacio Global City

0399 Taguig, Metro Manila Telephone No. (632) 830-8000

Facsimile Nos. (632) 403-7007 and (632) 403-7009

By:

2

ARNOLD M. CORPORAL PTR No. A -1676779; 01/09 /13; Taguig City

IBP No. 920830; 01/03/13; Makati City Roll No. 43033

MCLE Compliance No. IV-0012402; 02/12/13

ANTONIDif'o~56 s. 'NAcHuRA, JR. PTR No. A-1676796; 01/09/13; Taguig City

IBP No.920848; 01/03/13; Quezon City Roll No. 52683

MCLE Compliance No. IV-0014318; 03/21/13

FILEMONR YL.JAVIER PTR. No. A - 171603 ~ 1/09 /13; Taguig City

IBP Lifetime No. 010 8; 01/10/12; Pasig City Roll o. 59170

MCLE Compliance o. IV-017983; 04/22/13

MONICA JOY ARCELO PTR No. A-1827720; 4/30 /13; Taguig City

IBP No. 935366; 4/5/13; Quezon City Roll No. 62440

MCLE Compliance No. NI A

COPY FURNISHED

By registered mail (sans attachment):

RENE A.V. SAGUISAG Counsel for Petitioners NASECORE, et al. 4045 Bigasan Street Brgy. Palanan, Makati City

MARIA CRISTINA P. YAMBOT Counsel for Petitioners Bayan Muna, et al. No. 45 K-7th Street, Brgy. West Kamias, Quezon City

3

ENERGY REGULATORY COMMISSION Pacific Centre Building San Miguel A venue, Pasig City

DEPARTMENT OF ENERGY Energy Center, Rizal Drive, Bonifacio Global City, Taguig 1632

PHILIPPINE ELECTRICITY MARKET CORPORATION 9th and 18th Floor, Robinsons Equitable Tower, ADB Avenue, Ortigas Center, Pasig City 1600

FIRST GAS POWER CORPORATION 3 /F Benpres Building, Exchange Road cor. Meralco A venue, Ortigas Center, Pasig City

SOUTH PREMIERE POWER CORPORATION 808 Building, Meralco A venue cor. Gen. Lim Street, San Antonio Village, Pasig City

SAN MIGUEL ENERGY CORPORATION 808 Building, Meralco A venue cor. Gen. Lim Street, San Antonio Village, Pasig City

MASINLOC POWER PARTNERS CO. LTD. Masinloc Coal-Fired Thermal Power Plant, Barangay Bani, Masinloc, Zambales

QUEZON POWER (PHILS.) LTD. CO. 62 H. dela Costa, Mauban, Quezon Province

THERMA LUZON, INC. NAC Tower, 32nd Street, Bonifacio Global City, Taguig

SEM-CALACA POWER CORPORATION Barangay San Rafael, Calaca, Batangas

4

FGPCORP. 3 /F Benpres Building, Exchange Road cor. Meralco Avenue, Ortigas Center, Pasig City

NATIONAL GRID CORPORATION OF THE PHILIPPINES Quezon Avenue comer BIR Road, Diliman, Quezon City 1100 1590 ENERGY CORPORATION Unit 107 First Midland Office Condominium Building, Gamboa Street, Legaspi Village, Makati

AP RENEWABLES, INC. 15/F NAC Tower, 32nd Street, Bonifacio Global City, Taguig City

BAC-MAN ENERGY DEVELOPMENT CORPORATION/ BAC-MAN GEOTHERMAL, INC. 38/F One Corporate Centre, Julia Vargas comer Meralco Avenue, Ortigas Center, Pasig City 1605

FIRST GEN HYRDO POWER CORPORATION 3 /F Benpres Building, Exchange Road cor. Meralco Avenue, Ortigas Center, Pasig City

GNPOWER MARIVELES COAL PLANT LTD. CO. 1905 Orient Square Building, Don Francisco Ortigas Jr. Road, Ortigas Center, Pasig City

PANASIA ENERGY HOLDINGS, INC. 2nd floor, 808 Building, Meralco Avenue, Pasig City 1600

POWER SECTOR ASSETS & LIABILITIES MANAGEMENT CORPORATION 7th Floor Bankmer Building, 6756 Ayala Avenue, Makati City

SN ABOITIZ POWER - BENGUET, INC. SN ABOITIZ POWER - MAGAT, INC. 10/F NAC Tower, 32nd Street, Bonifacio Global City, Taguig City

5

STRATEGIC POWER DEVELOPMENT CORPORATION 2nd Floor, 808 Building, Meralco A venue cor. General Lim, San Antonio Village, Pasig City 1600

TRANS-ASIA POWER GENERATION CORPORATION 11th Floor PHINMA Plaza 39 Plaza Drive, Rockwell Center, Makati City 1200

VIV ANT STA. CLARA NORTHERN RENEW ABLES GENERATION CORPORATION Unit 107, 1st Midland Office Condominium Bldg., Gamboa Street, Legaspi Village, Makati City

COURTESY COPIES

By registered mail (sans attachment): NELSON A. LOYOLA Co-counsel for Petitioners NASECORE, et al. Suite 201 Carreon Building, 27 46 Zenaida Street, Brgy. Poblacion, Makati City

RONNIE B. RODILLAS Co-counsel for Petitioners NASECORE, et al. No. 136 Libis Gochuico Street, Circumferential Road 3, Caloocan City 1400

OFFICE OF THE SOLICITOR GENERAL 134 Amorsolo Street, Legaspi Village, Makati City

EXPLANATION FOR SERVICEBY REGISTERED MAIL (Pursuant to Section 11, Rule 13 of the Rules of Court)

Undersigned counsel respectfully manifests that due to time and distance constraints, the substantial number of parties to be served, and the temporary lack of messengers, undersigned counsel will serve copies of the foregoing MANIFEST I N by registered mail.

6

DECLARATION

I, GERMAINE L. CHUA, hereby declare that the J\11ANIFESTATION dated 8 January 2014 subn1itted elechonically jn accordance with the Efficient Use of Paper Rule is/ are complete and true copy/ies of the MANIFESTATION dated 8 January ?014.

Associate 9 January 2014

SUBSCRIBED AND SWORN to before me this 9th 'day of Jarnwry 2014, at Taguig City, Philippines, affiant who is personally known to me, exhibiting to me the follo-vving:

----------r------------------

Con1petent Evid ence of Identity

Affiant

Type of ID

..... -- .. --- ---1----r-------

Gennaine Chua

l

2

D . f nver s License

Passport 1\To.

.. -------_....___. ___ . ___ _

IJoc 1\f o. :__QL.; l''age :No. ..r_i: ; lJook T\Jo. _I_; Series of 2014.

ID Nun1ber and Expiry

Date (if applicable)

I-

N04-08-001992; expiring on 3

June 2016 f-

EB580297; expiring on 2.8

June 2017

-----

Comn1unity Tax Certificate

-

Number Date/Place Issued

19001807

28 February 2013; Taguig City

ANNEX "1"--l~EPUBLIC OF TI-IE PFIILIPPINES

SUPREME COURT l\l[anila

EN BA1\JC

Bayau 1Vluna Represenlat:ives NERI Ji\ VIER COLIVIENARES and C/-\JtLOS ISAGANI ZARATE, Gabriela Wo111en's Party Representalives LUZ ILAGAN. and ElVIJVII DE JESUS,.. Act Teachers Party-List Representative AN'fONIO 'TINIO, and Kabataan Pal"ty-List Represenlative TERRY RIDOl'J,

Petitioners,

--- versus ---

ENERGY COMlVIISSION EILECTRIC ~lVCERA:LCO),

REGULATORY and MANILA

COMPANY

Responde1 L ts, . \---------------------------------------------------------x

l\T.ATIONAL ASSOCIATION 01~ !ELECTRICITY CONSUMERS FOR REFORMS, represented by 'Pet1onilo L. Ilagan, FEDERATION 01:; VILLAGE ASSOCIATIONS, represented by Siegfriedo A. Veloso, iFEDERATIOI\T 01' LAS l~INAS HOJ\!IEOWNERS ASSOCIATIONS represented by Bonifacio Daza, and H()DRIGO C. DOl\IIIl\TGO, JR.,

. '

Pel'itioncrs, --- versus --~--- .,

lVlANILA ELECTRIC COlVIPANY ij~NJERGY REGULATORY C::OJVUVIISSION, and DEPARTMENT OF ENERGY,

Respondents . . \_'-------- --------------------------------------------------x

REGlS1.ERED -W/RET'URN CARD

_JAN 0 8 2013 II /()//{)2_

G.R. No. 210245

/tJ?/ Post Office " ""

-".i'.f'f "-Letter/Package No. E'..J";c;'L __;~-~\;---':"-""'"---Pouted on 't: ~0i; _ 1 8 : Q -..... ,""";---

:~ .. r' ref~r'~_ IJl:aP In c~( of Inquiry 11o.::?~. "li.1119 l ostma~terJTeUer ,~,,"

~GIS~ RECEIPT Letter/Package No. ...~_:_:~__.,;:------Posted on /'

i Preserve this recel

G.R. No. 210255

CONS:c;JLIDATED COl\IIMEN~/OPPOSITION

WITI-1 COUNTER-PETITION

Respondent MANILA EtECTRIC COlVIPANY ("MERALCO"), by counsel, and in con1pliance with this I-Ionorable Court's 23 Decen1ber 2013 H.esolution, respectfully submits its Cornn1ent/ Opposition to the : Petitions in G.R. Nos. 210245 and 210255, and its Counter-Petition to this I-Ionorable Court, on the folluwing allegations, argu1nents and premises:

PREFATORY STATEMENT

With the nation struggli~g to emerge fron1 a crippling power crisis which caused rotating'blackouts, stunted econo1nic growth and buried the state-owned and operated generation and nans1nission con1pany in enorn1ous and continuously increasing government debt, Congress enacted the Electric Power Industry Reforn1 Act ("EPIRA") 1nore than a decade ago in 2001 with the intention of ensuring affordable and reliable electricity to all power consu1ners in the Philippines. The EPIRA was enacted after at least seven (7) years of public hearings, deliberations, extensive research, consultations and study. It introduced sweeping .refonns including the restructuring of the entire power industry and the privatization of most state-owned povver generation and transmission assets. Such reforrns were intended to foster n1ore co1npetition an.cl introduce.more choices. for consurners while leveling the playing field in the power industry to encourage greater private sector participation and investment.

