MANILA ELECTRIC COMPANY, PETITIONER, VS. PUBLIC SERVICE COMMISSION, RESPONDENT.

These are four (4) different
appeals from a decision and an order of the Public Service Commission, dated
March 15, and July 16,
1965,
respectively.

The Manila Electric Company –
hereinafter referred to as the MERALCO – is a domestic corporation, operating
electric light, heat and power system in the City of
Manila, and several cities and
municipalities in the Island of Luzon. On March
10, 1955,
it filed with the Public Service Commission – hereinafter referred to as the PSC
– two (2) applications, namely, one for the reduction of rates for
non-residential customers and commercial customers (PSC Case No. 85889), and
another for the reduction of rates for residential customers (PSC Case No.
85890). On August 24,
1955, the
MERALCO filed a third application, this time for the reduction of general power
rates (PSC Case No. 89893). The last application was provisionally approved on
August 31,
1955,
whereas the first two (2) were granted on September 24,
1955.

Prior thereto, or on June 9,
1954, Dr. Pedro Gil had applied for the examination of the books of account of
the MERALCO, which was eventually undertaken by the General Auditing Office –
hereinafter referred to as the GAO – early in May, 1956. The GAO having
submitted its report late in May, 1956, the three (3) cases were set for hearing
on June 22 of the same year. On the date last mentioned the parties appeared
before an officer of the PSC and an “informal hearing,” for the alleged purpose
of defining the issues, was held. Thereupon, Dr. Gil submitted the cases,
relying upon the GAO report and his letter to the PSC, dated Jun 7,
1956,
suggesting an 8% return on the invested capital. On July
31, 1956,
the MERALCO objected to said report. Similarly, the Solicitor General submitted
the cases upon the aforementioned GAO report and said letter of Dr. Gil and upon
another letter-report of the GAO to the PSC, dated November 21, 1955. Other
parties made common cause with Dr. Gil.

On December 27, 1957, the PSC
rendered a decision directing the MERALCO to reduce its rates as
follows:

 

“Residential and domestic customers………………………………………………………………………….	16%
“Commercial customers, including government agencies and street lighting (except the street lights for the City of Manila, the rates for which are fixed by contract……………………..	8%
“Industrial customers, including non-associated electric utilities……………………………………..	6%

On appeal taken by the MERALCO,
said decision of the PSC was, on June 30, 1964, set aside by the Supreme
Court^[1] and the cases
remanded to the lower court, for further proceedings and rendition of the
corresponding judgment. Soon later, or on October 8, 1964, the PSC caused the
three (3) cases to be set for hearing on November 16, 1964. Earlier, or on
October 15, 1964, the MERALCO had, however, moved to withdraw its aforementioned
petitions for revision of rates. After due hearing, this motion was granted on
November 10, 1964.

About two (2) weeks before, or on
October 22, 1964, the MERALCO had, moreover, filed another petition^[2]seeking approval of a
revised (increased) rate schedule, and of the “Terms and Conditions of Service”
and the “Standard Rules and Regulations” appended to the application, for the
purpose of providing a fair return on the present value of its property now
devoted to public service and of attracting foreign capital with which to expand
its facilities in order to meet the requirements of its present and future
customers.

Said petition was opposed by the
Republic of the Philippines, the City of Manila, Ricardo Rosal and a number of
other entities and Individuals. After due hearing, in the course of which
testimonial and documentary evidence were introduced, the parties filed their
respective memoranda. Subsequently, or on March 15, 1965, the PSC rendered its
decision, the dispositive part of which reads:

“WHEREFORE, the Public Service
Commission disapproves the proposed rate schedule submitted by the MERALCO dated
October 22, 1964 and in lieu thereof, hereby authorizes and approves a modified
rate increase as follows:

For Residential Service, instead
of 32.5% (in crease as proposed) the Commission authorizes an increase of 23%
which is hereby approved;

For General Services, instead of
30.99% (increase as proposed) the Commission authorizes an increase of
24.99%;

For General Power, instead of
25.90% (increase as proposed) the Commission authorizes an increase of
24.90%.

The corresponding schedules for
the rates authorized herein are hereto attached as Annexes ‘A’, ‘A-1’ and ‘A-2’
and are made part of this decision. The above increase of rates is herein
authorized and approved subject to the condition, that a substantial portion of
the increased revenues resulting from the revision of rates allowed herein,
shall be devoted exclusively to the acquisition of equipment to meet the demands
of public service, to avoid a deterioration of the
service.