I'Y1ore than twelve (12) years after the law was enacted and despite son1e of the1n havirl.g participated in the process leading to the passage of the law and its. in1plementing rules and regulations, Petitioners con1e before this Honorable Court erroneously seeking to an1end the law under the guise of judicial review. Like ahnost all poV\rers conferred by the Constitution, however, the power of judicial review is subject to li1nitations,1 none of which Petitioners have overcon1e here. Congress s,aw, fit to declare that entities engaged in poV\rer generation are not' public utilities. This detennination is largely a legislative . function - it involve_s, threshold state policy considerations and raises a political question, which is within the exclusive realrn of Congress.

Senale 0 the Philippines v. Ermita, G.R. No. 169777, April 20, 2006, 488 SCRA 1, 35.

2

Moreover, in determining the constih1tionality of a statute (or certain provisions or implen1e1;1ting rules thereof), the Court should not lose sight of the presun1ption of validity accorded to. official acts of Congress. In Laivyers Against Monopoly and Poverty (LAMP) v. the Secretary of Budget and Management2, the Court citing Farinas v. The Executive Secretary.3 held that:

"Every statute is presumed valid. The presumption is that the legislature intended to enact a valid, sensible and just law and one ("vhi,ch operates no further than inay be necessary to effectt;tate the specific purpose of the law. Every presumption should be indulged in favor of the constitutionality and 1the1 burden of. proof is on the party alleging that there is: a dear and unequivocal breach of the Constitution." 4

"To justify the :nullification of the law or its in1plen1entation, there n1us t be a clear an_d unequivocal, not a doubtful, breach of the Constitution. In case of: doubt in the sufficiency of proof establishing unconstituti01;1alfty, the Court n1ust sustain legislation because 'to invalidate [a la~v] ibased on xx x baseless supposition is an affront to the wisdon1 not'. ;only of the legislature that passed it but also of the executive 1..Yhich approved it.' This presu1nption of constitutionality can be overco

1

me only by the clearest showing that there was indeed an infraction of the -Constitution, and only when such a conclusion is reached by the required majority n1ay the Court pronounce, in the discharge of the duty it cannot escape, that the challenged act 1nust be struck down."5

From the foregoing alone, the Consolidated Petitions must be disn1issed and the Ten1porary Restraining Order ("TRO") dated 23 Decernber 2013 of this Honorable Court, which has placed MERALCO, all other participants in the power industry and ultiniately, the public in great risk, n1ust with all due respect be reconsidered and dissolved, and the application for writ of preliininary injunction denied.

2

3 G.R No. 164987, 24 April 2012; 670 SCRA 373. 463 Phil. 179, 197 (2003). Lawyers Against Monopoly

1

and Poverty (LAMP) v. the Secretary of Budget and Management, G.R. 164987, 24 'April 2012, 670 SCRA 373, 386; emphasis supplied. Lawyers Against Monopoly and Poverty v. Secretary of Budget Management, et al., G.R. 164987, 24 April 2012, 670 SCRA 373, 386 citing Abakada Curo Party List v. Purisima, G.R. No. 166715, 14 August 2008, 562 SCRA 251 and Drilon v. Lim, G.R. No. 112497, 4 August 1994, 235 SCRA 135.

3

As shown in the table below, MERALCO' s dishibution charges did not increase in the bill nionth of December 2013. The increase in the electricity charge for the bill 1nonth of Dece1nber 2013 was accounted for by increases it} certain "pass-through" charges, namely generation charge, transmission charge, systeni. loss, and taxes. Thus, it is unfair to prevent or idi~allow MERALCO from billing and collecting these increased : charges unless the sources of such increased charges are likewise prevented or disallowed from billing and collecting the same from MERALCO. MERALCO did not and does not derive a single centavo of profit from any of these charges. Accordingly, it cannot be 1nade: to finance or: advance the payment of these "pass-through" charges unless it can recover these charges with certainty fro1n its custonters. Indeed, any prolonged prohibition against the collection of the : , pass-through charges would have disastrous effects not only ! on MERALCO, but als~ on: the , entire Philippine power industry, electricity consumers, and ultimately, the national econo1ny.

Ml.L!.Ml'ltf~ l'fEUIE

irAXES OTHERS

' I I: I

The law of supply a:q.d de1nand directly affects the price not only of elechicity but also .df other corrunodities or goods. Indeed, a war in the Middle East causf s 9A prices to spike, a typhoon in Baguio City 1nakes vegetables and ther crops produced by it expensive and a severe frost in Florida, UpA1 brings the prices of oranges up. The increase in generation charges results when demand is higher than the available supply. In this c:ase, when many power plants shut down during the san1e period~: electridty supply decreased, but the den1and remained the same. t-Ience, the generation cost increased .

. 4

This proble1n could have been avoided had concrete ineasures been taken to likewise increase the capacity to produce power.

Currently, 2,462 MW of installed capacity in the Luzon grid runs on hydro, dependent qn rainfall and thus, u1u-eliable and usually unavailable during the su1mner/peak 1nonths. On the other hand, 1,778 MW installed capacity in the Luzon grid uses oil (diesel, oil thennal, gas turbine) which;is expensive and usually used only for peak de1nands but due to tl}e low supply, are constrained to be used like base-load plants. Moreover, from 2001 to 2013, the Luzon grid peak den1and of electricity increased by 2,659 MW while new construclion of base load: power plant during the same period

conb~ibuted only 652 MW of installed capacity with a dependable capacity of only 495 MW. As no new substantial capacity has been put :in to address the dernand, the existing plants in the grid are ageing, subject to inefficiency and de-rating, and thus would require increased 1naintenance to avert risk of outages. This has resulted in tighter supply of electridty. The increasing demai1d in the maiket without the corresponding increase in the supply will inevitably result in price increases.

l\1ERALCO for its part has exerted all reasonable efforts to effectively inanage the ccist of power in 1neeting its service obligations within its franchise area through appropriate energy sourcing arrangements. Asia 1natter of fact, the average generation cost for 2013 even including .the PhP9.107 per kWh in Dece1nber amounted only to PhPS.6367 per kWh, which is still lower than the average generation cost of) Pl~PS.7517 per kWh, for 2012, and not significantly higher than the average generatio11 costs of PhPS.3791 and PhPS.2261, for 2010 and 2011, respectively.

It n1ust also be en1phasi~ed that MERALCO has complied with all of its obligations under the law. The retail rates charged by ]VIER.ALCO for the supply of .electricity to its custorr1ers6 were approved in con1pliance with, the Energy Regulatory Co1nmission' s (1'ERC's") regulation as provided in Sections 25 and 43() of the EPIRA.

In fact, a careful perusal of the Consolidated Petitions reveals that aside fron1 general allegations of collusion, which NIERALCO will disprove belovv, there are no particular wrongful or tuilawful acts or on1issions athibuted to MERALCO. This is because the

.

Pertains lo customers of MElZALCO who belong to the captive market or the non-conteslable end-users as defined it~ Section 4(c) of the EPIRA.

increased billings co1nplained of here do NOT involve any increase in. 1\IIERALCO's distribution charges, which is the only ite1n in an electricity bill that IvIERALCO stands to benefit fro1n. There is shnply no rnotivation, reason or purpose for IvlE~ALCO tq be involved _in . any alleged collusion relating to generation charges.

Purtherrn.ore, the issue of collusion falls within the original and exclusive jurisdiction of the ERC under the EPIRA, and so this resort to the courts ahead of an ERC action is premature and fatal to the Consolidated Petitions. The' EPIRA has granted the ERC ample power and authority to address and redress n1arket abuse, anti-competitive behavior, discrhninatory behavior, cartelization and even abnorn1al inarket conditions.

The generation charges, , which are the subject of these Consolidated Petitions, are 1nere "pass-through chaxges" not accruing to MERALCO. As Distribution Utilities ("DUs") are entities (aside fron1 the Supply Sector7) that directly supply electricity to the end--users, the DUs collect tbe ','pass-tluough charges" on behalf of the generation and trans1ni~sion co1npanies concerned. The generation charges are billed,' pursuant to Power Supply Agreements ("PSA")8 duly filed, reviewed and approved by the ERC after public hearings, or tluough the Wholesale Elechicity Spot Market ("WESM"), which is administered by the Philippine Electricity l\!Iarket Corporation ("PEMC"). PEMC is chaired by the Secretary of the Deparhi.1ent of Energy ("DoE") and its Price Detennination Methodology ("PDM") and 1narket fees are. approved by the ERC. i-\lso, the trans1nission charges and the fonnula for the pass-through of the hans1nission rates are duly approved by the ERC. As generation and transmission charges are pass-through charges, MERALCO does not stand, and is not allowed and permitted, to profit fron1 such charges. All arnounts received by MERALCO fro1n its custorners representing generation, transnlission and other pass-tluough charges are ren1itted' in Jull to the generation or transmission co1npany concerned and even to the Govern1nenL

In essence, the an1ount ' collected by MERALCO from its custo111ers is what MERALCO uses to pay for the elechicity. that it has purchased fro1n the generation con1panies and wheeled by the transn1ission con1pany. Accordingly, while the TRO is effective, MERALCO is at undue, ever-present and constant risk and threat of -----------

7 See EPIRA, Sec. 29 The term PSA also includes Power Purchase Agreements between MERALCO and Independent Power Producers namely: Quezon Power Philippines, Ltd., FGP Corp., and First Gas Power Corporation.

6

being required to pay the full ainomi.t of the increase in generation and transni.ission charges or, 0

1

being denied continued . access to electric supply and trans1nissioniunder its PSAs, the WESNI, and the relevant ERC regulations.

For the Decernber 201'3 billing 1nonth, the increase in the generalion charge and all oth1er pass-through adjustments transJated to about PhPS.9 Billion. It is ~ossly .unjust, unfair rui.d i~equitable for :rvIERALCO to pay and/ or advance such a huge amount which it is however restrained from collecting. Due to the TRO, MERALCO's cash flow is at the risk of being severely restricted. Consequently, its ability to deliver efficient and reliable service to its customers and to the public is also hnpaired.

Since the TRO was issued, MERALCO has been constrained to pay the generation, l-ransn1J$sion and other pass-through charges only to the extent of what it l~as been ordered to temporruily bill and collect froni. its custo1ners!. If the current situation persists,

!

J\1ERALCO will face the great risk of not being able to purchase all the elecl-ricity needed for the succeeding months, especially if abnormal or exhaordinary: supply versus demand conditions continue. The generation. companies 1nay then eventually stop . supplying electricity to MER.ALCO. The trans1nission company may stop transni.itting if MERALCO is unable to pay for the transmission charges. The entire power industry 1nay co1ne to a screeching halt. One can readily ini.agine the dire consequences to the economy and security of the country should this happen, as there will surely be rotating blackouts throughout MERALCO' s franchise area.

In fact, :tvIERALCO has already received de1nand letters from transn1ission and generation coni.panies for the full pay1nent of their Novernber 2013 power bills. This n.1eans that the griln scenario described earlier is not at all ftir-fetched and may well be hnrninent.

MERALCO is being enjoined fron.1 perfonning an act that it is entitled to perforin under the law (i.e., pass-on the generation and other pass-tluough charges to its customers) "Vvithout ai1y allegation, n1uch less any proof, of wrongdoing on its part. If there are accusations of collusion between and ainong generatio11 con1pallies in order to siinulate an electricity p.rice hike, NIERALCO should not be

I

prejudiced, penalized and dan1aged for it is not even remotely involved in the alleged scherni:: 0-nd does not stand to receive any benefit fron1 it. MERALCO: shnply complied with its obligations under the law and all governrnental regulations in ensuring the

7

quality, reliability, security .and affordability of the supply of elechic power9 to its customers. In) fact; MERALCO, even if not required by la-vv, took ineasures to initigate the effects of the shutdowns of several power plants and the resulting increase in generation charges by, arnong others, proposing the staggered billing due to th.e increased generation rates. It is unfortunate that MERALCO is now being made to bear the burden and incur the ire of the public for the increased generation rates for which it is, clearly not responsible for.

Worse, in these Consolidated Petitions, son1e .of the Petitioners who are n1e1nbers of Congress, desire to use this 1-Ionorable Court to an1end if not nullify the legislative reforms enacted by their own branch of Goverm11ent. The Petitioners even have the audacity to pray that this I-Ionorable Court direct MERALCO to refund amounts collected by virtue of the a'utornatic adjushnents since 2004, when in fact, MERALCO not only co1nplied with all relevant laws and regulations in collecting such ainounts (including the EPIRA), but n1ore in1portantly, it did not gain from the pass-through generation charges it is 1nandated to collect from its customers. This is utterly unfair since all an1ounts cbllectecl in accordance with the automatic adjustrnent 1nechanisn1 (usually pertaiii.ing'to the fluctuations of fuel cost and foreign exchang~), such as generation and transmission charges, prior to the Dece111ber 2013 billings have already been rernitted to the generation and hans1nission companies as well as, when applicable, the govenunE'.nt units concerneq. Despite this, Petitioners have not even hnpleaded in this proceeding a single generation con1.par1y or han~rnission company, which undeniably received a portion of the auto1natic adjush11.ents, nor have the Petitioners bothered to explain the 01nission.

Considering all the foregoing, 1\1ERALCO respectfully beseeches this Honorable Court to disnliss these Consolidated Petitions, but not before 1 ruling iim11.ediately that the continued effeclivily of the TRO ag~inst: JVIERALCO without a shnilar order against the generation an~ trans1nission companies .would prejudice not only MERALCO but, tl~e entire elechicity supply chain, including ultirnately, the public as well.

EPIRA, Sec. 2 (b). 8

I. COUNTER-STATEMENT OF TI-IE FACTS

For this 1~ronorable Court to better appreciate the disastrous effects, not only of the 23 Decen1ber 2013 TRO, but 1nore importantly, of granting the baseless relief prayed for by Petitioners, MERALCO is constrained to lay down a: complete picture of the elecli-ic powe{ industry and the ach1al events that transpir~d before the filing of the Petitions.

The Crippling Power Crisis Prior to EPIRA

1.1 Prior to the pas~age of Republic Act No. 9136, otherwise known as the "Electric _ Power In_dustry Reform Act of 2001 ("EPIRA"), the Government, tluough the National Power Corporation ("NAPOCOR") had the monopoly of ownership and operation of generation anq trans1nission facilities for the supply of electricity pursuant to Presidential Decree No. 40.

1.2 l-lowever, in the early 1990's it was foreseen that the national de111and for electricity would increase by nine percent (9%) aiu1ually for the next ten (10) years.1 To ni.eet the predicted demand,

I '

5,000 1negawatts was needed, translating to necessary government infusion of approxhnately PhP38 Billion annually into the developn1ent of the powei indush-y to curb the shortfall, without vvhich another power crisis, rentiniscent of the 1980s and 1990s was expected.11

1.3 Unfortunately, !the burgeoning budget deficit then pegged at PhP145 Billion hindered the infusion of funds into the ailing, highly leveraged an~l financially handicapped NAPOCOR.12 Further, the elechicity bills then were bundled, 1naking it impossible for the public to detennine how their pay1nents were allocated. There vvas no sei11blance of transparency in the n1am1er customers were biUed.

1.Ll To assist the then, financially handicapped NAPOCOR, Executive Order No. 215 allowed the, priyate sector to engage in povver generation activities'. Su:bsequently, Republic Act 7648 or the "Electricity Power Crisis Act" gave then President Fidel V. Ramos

10 A13ANES, MENANDRO, "Rcv,isiting the 10-year old Philippine Electric Power Industry Reform Act-of 2001 (RA 9136) and its L~JCal Implications", p. 2. , ,

u A13ANES, MENANDRO, "Revisiting the 10-year old Philippine Electric Power Industry Reform Act of 2001 (RA 9136) ~nd its Local Implications".

12 lliid.

9

authority to enter into co1i.hacts with these Independent Power Producers ("IPPs") for numerous projects.13 By 1994, the Philippines had 111ore IPP contracts than the rest of the developing world cmnbined.14

1.5 In the contracts with IPPs, the Govern1nent guaranteed the purchase of 75% to 80% 'oftheir production over 10 to 20 years under take or pay provisions.15 Thus, when the Asian finan.cial crisis struck :in the late 1990s, the fiscal and 1nonetary disruption flowing therefro1n had an in11nedi~ te , impact on the IPP sector in the Philippines, 1naking the take-or-pay or capacity payn1ents included in the povver purchase conhacts unsustainable.16 As a result of the inability to sustain sovereign guarantees, the pric_es of electricity. together with the goverrunent's d.ebt, drastically increased.

1.6 By Dece1nber 2000, NAPOCOR had accun1ulated debts of PhP900 Billion, nearly half of the government's PhP2.179 Trillion debt. It nJade each Filipino owe approxin1ately PhPll,842.00 to .NAPOCOR's creditors.17 Thus, the Govern1nent saw privatizing the indusll:y as the 1nost plausible alternative to solve the povver proble111.

1.7 Following the lTend of rrmny subsidy-laden countries, including the socialists, the Governn1ent saw deregulation and privatization as a n1eans to free itself fron1 the enormous burden of continuing electric subsidy and fron1 otherwise needing to raise taxes to support electric users. By: encouraging private sector investment, governn1ent subsidies and funds for the power sector could then be charu1elecl to other priority concerns.18

15

16

17

18

Id., at p. 3. WOODHOUSE, ERIK J., "The, IPP Experience in the Philippines", September 2005, Program on Energy and Susta~1able Development, Standford University, available at: htlp://iis-db.stanford.edu/pubs'/20816/PhilippinesIPP.pdf, citing WORLD BANK, PHILIPPINES POWER SECTOR STUDY: STRUCTURAL FRAMEWORK FOR THE POWER SECTOR, Report No. ,13313-PH (Nov. 30, 1994) at 43 [hereinafter WORLD BANK, POWER SECTOR STUDY]. ABANES, MENANDRO, "Revisiting the 10-year old Philippine Electric Power Industry Reform Act of 2001 (RA 9136) and its Local Implications", p. 3. WOODHOUSE, ERIK J ., "The i IP:8 Experience in the Philippines", September 2005, Prngram on Energy and Sustainable Development, Standford University, available al: http: I I iis-db.stanford.edu/ pubs /20816 /PhilippinesIPP.pdf ADANES, MENANDRO, "Revfoiting the 10-year old Philippine Electric Power Industry Reform Act of 2001 (RA 9136) and its Local Implications" lVid. .

10

EF'IRA: A New Order to Solve the Poiuer Crisis and Provide the

I .

Franiework for Energy Securitlj

1.8 It was under this factual 111.ilieu that the EPIRA came into be.ing. On 8 June 2001, after' 1nore than seven (7) yeass of public hearings and floor deliberations on various versions of the 1neasure in Congress,19 the EPIRA was enacted into law to address many issues that plagued the power industry. EPIRA became, and still is, the State's official policy on the n1atter. An1ong EPIRA' s declared policies, are to:

19

20

21

22

23

25

a) Ensure the quality, reliability, security and affordability of the supply of electric power;20

b). Ensure transparent and reasonable prices of electricity in a reghi-Le of 'free and fair competition and full public accountability to achieve greater operational and econonuc efficiency' and enhance the competitiveness of Philippine products in the global market;21

c) Enhcu-1ce the inflow of private capital and broaden the ownership base of the power generation, transn1ission and distribution sectors h1 order to n1inimize the financial risk

I

exposure of the national governrnent;22

d) Ensure fair and non-discrhninatory lTeatment of public and private sector entities in the process of restructuring the eleclTic power industry;23

e) Protect tll.e public interest as it. is affected by the rates and services of electric utilities and other providers of electric power;24 and

f) Establish a sb:ong and purely independent regulatory body and syste1n to ensure consun1er protection and enhance the con1pelitive.operation of the electricity inarket.25

See http://www.doe.gov.ph/ elechic-power-statislics/199-energy-faqs/ faqs-epira-ra9136 Republic Act No. 9136, Section 2 (b). Ibid., Section 2 (c). Id., Section 2 (d). Id., Section 2 (e). Id., Section 2 (f). Id., Section 2 U).

11

1.9 The EPIRA provided a legal framework for the restructuring and privaliz~ticin of the electric power industry. In restructuring the electric power industry,26 the EPIRA provided that the power industry be cli\rided into four ( 4) sectors: generation, transn1ission, disuibution and supply.