“The Commission believes that the
‘Terms and Conditions of Service’ attached to MERALCO’s application of October
22, 1964 (Annex ‘C’ and ‘Standard Rules and Regulations’ attached to said
application (Annex ‘D’) should be the subject of a separate application and,
therefore, no action is taken thereon in this decision.

“The increases hereinabove
APPROVED and AUTHORIZED shall be effective from the date of this decision, and
Annexes A, A-1 and A-2 cancel and supersede all previously authorized rate
schedules, including the wholesale power
rate.”

What transpired immediately
thereafter is set forth in our decision in Manila Electric Co. vs. PSC et al.,
L-24406 (June 29, 1965), from which we quote:

“After promulgation and
publication of the decision,^[3] which expressly
provided that the increases ‘shall be effective from the date of this decision’,
the Solicitor General filed, on March 18, 1965, a petition for reconsideration,
and on March 19, 1965, moved ex parte to suspend the effectivity of the decision
authorizing the rate increases. On the same day, and without notice to, or
hearing of, the applicant, the Commission issued an order suspending the
effectivity of the decision (Annex B, Petition). Applicant MERALCO (Petitioner
herein) moved for a hearing to enable it to oppose the order of suspension, but
no action was taken on its motion. In the meantime, other motions seeking
reconsideration of the decision were filed, and petitioner MERALCO filed its
opposition to the same on March 23. On the same date, respondent Medina issued
an order requiring applicant to answer the motions for reconsideration within 20
days and the movants 20 days to reply (Annex ‘C’). By telegram of March 29,
respondent Commissioner Enrique Medina, ordered that the motions for
reconsideration be not calendared until his arrival, and that oppositors ‘be
notified and given legal period for the reconsideration and also to reply’
(Annex ‘D’). On March 31, said Commissioner (Medina) issued an order expressing
the desire that all motions for reconsideration and oppositions thereto ‘be
heard and argued simultaneously, to save time and effort’, and directed the
Secretary of the Commission to call his attention as soon as the reglementary
period to file motions for reconsideration expired, ‘with the end in view of
setting all motions for reconsideration and all oppositions thereto in one
setting’ (Annex ‘E’, Petition). In view thereof, MERALCO resorted to this Court,
claiming the aforementioned orders to be invalid and without, or in excess of,
jurisdiction and charging the respondents, particularly Medina, with a scheme to
delay the hearing and resolution of the motions for
reconsideration.

“Respondent Commissioners and the
Republic of the Philippines answered, alleging that the orders complained of
were legal, valid and within the jurisdiction of the Commission; that the orders
of Commissioner Medina alone, Annexes ‘C’ and ‘E1’, were interlocutory and
lawfully issued by him as presiding officer of the Commission. Such is also the
City of Manila’s answer.”

On June 29, 1965, we rendered the
aforementioned decision in L-24406, granting the writs therein prayed for,
annulling the PSC order of March 19, 1965,^[4] and directing the
PSC to immediately hear and promptly resolve the motions for reconsideration of
its decision of March 15, 1965.

On July 16, 1965, two (2) orders
were registered in the Office of the Secretary of the PSC. One, filed at about
2:52 p.m., was signed by five (5) members of the PSC,^[5] the dispositive part
of which reads:

“Finding some of the reasons of
the Solicitor General and even that of Mayor Viliegas to be acceptable, it is
our considered opinion that the average rate increase of 23.7% as contained in
the decision of March 15, 1965, should be, as it is hereby rejected,
reconsidered and reduced with respect to residential customers only, in the
following manner:

a. All residential Flat Rate
Customers are exempt from any increase;

b. All hospitals, public and
private are also exempt from any increase;

c. All metered residential
customers who consume from 1 to 30 kwh (30,000 watt-hours) are likewise exempt
from any increase;

d. All metered residential
customers with consumption of:

1. 31 to 40 kwh-gradual increase up to……………………………………..	5%
2. 41 to 50 kwh-gradual increase up to……………………………………..	8%
3. 51 to 60 kwh-gradual increase up to……………………………………..	10.71%
4. 61 to 70 kwh-gradual increase up to……………………………………..	12.67%
5. 71 to 80 kwh-gradual increase up to……………………………………..	14.38%
6. 81 to 90 kwh-gradual increase up to……………………………………..	15.88%
7. 91 to 100 kwh-gradual increase up to……………………………………	17.22%

 

“These percentages are based on
our newly approved schedule, which the Rate and Finance Division of the
Commission should use as guide, as follows:

RATE	(Per month)
First	14 KWH	P2.00	per KWH
Next	46 KWH	P0.125	per KWH
Next	130 KWH	P0.07	per KWH
Excess	KWH	P0.06	per KWH

 

“The rates prescribed in the
decision dated March 15, 1965 for commercial, industrial and general services
shall remain unchanged.