1.10 Generation of electricity "refers to the production of electricity by a generation co1npany."27 A Generation Company ("Gen Co") refers to "any person or entity authorized by the [Energy Regulatory Cornmission ("!ERC")] to operate facilities used in the generation of electricity."28

1.11 Trans1nission of elecuicity "refers to the conveyance of electricity through the high voltage backbone syste1n."29 The EPIRA created the National Trans1nission Co1npany ("TRANSCO") which assun1ed the elecuical ttansrnission functions of the NPC. The TRANSCO concession was awarded to the National Grid Corporation of the Philippines ("NGCP") which secured a legislative franchise to operate the trans1nission network under Republic Act No. 9511.

26

27

28

29

30

1.11.1 As systen1 operator of the Philippine power grid, NGCP balances the supply and demand of

I

electricity to efficiently serve all of its custo1ners-power generators, private DUs, electric cooperatives,

govenunent-ow1~ed utilities, eco-zones, indusuies, as well as directly-co11nected co1npan.ies. It is primarily responsible for; putting online the right n:rix of power plants that generate high-voltage electricity and transn1itting this 'to the 'variOus distribution utilities

I .

which, in turn, 1 deliver the electricity at a lower voltage rating to households and other end-users. NGCP also operates and 111aintains n1etering facilities and provides technical services, particularly systen;1 studies, and operation and nl.aintenance of customer facililies.30

1.11.2 Under the EPIRA and EPIRA. IRR, the NGCP is required to inaintain the reliability, adequacy, security,

I

integrity and stability of the grid in accordance with the perforrrtance . : standards for the operation and

Id., Section 5. Id., Section 4 (y). Id., Section 4 (x). Id., Section 4 (ccc). h ttps: I I www.ngcp.ph/ corporale.asp?id=39 (last accessed on 7 January 2014).

12

nmintenance o( the grid. The perforn1ance indicators for reliability, secufity, adequacy, integrity and stability shall include but are ,not lin1ited to the following:

1. Number of hi.terruption Events;

2. Sustained Average Interruption Frequency Index;

3. Mo1nentary Average Interruption Frequency Index;

L1. ' Sustained Average h1terruption Duration Index;

5. Syste1n h1terrl.1:pli01'\ Severity Index;

6. Frequency of tripping per 100 c-km;

7. Average Forced Outage Duration;

8. Accun1tilated Tirne Error;

9. Frequency Linut Violation; and

10. Voltage linut Violations.31

1.1.1.3 Under the established procedure, it is the NGCP that rec~ives notices of shutdowns fron1 the power plants and the1~eafter, schedules the shutdowns of power plants. Thus, the l\JGCP has the prilnary obligation to ensure that a : sufficient nun1ber of power plants are operating at any given mon1ent, and forewarn the DoE of any ilnpending decrease in supply.

1.12 Distribution of electricity "refers to the conveyance of electric power by a distribution utility through its distribution systen1."32 Distribution Utility ("DU") refers "to any electric cooperative, private corporation, governn1ent-owned utility or existing local govern1nent! uri.it which has an exclusive franchise-to-

,

3.l

32

'

Sec EPIRA IRR, Rule 6, Section 7 (c). Ibid., Section 4 (n).

13

operate a distribution systein." 33 As defined by EPIRA, MERALCO is a DU and not a Genco.

1.13 Supply of electricity "1neans the sale of electricity by a party other than a generator! or a distributor in the franchise area of a distribution utility using the wires of the disbibution utility concerned."34

1.14 While not included. in the sectors enumerated in EPIRA, one in1portant aspect of the, power industry is the uFuel Sector". As around 80% of power plants producing electricity are run by fuel (such as natural gas, coal, di~sel, an1ong others) the rise and fall of the prices of the power infused: into the grid is primarily dependent on the price of fuel. In turn, the price of the fuel is based on the fluctuating price in the international 1narket and affected by the consequent fluctuations in the foreign exchange between the state of the supplier and the state of the buyer/ user.

1.15 The power sector supply chain 1S best illustrated as follows:

33

34

Generation

!Distribution and Supp!ly

Id., Section 4 (q). Id., Section 4 (zz).

Transmission

14

I I

1.16 The electricity supply chain begins in power stations :vhe:re electricity is generatfd . Electricity generators use either fossil fuels, such as coal and gas~ or renewable energy sources, such as wind, water or the sun. Ele~tricity is hansported over long distances frorn power stations through high voltage transmission power lines within the island. The electricity is then transfonned to lower voltages before being dislTi"f,uted to residences and businesses.

1.17 Under the EPIRA, the generation35 and supply36 sectors, although open and competitiv~ are required to obtain a certificate of con1pliance and a license frcnn the ERC.

1.18 On the other hand, both the distribution37 and trans1nission38 sectors, being natural monopolies, are considered public utilities and subject to the ERC's shict regulatory powers. The dislTibution and transmission sectors are considered natural 1nonopolies because it is hrghly ilnpractical and not cost-effective to have 1nore than one set of poles and transforn1ers to transmit electric power fron1 Gen Cos to i end-consu1ners. Hence, to ensure the protection of the public, th~ ERC was given the power to regulate the rates of TRANSCO (and NGCP) and DUs. Sections 19 and 24 of the EPIRA provide:

"Section 19. Transrnission Charges. - The traii.smission charges . of the TRANSCSJ shall be filed .with a~d approved by the ERCipursuant to paragraph (f) of Section L13 hereof.

"Section 24. Distribution Retail Wheeling Charge. - The retail wheeling rates of distribution utilities shall be filed with and approved by the ERC pursuant to paragraph (f) of Section 43 hereof."

1.19 To facilitate entry into the generation sector of various I

GenCos in an effort to reduce electricity costs, the EPIRA made such sector open and con1petitive wi:th 1ninilnal state regulation. Section 6 of the EPIRA provides:

35 Id., Sectio11 .6. 36 Id., Section 21. 37 Id., Section 6. 38 Id., Section 7.

15

"Section 6. Generation Sector. - Generation of elechic power shall be competitive and open.

xxx

Any law to the contrary notwithstanding, power generation shall not be considere\1- E! public utility operation. For this purpolie, any person or entity engaged or which shall engagf1 in power generation and.supply of electricity shall not be required to secure E! local or national franchise.

Upon in1plementation of retail competition and . open access, the price~ charged by a generation company for supply of electricity shall not be subject to regulation by the ERC except as otherwise provided in this Act.

xxx

The ERC shall, in deternlining the existence of :market power abuse or anti-competitive behavior, require fron1 generation co1npa.nies the sub1nission of their individual pricing fornl.ulas as well as their financial

I . staten1ents." (en1phas~s supplied)

1.20 Shnilarly, the Supply Sector under the EPIRA is open and cornpetitive and is not subject to ERC regtilation.39

1.21 Nevertheless, despite the generation (and supply) sectors being open and con1petitive, the ERC still 1etains authority over the1n. For one, GenCos ' before being allowed to QPerate are required to first secu1e !!

1cerlificate of co1npliance fron1 the ERC

under which certain conditions are or can be imposed. Moreover, the ERC has the power !:o prevent market power abuse, cartelization, and anti-con.\petitive or discrin1inatory behavior.40 In

39

40 Id., Section 29. Seclion 45 of the EPIRA, in part, provides:

"Section 45. Cross Oiimership, Marlcet Power Abuse And Anti-Competitive Behavior. - No participant in the electricity industry may engage in any anti-competitive behavior including, but not limited to, cross-

1 .

subsidization, price :or market manipulation, or 0U1er unfair trade practices detrimental to the encouragement and protection of contestable markets. xxx

16

addition, PSAs of the DUs vyith the GenCos are subject to review and approval by the ERC as ~ell as verification of the billings and charges.

1.22 Pursuant to the 1foregoing section, and Rule 11, Section 8 of the hnple1nenting Rulesi and Regulations of the EPIRA ("EPIRA I.RE"), the ERC on 23 Au~ust 2006 pro1nulgated the Co1npetition Rules and Co111.plaint Procedures ("Co1npetition Rules"). The objectives of the Con1petition Rules are to ensure and promote con1petition, ensure market develop1nent and customer choice, and to discourage or penalize anti-competitive or discrhninatory behavior and the abuse of 1narket power, in order to further the intent of the EPIRA and to protect public interest.

1.23 The Co1npetition Rules likewise prescribes the 1naiu1er ttu-ough which the ERC will investigate possible violations thereof consistent with the require1nent of due process.41 Specifically, the Rules grant ERC the power t~ issue orders42 requiring a Person43 to stop engaging in the condud that constitutes the violation, requiring the Person to do any act or.thing to rectify the violation or to remedy

The ERC shall, withht one (1) year from the effectivity of this Act, promulgate rules and regulations to promote competition, encourage market development and customer choice and discourage/ penalize abuse of market power, carlelization and any anti-competitive or discriminat01y behavior, in order to further the intent of this A.ct and protect the public interest. Such rules and regulations shall define the following:

(a) the relevant markets for purposes of establishing abuse or misuse of monopoly or market position; (b) areas of isolated grids; and -(c) the periodic rep~rtorial requirements of electric power indushy participants as may be necessary to enforce the provisions of this Section.

The ERC shall, motu 1propio, monitor and penalize any market power abuse or anti-competitive or discriminatory act or behavior by any participant in the electric power industiy

Upon finding that. a, market participant has engaged in such act or behavior, the ERC sh~ll stop and redress the same. Such remedies shall, without limitation, include the imposition of price controls, issuance of il1jtmclions, requirement of divestment or disgorgement of excess profits and imposition of fo1es and penalties pursuant to this Act. xxx"

41 ERC Competition Rules and Complaint Procedures, 23 August 2006, Rule 2. 42 lbid., Rule 11, Sec. 2. : !3 "Person" is defined as a natural or juridical person including an individual, a

corporation, a partnership or an association to which the law grants a juridical personality, a trustee, a gov~rnrnent-owned or government conholled corporation, a local government unit, an electric cooperative organized pursuant to Presidential Decree No. 269, or an entity o_f ai1y 0U1er kind whatsoever, which has a separate legal personalily, and whether or not that person is a Philippine National.

1'7

or n1itigate the consequences of the violation including an order requiring the Person:

a) to vary an agreen1ent, arrange1nent or 1mderstanding within such time and in such Inanner as is specified in the order;

b) not to enforce an agree1nent, arrange1nent or understanding or such provisions thereof as are specified in the order . I

c) to refund inoney or return property; and

d) not to carry on a particular business or not to undertake particular operations.

. '

1.24 Furthennore, the! ERC was also granted the powers, an1ong others, to issue an order requiring the Person to pay to the ERC a fine or penalty44 or to 'pay the ERC an amount not exceeding the ERC' s estiination of 'the ainount of any ni.onetary, financial, or econ01nic benefits acquired by the Person, or accrued or accruing to the Person, as a result of the violation of the Competition Rules,45 as well as the power to fix or control the price at which the Person 1nay supply or acquire eleclTicity or goods or services that are directly or indirectly related to or used in connection with the generation, transn1ission, distribution or ~ale of elechicity.46

1.25 The ERC was also granted original and exclusive jurisdiction over all cases contesting rates, fees, fines and penalties it inay irnpose, in the exercise of its above-1nentioned powers, functions and responsibilities, and over all cases involving disputes between . and an1ong participants or players in the energy sector.47 In appropriate cases, the ERC is authorized to issue cease and desist orders48 as well as to:

41

45

46

47

48

49

a) Enforce the. in1plemenling rules and regulations of the EPIRA;49

ERC Competition Rules and Complaint Procedures, 23 August 2006, Rule 11, Sec. 2 (c). lbid., Rule 11, Sec. 2 ( d). Id., Rule 11, Sec. 2 (f). Id., Section

b) Enforce the rules and regulations governing the operations of the electricity spot market, and the activities of the spot. market oper~tor. ad other participai)ts in the spot rnarket, for the purpose of ensuring a greater supply and rational pricing of electricity;so

c) Monitor and take 1neasures and penalize abuse of rnarket power, cartelization, and anti-co1npetitive or discrilninatory behav;ior by any electric power industry participant;51

d) Monitor the activities in the generation and supply of the electTic power indusny with the end view of pro1noting free n1arket con1petition and ensuring that the allocation or pass through of bulk purchase cost by distributors is transparent, non-discriminatory and that any existing subsidies shall be divided pro-rata among all retail suppliers;s2 and

e) In the exercise of its investigative and quasi-judicial powers, act against any participant or player in the energy sector for violations of any law, rule and regulation governing the san1e, including the rules on cross-ownership, anti-con1petitive practices, 'abuse of 1narket positions and silnilar or related acts by any participant in the energy sector or by any person, as 1nay be provided by law, and require any person or entity to subn1it any report or data relative to any investigation or hearing conducted pursuant to the EPIRA.53

Pass-through nature of' generation charges

1.26 As stated, the 1 power industry is comprised of the generation, disnibution, nal)lSinission and supply sectors. Each sector of the elecnic power industry generates a "charge"-. i.e., generation, rransn1ission, disnibution, and supply chaiges -- which are unbundled and forn1 part of the Retail Rate charged to custoiners.54

1.27 The "unbundling of rates" was devised to provide for greater accountability in the electric power indushy, as well as transparency to enable the consu1ners to know where every peso of

50

51

52

53

54

Id., Section 43 (c). Id., Section 43 (k). Id., Section 43 (o). Id., Section 43 (r). Id., Section 36.

19

their payn1ents for elecnicity goes. Thus, generation and trans1nission charges are specifically iden~ified and reflected in every bill issued by the DUs, such as. MERALCO. while DUs, such as MERALCO, are obligated to supply electricity to their custo1ners in the least cost lYlaIUler, they have no absolute c,ontrol over the GenCos.

1.28 In the average MER.ALCO bill for the period January to June 2013, the generation charge constitutes the single largest co1nponent, which is about 56.9% of the total amount. On the other hand, the dislTibution-related charges (comprised of the distribution, supply, and ni_etering charges, which are the only portions that go to TVIERALCO) are only about 17.6 % of the billed amount. The re1naining bill components are trans1nission charge55 of about 9%, systeni_ loss charge of about 5%, and taxes and universal charges of 11.5% of the billed ainount.

1.29 In order to ensure lower electricity rates, generation charges of GenCos and transnussion charges of NGCP, among others, are legally considered as 1nere /1 pass-tluough charges,"56 which are billed directly by the DUs :to their custoiners.57 When MERALCO

I

bills its customers the pass-tluough charges it does not stand to benefit therefro1n. The only: portion that goes to MERALCO are the distribution-related charges.~

1.30 This syste1n of passing on the costs of generation charges billed by the GenCos tluo11gh the DUs has been in place since the 1970s.

1.30.1 Until 1974, MERALCO owned and operated all the power plants it was using. It charged the basic power rates based on the cost of fuel and exchange rate at the thne of the application for approval of the adjusted rates. However, in 1970, a currency exchange rate adjustn1ent to cover changes in its operation and ma~ntenance expenses due to exchange rate fluctuations was approved for hnplementation. In addition, a fuel cost adjustni_er{t ("FCA'') was approved for MERALCO ill. 1974 to cover increases in its fuel oil cost above the basic cost

55 Section 4 (aaa) of the EPIRA 'defines "Transmission Charge" as the regulated cost or charges for the use of a tra11.smission system, which may include the availment of ancillary services. Transmissio+1 charges are currently paid to the NGCP.

50 See ERC Resolution No. 16, Ser,ies of 2009; Order dated 30 May 2003 in the ERC Case Nos. 2001-646 and 2001-900; Guidelines for the Automatic Adjustment of Generation Rates and System Loss Rates by Di~tribution Utilities, as amended by Resolution No. 10-01, Series of 2004; ERC Resolution~No. 7, Series of 2011.

57 See Republic Act 9136, Section 25.

20

incorporated in its bas1

ic charges. Someti1ne in 1975, it sold to NAPOCOR its five (5) base load generating power plants.

1.30.2 As a result of the sale, MERALCO entered into an agreernent with NAPOCOR for the latter to supply all the electric power neededi by the fonner to service its custo1ners vvithin its franchise mleas. Under the agree1nent, the electric power and energy pu1:chased by MERALCO from NAPOCOR would be priced at the~1nal generating cost, subject to fuel cost adjustment by NAPOCOR. The fuel cost adjustment allows the latter to recover the increases in fuel oil over and above a base price.

1.30.3 In 1978, MERALCO applied with. the Board of Po-wer and Waterworks ("BPW") for the approval of Purchased Power Cost Adjustment to cover the increase in the cost of electric power and en~rgy being purchased from NAPOCOR. :NIERALCO also applie1d for the approval of the retention of the fuel adjusbn.ent clause for the three peak-load plants over

I .

which itretained ownership. However, starting 1January1979, all of MERALCO' s po~el. requirements were purchased fro1n J\JAPOCOR when tl:ie :latter took av.er the operation of th~se. reni.aining plants. ME~ALCO stopped hnple1nenting the Fuel Cost Adjustn1ent which was used to cover changes in the cost of power purchased fron1 l\TAPOCOR.

' I

1.30.4 In 1980, the Board of Energy ("BOE"), which took over the functions of the BPW, authorized the continued use of the Purchased Power 4\,djusl111ent ("PP A") clause stating that it was strictly for the purppse of cost recovery only. In other vvords, every increase in the cost of fuel oil to NAPOCOR above a base price reflected in ,its fuel cost adjustment billing to MERALCO, vvas autoni.atically recovered by MERALCO from. its custoni.ers under the autli.ority of the PPA clause.

1.30.5 In 1987, under E.O. No. 172, the Energy Regulatory Board ("ERB") was ~reated. It was granted regulatory and adjudicatory powers and unctions covering the energy sector. Also enacted was E.O: No. 215 opening the business of electric power generation to the private sector and allowed private corporations, cooperatives and sin1ilar associations, or the IPPs, to operate electric generating plants within the country.

21

58

1.30.6 In addition to its various powers and functions, the ERB was inandated to E;nforce the pertinent provisions of R.A. No. 7832, othe1wise known as the" Anti~Electricity and Electric Trans1nission Lines/Materials Pilferage Act of 1994." To ensure the viability of private electric utilities, R.A. No. 7832 allows DUs to pass on to its consun1ers systen1 losses equivalent to either the actual electric energy lost due to tecluucal and non-technical/ pilferage causes, or the cap in1-posed by law, whichever is lower.

1.30.7Pursuant to R.A. No. 7832 and Rule IX, Sections 2 and 5 of its IlTLplenl.enting Rules and Regulations, the ERB adopted an auton1atic cost adjustment forn1ula to guide electric utilities and electric cooperalives in the recovery of purchased power cos ts frorn all sources fron1 customers. The PP A formula subsequently underwent several 1nodifications. Each revision 'Was approved by the ERB after service of the notices of public hearing on the respective 1nayors of the cities and inunicipalities witlun !1VIERALCO's franchise area, posting thereof on the respective bulletin boards of the said local govern1nent units, and publication in two newspapers of general circulation.

1.30.8 A power adjusl1nent clause is a convenient regulatory. 1nechanisn1, if not a necessity. Considering the unstable prices of fuel oil, the clause will reduce' the necessity for application for rate increase or decrease, whenever there is a change in the fuel prices. It operates like a foreign currency adjustment clause the use of which has received the imprilnatur of this I-Ion.arable Court.SS

1.30.9 Thereafter, the EPIRA was enacted. Pursuant to the EPIRA, the ERC issued :an Order dated 29 January 2003 setting for public consultation its proposed hnple1nenting Rules for the Recovery of Deferred :f'.uel and Independent Power Producers Cost ("DECOR") and Deferred Incremental Currency Exchange

I

Recovery ("DICER"), Y,hich were fonnulated to replace the PP A and the Currency Exchange Rate Adjustn1ent ("CERA") n1echanimns, the auto11.1atic adjustment mechanisms then in effect, on its view that they (PP A and CERA) did n~t ineet the . goal of balancing the need for timely recoveries of costs by the

See Manila Electric Company vs. Republic, L-32402, October 4, 1971, 41SCRA644.

22

utilities with the ERC' s need to review the reasonableness and prudence of such costs.159

1.30.10 The ERC then caused the publication of a notice of the public consultation on the proposed implementing

rules for the recovery of DECOR and DICER in. the Philippine Star on 3 February 2003. DUs and consu1ner groups, including NASECORE, filed their cormnents thereon.60

1.30.11 During the public consultation on 17 February 2003, where both the DUs and consumer groups were present, the consumer groups requested a separate consultation exclusively for then1, which request was granted by the ERC. On 21 February 2003, the set date for the public consultation for the consun1er groups,. the ERC explained what the DECOR and the DICER are. MERALCO then explained the PP A and the computation thereof .. The consumer groups manifested their concerns, which were noted by the ERC.61

1.30.12 After taking into consideration the positions, concerns and co1ru11ents of the DUs and the consumer groups, the ERC promulgated the Order dated 24 February 2003 in ERC Case No. 2003-4t1, where the ERC adopted the Imple1nenting H.ules for the Recovery of Fuel and Independent Power Producer Costs: Generation Rate Adjustlnent Mechanism (GRAM) and the Ilnpl1e1nenting Rules for the Recovery of the Incren1ental Currency, Exchange Rate Adjushnent (ICERA).62 The GRAM replaced the PP A, which was discontinued when the unbundling of rates was ilnplen1ented under the EPIRA, and the ICERA replaced the CERA.

1.30.13 Subsequently, the ERC replaced the GRAM with the Auto111atic Generation Rate Adjustl11ent ("AGRA"). On 13 October 2004, the ERC issued the /1 Guidelines for the Automatic Adjustment of Generation Rates and Systern Loss Rates by Distribution Ul-ilities." 63 ("AGRA Rules") On 20 and 27 October 2004, the ERC issued Resolutions Nos. 10-01 and 10-04, respectively, both entitled 11 In the Matter of Aniending ~he

59 NASECORE v. ERC, et al. 60 Ibid. 61 Ibid. 62 Ibid. 63 PromulgaleLi pursuant to Section 43() of the EPIRA and Rule 7 of its IRR; and Section 10

of R.A. No. 7832; A copy of ERC Order dated 13 October 2004 in ERC Case No. 2004-322 is attached hereto as Annex "1" and made an integral part hereof.

23

65

66

67

Guidelines for the Automatic Adjustment of Generation Rates and Systeni Loss Rates by Distr~bution Utilities."

1.30.14 The auton1alic generation rate adjustment 1nechanisn1 is in the il.ature of an /1 escalator clause" or "purchased power or fuel adjusbnent clause" under American jurisprudence, which is a inethod allowing DUs 'to reflect the "changing ele1nents of opera ling costs.;. without having to resort to the ctunbersome procedure of filing a new rate case as often as n1aterial changes on the factors effecting the reasonableness of the rates occur."64 This method /1 guarantees to the custo1ner that ;he is not charged more than he ought to pay and to the utility that it gets its due con1pensation for its services."65 As such, the DUs are able to recove~ their cost of power purchased in the inost expeditious manner.66

1.30.15 The use of the above-described power acljusl1nent clause is a com1non n1echanisn1 and has received widespread acceptance and approval in many. jurisdictions. In the United States, this n1echanisn1 has been operating in various States without difficulty, .including, among others, Arizona, Arkansas,, Illinois, Iowa, Louisiana, Michigan, Mimi.esota, Virginia, Ne:w I-Iainpshire, New Jersey, New York, and South Carolina.~7 The acceptability was affirmed in an A1nerican case, V\rhere it vvas hek~:

"The Coni.1nission has for inany years approved rates for lower costs of electric power that are based on fuel clause's. The operation of those clauses results in increases or decreases in rates ;as the cost of fuel increases or decreases. No objection has ever been n1ade to ~uch rates despite the long period of their effectiveness. They cannot be distinguished in

Duquesne Light Co. v. Pennsylvania Public Comm., 5 PUR 3d, 141-142; For power traded in WESM, the price of electricity changes every hour, while for power sold under bilateral contracts, the price of elechicity alters, taking into consideration variable costs, such as for fuel which are computed and reflected every billing montl~. Re Lynchburg Gas C., 6 PUR 3d., 34; City of Norfolk v. Virginia Electric and Power Co., 11 PUR433. Re Indianapolis Power & Light Co., 1984, 62 PUR 4th ed. 666. Re Worcester Gas Light Co., 9 PUR 3d [1955] 1952, 1956; Re Hartfor,d Electric Light Co. [La 1952] 95 PUR NS 161; Ex Parte Gulf Utilities Co .. [La 1950],' PUR NS 225; National Forge and Ordinance Co., v. Pe1msylvania Electric Co. [Pa. 1953], 99 PUR NS 161; Re Community Pub. Service Co.! [NM 1951] 93 PUR NS 18; Re Duke Power Co. [NC 1948] 75 FUR NS 65; Re Rush Counhy Rural Electric Membership Corp. [Ind. 1947] 72 PUR NS 128; Re Wisconsin Michigan'Power Co. [Ws 1948], 76 PUR NS 153; Glens Fall Portland Cement Co. v. New York Power & Light Corp. [NY 1947] 69 PUR NS 37.

24

effect fron1 the escalator provision proposed here. Electric rates with'fuel clauses were considered and accepted by this commission 1nore than thirty years ago."68

1.30.16. The PPA inechan.isn1 was then the 1nost convenient, fair and necessary way of allowing MERALCO to recover frorn its custon;iers. the increases in the cost of power purchased fro1n GenCos. Under the said mechanis1n, MERALCO turned over to the GenCos the collection for the PP A portion of the billings, without retaining any single centavo thereof. The cost recovery ,device was dictated by the situation whereby the_ cost of purchased power was unstable due to escalating fuel oil prices and fluctuating foreign

I

exchange rate, over which 1natter MERALCO had no conhol. Moreover, these are n1a,tters of public knowledge or are easily verifiable. -

1.30.17 Thus, this Honorable Court in Emmanuel T. Santos v. Manila Electric Cmnpany69 already upheld the validity of the PP A n1echanisn1:

"Petitionel' E1nmanuel T. Santos filed this action for prohibition and mandainus on November 19, 1981 to prohibit respondent xxx (Meralco) from including the "puTchased power adjushnent" or PPA in its billings for delivery of electric services. I-le contended that 'pp A is unla-wful, arbitrary, oppressive, and a den.ial of due process.

The issue of validily of the .PP A was settled in Concerned '1Von1en of the Philippines, et al., v. National Power Corporation, et al.; and Perla C. Bautista v. Boardiof Energy, et al., (G.R. Nos. 63354

I

and 63267, J anuai~y 30, 1986):

"Insofar as Meralco is concerned, the increase in its basic rates :was, therefore, brought about by the increase in 1'.ates of the NPC fron1 where it purchases power: for disl-ribution to its custorners. The fonnula used and its application allows the

6B 7 PUR 3d 108, 112, 113, citing Re Virginia R. & Power Co.- PUR 1921C 193, 208; Re Lynchburg Traclion &: Light Co. PUR 1921E 87.

25

recovery of increases in the cost of the power purchased fron1 NPC. In other words, the PP A cla1,1se in only a 1.cost pass-through' device. The PPA clause was approved by BOE as early a's May 8~ 1980 in BOE Case No. 28-86. The petitioners should have appealed front that decision if they felt that the PP A was invalid as a schen1e or would result in over recovery by Meralco. xxx

The Petitioners have failed to show that the BOE erred in its appreciation of the 1nathematical con1putations submitted by both petitioners and respondents to substantiate their respective positions on the validity of the approved rates. xxx"70

Securing Adequate Electricity either Through Bilateral Contra.cts or Through t-he Wholesale Electricity Spot Market

1.31 Under the regulatory set up in EPIRA, the obligations of the DUs' (such as MERALCO) are, a111ong others, to provide distribution services and c9nnections to their systems for any end-user within their franchise area consistent with the distribution code71 and to supply electricity to their custo1ners in a least costn1.ani1.er.72

1.32 The DUs' respopsibility is in consonance with the policy of the EPIRA to ensure quality, reliability, security and: affordability of the supply of electric power. To note, /1 affordability" of electricity is only one of the declared policies in the EPIRA. Equally important are the quality, reliability and security of power supply to, among others, avert the 1nore disruptive and dan1aging blackouts.

1.33 In. carrying out its obligation, MERALCO is not required to, and ca1u1.ot, /1 over-source" eiectricity supply because doing so would result in higher electricity cost, which 1nay violate the principle of "affordability"! On the other hand, even if prices in the 1narket are high, IvlERALCO cam1ot afford NOT to buy or withdraw less power fro1n the grid because it would result in inadequate supply, which could result to blackouts, and thereby may run

70 Emphasis and underscoring supplied. 71 See EPIRA, Section 22. n Illid., Section 25.

26

counter to the principles of quality, reliability and security in the .EPIRA.

1.34 MERALCO, as a!DU, has -Lwo (2) options where to source or buy electricity-eithet: [a] directly fron1 the GenCos, through PSAs/bilateral ag:reen1ents 1or [b] through the WESM, which is a con1n1odity n1a:rket where electricity is traded.

1.35 As the Market Operator, the Philippine Electricity Market Corporation ("PEMC") is the ad1ninistrator of the WESM. It is responsible for the day-to-day operations of the WESIYI, as well as the registration of WESM ine1nbers. PEMC, as the inarket operator, is also responsible for coordinating all the corrunercial aspects of WESM lTansactions. The chainnan: of the PEMC Board of Directors is the Secretary of the DoE.

1.36 When MERALCO buys generated electricity directly from the GenCos, the tern1s and conditions, including . the rates, are governed by the PSAs. The terms of these PSAs, including the generation rates and the corresponding formula for the computation of the generation costs, are approv.ed by the ERC. On .the other hand, if the generated electricity is, sourced from the WESM, th~n the prices are governed by the dictates of the market and determined in accordance with the PDM approved by the ERC, after due notice and public hearing.

1.37 Currently, the. trading process at WESM works in this inmuler:

a) PEMC, or the Market Operator, determines the total den1and for elecb:icity for each hour of the next clay.

b) The sellers or GenCos, sub1nit offers, essentially telling PEiYIC they are willing to sell elechicity at a certain price (e.g., 100 nlegawatts at P10 per nlegawatt:) (the Supply).

c) PEMC then ranks the offers fron1 the lowest to the highest price, until it has enough supply offers to 1neet the total de1nand for power.

d) The last highest price offered to n1eet tl1:e buyer's den1and beco1nes the WESM' s clearing price for the hour and is the price paid to all the sellers who were dispatched by PEMC/NGCP to nleet the de1nand.

27

e) Power supply contracted tluough PSAs ntust also be offered to the WESM wi.der the gross pool concept, but nonnally at zero price or at variable cost to .assure dispatch of the PSA plant. I-Iowever, settleinent of prices under PSAs is done outside the 1narket where the DU pays the GenCos directly using the contracted price under the PSA' s.

f) : The generators produce the arnount of power (MW) according to the dispatch instruction fro1n the PEMC/NGCP, in accordance with PEMC's dispatch schedules, and ,co1npliance with dispatch inshuction is n1onitored by NGCP.

g) Load custo,1ners (such as DUs) withdraw power fro1n the grid at vvhateyer price has cleared for ead1 hour of the billing n1onth.

h) The electri~ity is distributed. to hous.eholds and businesses tluough DU:s, like MERALCO, who buy power from the WESl\1.

1.38 The hading in WESM is on an hourly basis. The prices, which are driven by ni.arket forces, increase or decrease, by the hour, depending on one hand ori demand fron1 households, 1nanufacturers, office buildings, and other consumers and, on the other hand, the available supply of eleclTicity. The ERC-approved PDM is the 1nechanisni. that calculates the clearing prices in the WESM in accordance with ERC-approved algoritluns.

1.39 For the first five (5) years of WESM c01mnercial operations, DUs were required to source at least ten percent (10%) of their power ron1 WESM. As the five-year period has already lapsed and the prices in WES1\II are volatile, and in fact, exRected to be higher during peak periods compared to the prices of eleclTicity under the PSAs, MERALCO :endeavors to ke.ep sourcing fro1n WESM beknv 10%. Nevertheless, as1MERALCO cami.ot and should not over-contract with GenCos under; PSAs, MERALCO still dee1ns it prudent to \tVithdraw power fron:i. the grid through the WESM for contingencies or residual requirements.

The rates charged, or the fonnula to derive such rates, by MERALCO were approved by the ERC and other relevant govermnent agencies after the appropriate notice and hearing

28

1.40 All charges, i.e~,, the actual rate imposed, or' the formula used to derive the rates, that cmnprise the electridty bills of IVIERALCO' s customers are hpproved by the ERC.

1Al In the same inanner, the distribution 'charges of Iv1ERALCO are always approved by the ERC, consist~nt with the provisions of the EPIRA, and the EPIRA IRR, which w~re issued by the DoE and approved .. by the Joint Congressional Power Comn1ission on 27 June 2001. The EPIRA .IRR was .issued only after proper notice and hearing were accorded to relevant stakeholders.

-

1.42 Specifically, the distribution charges of MERALCO con1plied with Section 4(e). of the EPIRA IRR which provides the following procedure for rate adjustments:

. .

(a) The interested party shall file a verified application or petition, acco1npanied by:

1. Acknowledgn1ent of receipt of a copy by the local legislative body;

2. Certifica.tion of a notice of publication;

(b) The ERC n1ay issue a provisional orde:r granting or denying .the application or petition for not later than seventy-.five (75) days;

(c) The ERC shall conduct a forn1al hearing on the application or petition, with:

l. Notice to all parties concerned;

2. At least one public hearing conducted in the affected localily;

(cl) The ERC shall decide the 111atter on the merits not later than lwelve (12) 111onths fron1 the issuance of the provisional order.

1.43 The PSAs between Iv1ERALCO and. Ge~1Cos, which contain the generation cost con1ponents and the formula for cornpuling the variable cost components charged by th~ GenCos are also approved by the ERC. Sirnilarly, as earlier explained, the prices

29

o.f electricity bought by l\tIERALCO fro1n the WESM, ire determined in accordance with the PDM approved by the ERC. l

1.4L1 On the other hand, the generation charg. passed-on by l\1ERALCO to its custo1ners is in accordance witi1 the formula specified in U1e relevant guidelines approved by U1e Etc.

1.45 On 16 August 2006, this' Ho1i.orable Oourt issued a Re~olution in NA.SECC:RE, et al:, v. Energy R~gulaton1 ~ommission and NIERALC0,73 which: (1) recognized the ERC s power[ to. promulgate rules, guideline and metho&::>logy for the recovery by the distribution utilities of their fuel and pui-chased power cost and (ii} declar~d that "unless Section 4 (e), Rule 3 of the.IRR of the EPIRA i~ aiended, the adjusti11ents of rates based .on purchased povver or fuel adjustment costs shall not or in no case be "auto1natic" ." ThJs, , clearly, this I-Ionorable Court, recognizes that there are certain chkrges that 1nay be auto1natically charged to custon1ers provided tha1

1

1t the pertinent rules be an1ended.

1

I

1.46 On 21 June 2007, the DoE made the ameldments to the EPIRA IRR and pron1ulgated the" Amendments to Sectibn

14(e) of Rule 3

and Section 7 of Rule 18 of the Implementing Rules and RJgulations (IRR) of Republic Act No. 9136 otherwise known as the ElectriciPower Industn; Reform Act (EPIRA)." Essentially, the amend1nent was to render Section 4(e) not applicable to generation rate adjush~ents and other sin1ilar rate adjushnents involving pass-tluough cl:harges. Thus, insofar as the 1nonthly. a,djusbnents 0 ,generatioh charges . ar~ concerned, the requiren1ents of publication, notic~ and hearing were dispensed with, subject to verification by tlie ERC of the generation charges passed on by the DUs.74 Section 4 (e), in part, novv provides: I

13

74

I

"Section 4. Responsibilities of the ERC. I (a) Any application or petition for rate adjusbnent

or for any relief affecting the customers 1nust b~ verified, and accon1paniecl wiq1 an acknowledgement receipt of a copy thereof by the L~U Legislative Body of tl~e locality where the applicant or petitiorrer principally j operates together with the certification of the notice of pf blication

' i . . I

G.R. No. 163935, August 16, 2006, 499 SCRA 103. I In accordance with the ERC Resolution No. 16, Series of 2009,.MERALCO.has filed Petitions before the ERC for the confirmation of the subject pass-through charges. The Pelitions are currently pending: before the ERC. I

30 I

I

thereof in a newspaper of general circulation in the sa1ne locality

xxx

Thereafter, the ERC shall conduct a forn1al :hearing on the application or 'petition, giving proper notic,es to all parties concerned, with at least one public hearing in the affected locality, and shall decide the 1natter on th~ ni.erits not later than twelve (12) 1nonths from the issuante of the afore1nentioned provisional order.

xxx

This section 1 il;l shall not apply to Gene:uation Rate Adjustn1ent Mechanisrn (GRAM), Incremental Currency

Exchan~ Recovery Adjustment (ICERA), Transhtission Rate Adjusbnent Mechanism, Trru1sn1ission True-up Mechanisni., Syste1n Loss Rate Adjustment Mechanism, Lifeline Rate Recovery Mecharusrn, Cross""Subsidy Mechanis1n, Local Franchise Tax Recovery Mechanism, Business Tax Recovery Mechanis1n, Automatic Generation Rate Adjush11ent Mechanism, and Recovery of Deferred Accotmting Adjustment for Fuel i Cbst and Power Producers .Qy NPC. and NPC-SPUG, Provided that, such adjusbnents shall be subject to subsequent verification by the ERC !_Q avoid over I under recovery of charges."

1A7 Notably, Petitioners NASECORE et al., did, not question the AGRA Rules at the tini.e notwithstanding it actively participated in its adoption or prornulgation.

1.48 On the other hand, for the lTans1nission charge, the NGCP ni.akes a separate filing or application with the ERC 01~ the approval of its Maxin1un1 Allowable Revenue ("MAR"). Once, the MAR .is approved by the ERC, this. arnount is translated intd transmission charge to be collected by NGCP fro1n its custon1ers, such as the DUs, and for the DUs to pass tluough and collect fron1 t11eir customers.

31

1.49 The adoplion of the autornatic generatioii. rate adjustnl.ent is absolutely necessary for the DUs and the public. As tonfirn1edin the DoE' s statement dated 22 June 2007, the EPIRA IRR!A1nend1nent will allow the tin1ely recovery of generation and foreign exchange related costs, thus:

"111e 1 f imp ementation. o - auto1natic recovery i11echanisn1 will shield consu111ers frorn the burden of additional cost given that consumers are often s~bjected to additional costs because of interests on, deferred charges. This way, we will be able to balrui.ce the need for consun1er protection, observanc~ of. due. process ru1d enabling business to beco1ne financially viable. xxx:

This will also provide the ERC inore tin1e to' attend to other equally iinportant rate applications. Under the current systern, if all distribution utilities will: apply inonthly to adjust generation rates, the ERC will be swainped with approxilnately 1,680 applications ru1d hearings in various localities in a year."

I

1.50 The EPIRA IRR A1nenchnent was approved' by the Joint Congressional Power Conlffiission ("JCPC") on 7 June 1 2007. In the deliberations, the JCPC acknowledged that: (i) th~ auto1natic adjus tn1ents of pass-tluough charges were aheady in plate even prior to EPIRA; (ii) the requirement for notice and hearing was inerely in the old EPIRA IRR and not in the EPIRA itself; (iii} there was a need to antend the EPIRA IRR because the then regulation was an "acln1inistrative nighhnare" and resulted in higher cost for the

'consu1ners because of carrying costs; and (iv) the automatic adjustn1ents do not inure to the benefit of the DUs such being merely pass--through charges.7s

1.51 The EPIRA IRR An1endn1ent was passed hi view of the pass-through nature of generation charges. Without an automatic generation rate adjushnent, the DUs will be in dru1ger of significant cash shortfalls if generation charges and other pass-through charges are not recovered in a tin1ely and efficient manner. This is particularly true considering the volatile market conditions that are beyond the control of the DUs, brought about by different factors,

75 Copies of the 7 June 2007 TSNs of the JCPC deliberations are attached hereto as Annexes "2" and "3" and made integral parts hereof;- A copy of the JCPC letter to then DoE Secretary Raphael Lotilla dated 20 June 2007 confirming the amendment in the IRR is also attached hereto as Annex "4" and made an integral part hereof.

32

such as the inaintenance or unannounced shutdowns of certain power plants, the increase in fuel prices and the unpredictability of foreign exchange rates, and the market-dictated prices iniWESM. The

. I AGRA Rules serve to ensure not only the financial staqility of DUs and the viability of the GenCos, but inore importantly the long-term interest of the consurners who will be ultilnately affected by the lack of supply or generation capacity and the inability of the DUs to provide efficient and reliable service clue to the lag in the recovery of the "pass-tluough" charges ..

1.52 The approved fo1~mula for the automatic adjustment has been put in place because the require1nent for prior approval of the prices every tiine a DU would withdraw power from thE7 grid would prevent the DU fr01n hnmediately buying power from WESM when the need arises. The delay in the recovery of generation cost entails carrying cost on the part of the GenCos so that they can pay their lenders, which also charge interests. The carrying cos't is then billed to the DUs and forms part of the electricity bills of the DUs' custon1ers because carrying costs are considered pa~t of ithe prudent and reasonable cost incurred by the DUs as the delay ip the collection is not a result of the DUs' negligence but brought about by the process in1posed by regulation. '

1.53 Ulthnately, it is the consun1ers who bene{it from the autornatic generation rate adjushnent inechanism, as the DUs will not only have the resources to ensure the efficiency, reliability and quality of power supply, but carrying costs are al~o avoided. Conversely, if the DUs are made to suffer cash-flow pro~lems due to delayed collection of generation charges, they might be unable to purchase the needed electricily for the succeeding rponths. The resulting blackouts would have dire consequences to the economy, and even national security.

l.54 It bears pointing out that the auton1atic generation rate adjustn1ent 111~chanis1n is subject to a post-verificatio1-\ process 'by the ERC, to protect the public interest by ensuring that only the correct arnounts are passed on to the consu1ners in accordance 1 with EPIRA and EPIRA IRR.

'

1.55 Section 45 of the EPIRA grants the ERC suffiFient powers to address any rnarket power abuse by any poV\('er industry participant that inay be brought about by the auton1atic adjustn1ent, and order refund of any e?

co1npetitive or discriminatory act or behavior by any partidpant in the elecb.ic power industry, Upon finding that a markJt participant has engaged in such act or behavior, the ERC shall stoi:? and redress the sarne. Such ren1edies shall, without limitation, i include the i111position of price conh'ols, issuance of injunctions, and imposition of fines and penalties puTsuant to the EPIRA.

1.56 Thus, based on law and regulations, eveni if there are excess payn1ents of generation charges to GenCos, the ipublic is not without any remedy as these GenCos may, an1ong 0th.er~, be ordered

I subsequently to refund the excess amount to the DUs, and the DUs,

. '

in turn, will hand the refunded arnount over to their cus~o1ners.

lvialanipaya's and other GenCos' shut down 1nainly contributed to the supply constriction and thus, the power - rate hike

1.57 When SPEX-Malarnpaya Deep Water Gas-to-Power Project ("Malan1paya") shut down for periodic 1naintenance on 11 T\foven1ber 2013 to 10 December 2013, the generation charges increased give1.1 that the den1and ie1nained the sa1ne,' b~t the supply was considerably reduced.

1.58 Malan1paya uses deepwater technology, drawing natural gas fro1n deep beneath the Philippine waters. The indigenous gas fuels three natural gas-fired power stations, i.e., Ilijan,

1San Lorenzo

and Santa Rita, which supply an aggregate capacity of 2700MW to I

l\1EH.ALCO's f-ranchise, or about 40% to 45% of Luzon's power generation req uire1nents.

1.59 Malarnpaya is allowed to conduct a scheduled inaintenance shutdown equivalent to fifteen (15) days every year. Unused scheduled n1aintenance days can be carried forward to the following year provided the aggregated scheduled n1ait~tenance_ days shall not exceed thirty (30) days per year. For this year's!maintenance period, the original shutdown period was fro1n 1 Nove,rnber 2013 to

. I

30 Noven1ber 2013, but was rnoved to 8 Novernber 2013 to 7 Decen1ber 2013. I--Iowever, the start of the shutdown was again n1oved to 11 November 2013 to 10 Decen1ber 2013 because of l:yphoon Yolanda.

-:

1.60 The Malampaya shutdown also coindided with the inaintenance shutdown of other power plants, suchi as Pagbilao Power Plant - Unit 2, Ilijan Po-wer Plant - Unit 2, Calac~ Power Plant - Unit 2 and San Lorenzo Power Plai1t ...... Module 50.' In addition, iviodule 60 of San Lorenzo Power Plant was still undergoing repair during the saine period. Moreover, there were also 1 other power plants that experienced forced outage (i.e., QPPL, Sual 1, Calaca 1, lVIasinloc 1 and GN Power, 2) dl.1:ring the san1e period.', Particularly, the schedule of the shutdown of the various power plants which overlapped with that of Malainpaya was as follows:

a) Power plants with scheduled inainten~nce shutdown coincided or overlapped with Malampa:xa shutdown schedule:

Power Plant

Pai:;bilao 2 GNPower2 Santa Rita Unit 20 Ilijan 1

Santa Rita Unit 30

Capacity (in MW)

Scheduled M~inten.ance Shutdown Period

' I (*extended its shutdown)

350 31 August - 26 November 2013 300 . 26 Septe1nber -10 r..:r.ovember 2013* 250 23 - 28 October 2013* 1 600 29 - 30 October 2013*, 5 - 11

December 2013 250 31 October - 2 Noven1ber 2013*,

18 - 22 Deceni.ber 2013 , 1 November - 9 Dece1nber 2013 San Lorenzo Unit 50--~----~+-----+----------'------~ Santa Rita Unit 20 250 3 Nove1nber 2013*

250

Ilijan '.:=-2 _____ _i _ __:.6~0-=--0---1._:...9_N_ov_e_rr_1-'-b_er__ -_1_5_D_e__;___c_em+, _b_e_r_2_01_3_--1 Calaca 1 300 24 Decen1ber 2013 -I 10 January

2014*

b) Various power plants also_ weryt on. a fo,rced outage on dates overlapping with the Malan1paya shutdown:

Power Plant Capacity Forced Outage Period (in MW) i

Calaca 1 300 26 October -15 Noverr:iber 2013 Calaca 2 300 17 - 18 December 2013' Gl'J Power 1 300 1 - 2 November 2013 Gl'J Power 2 300 10 - 19 November 2013, GT'J Power 2 300 27 Nove1nber - 8 December 2013 GNPower2 300 11-17 Dece1nber 2013 1

,____

35

Ilijan 1 Ilijan 2 Masinloc -1 IV1asinloc - 1 Masinloc - 2 Masinloc - 2 Masinloc - 2 Masinloc - 2 Pagbilao 1 Pagbilao 2 San Lorenzo Mod

600 600 300 300 300 300 300 300 350 350 250

8 -10 Nove1nber 2013 ~ 8 - 9 November 2013 31 October - 7 N oven1ber 2013 6 - 8 Dece1nber 2013 6 - 8 November 2013 24 November 2013 4 - 6 December 2013 13 -16 Dece1nber 2013 i 29 November - 13 Dec~mber 2013

. .

29 November - 14 December 2013 11 - 12 Dece1nber 2013 ~--~~~~~~f~~~~-+-~~~~~~~~~~~~_:_--l 50

14 - 17 Dece1nber 2013 . San Lorenzo Mod 50 San Lorenzo Mod 60 Sta. H.ita I\/Iod 10-40 Sual 1

250

250 28 May-10 Decen1ber 2013

250 11 December 2013 . 600 22 - 26 Octa ber 2013

1.61 In anticipation of the l\!Ialainpaya shutdown, MERALCO in1ple1nented measures to 1nitigate the impact of the: Malampaya shutdown on the generation charge to its custo1ners. Particularly, MERALCO contracted through PSAs at least ninety per~ent.(90%) of

I

its peak power requiren1ent to avoid the volatility of WESM prices. In addition, First Gas Power Corporation, which operatbs Santa Rita plant, inquired whether it win run the plant using! liquid fuel. MERALCO consented to ensure sufficiency of supply to n1eet its povver require1nent.

1.62 I-Iowever, despite these n1easures, MERALCO still had to secure additional electricilyrequirements fro1n the WESM in order to continue supplyhtg electricity to its customers within i its franchise

. I

area. Consequently, as the prices in the WESM turned out to be higher since the supply levels were low as a result of ~heioutages, and due to the use of m.ore expensive fuel by the Santa Rita and SPPC

I

plants, the Decen1ber 2013 electricity billings o.f MERALCO's custon1ers significantly increased, with the total ger1er~tion cost for the Novetnber 2013supply1nonth ainounting to PhP22.94 Billion. To en1phasize, however, the increase in generation cha11ges was the result of a surge in WESM prices ai1d t11e use of n1ore expensive .fuel for the Malan1paya gas-fired plants to be able to supply adequate puwer, and the increase was not due to the distribution charges being collected by MERALCO.

36

I

1.63 It bears to einphasize, however, that the generation charge spikes in MERALCO's November and Dece1nbe~ 2013 supply rnonths (which cover the Dece1nber 2013 and Januaryi 2014 billing 1nonths) are isolated, non~recurring and primarily the/ result of an abnonnal confluence of simultaneous and overlappi~g, forced or unscheduled outages, including extended and schedule~ shutdowns of n1ajor power plants, leading to extraordinary high WESM prices. These occurred as did the use of liquid-fuell such as condensate and bio-diesel (which are inore expensive than natural gas) by the gas-fired power plants during the maintenance shutdown of the lVIalarnpaya gas facilities.

1.64 Prior to this confluenc~ of events, the generation cost was relatively stable. There was adequate supply that was enough to keep prices at inanageable levels. In fact, prior to the lYialhn1paya and other power plants' shutdowns, the October 2013 gene~ation charge covering the Septernber 2013 supply rnonth cost, we1~t as low as PL1.68/kWh.

1.65 Further, the average generation charge for ye~r 2013, even including the PhP9.107 /kWh generation charge for Decefriber 2013, is still lower at PhP 5.6367 compared with the average generation charge in 2012 of Ph.1?5.7517 /kWh.

I

GENERATION CHARGE RATE I I

I

2012 12013 ..

January 5.L1643 5.7910 February 5.5774 5.2414 March 5.3348 5.1865 April 5.6621 5.3873 May 5.5983 5.4704 June 6.1375 5.6580 July 6.L1549 5.3269 August 6.7397 5.0479 September 5.3965 5.1747 October 5.4979 4.6832 November 5.6331 5.6673 .Decen1be:r 5.4817 9.1070 Average 5.7517 5.6367

37

l\.1ERALCO's efforts to mitigate the generation clnirge increase

1.66 The AGRA Rules establish a process for the automatic I