“All other matters in the
decision of March 15, 1965, there being no reason to disturb the same, are
hereby affirmed.”

The other order, filed on July
16, 1965, at about 4:01 p.m., although dated June 14, 1965, was signed by PSC
Commissioner Medina and concurred in by Associate Commissioner Panganiban,^[6] and favored the
granting of the motions for reconsideration above mentioned. Appeals were taken
from said order of July 16, 1965, and the aforementioned decision of March 15,
1965, by the Meralco (G. R. No. L-24762), Ricardo Rosal (G. R. No. L-24841), the
Republic of the Philippines (G. R. No. L-24854), and the City of
Manila (G. R. No.
L-24872).

The MERALCO, has, however,
questioned the timeliness of the appeals taken by the Republic of the
Philippines and the City of Manila-hereinafter referred to as the Republic and
the City-upon the ground that said appeals had been interposed beyond the period
of 15 days-after notice of the order denying the motions for
reconsideration-prescribed in Section 36 of the Public Service Act (Commonwealth
Act No. 146).^[7]

The MERALCO has, also filed a
motion for dismissal of the appeal of Ricardo Rosal, alleging that his motion
for reconsideration of the decision of March 15, 1965, was filed on April 12,
1965, or more than 15 days after March 25, 1965, when he received notice of said
decision, in violation, allegedly, of Section 34 of Commonwealth Act No.
146.^[8]

It should be noted, however, that
said 15 days expired on April 9,
1965,
which was a holiday, it being Bataan Day; that April
10, 1965,
was Saturday, on which day the offices of the PSC are closed; and that
April 11,
1965 was
Sunday. In other words, the first working day immediately following the date of
expiration of said period – which date happened to be a holiday – was
April 12,
1965.
Accordingly, said motion for reconsideration of Rosal was filed within the
reglementary period, and his appeal has been seasonably
perfected.

Let us now take up the appeals of
the Republic and the City. As above indicated, the MERALCO maintains that said
appellants had only 15 days from notice of the order of the PSC dated July 16,
1965, within which to perfect their appeal, pursuant to Section 36 of
Commonwealth Act No. 146, which, the MERALCO maintains, is controlling. Upon the
other hand, the Republic and the City allege that they had, for purposes of
appeal, the period of 30 days prescribed in Rule 44, Section 1, of the Rules of
Court,^[9] which should prevail
over that prescribed in Section 36 of Commonwealth Act No. 146, said Rule being
subsequent, in point of time, to this statute. Replying thereto, the MERALCO
insists that Commonwealth Act No. 146 must prevail over the Rules of Court, not
only because the former has, constitutionally, a higher status than the latter,
but, also, because the former is a special legislation, enacted exclusively for
the PSC.

The last part of MERALCO’s
argument is, however, weakened by the fact that Rule 44, Section 1, of the Rules
of Court, refers specifically to appeals “from a final award, order or decision
of the Public Service Commission x x x,” among others. At any rate, the 15-day
period provided in the last part of the first sentence of Section 36 of
Commonwealth Act No. 146, governs only when the motion for reconsideration has
been denied. It has no application when the motion is granted, because, then,
there results, in contemplation of law, a new decision, which may be reviewed on
application filed with the Supreme Court within thirty (30) days from notice of
said decision or of the order granting the motion for new trial, pursuant to
both, the first part of the first sentence of said Section 36 of Commonwealth
Act No. 146, and Rule 44, Section 1, of the Rules of
Court.

In the cases under consideration,
the motions for reconsideration of the Republic and the City were, in effect,
granted, although not to the full extent sought by the movants. In fact, the
order of the majority of the PSC, dated July 16, 1965, explicitly declares that
the average rate increase of 23.7% sanctioned in the decision of March 15, 1965,
was thereby “rejected, reconsidered and reduced with respect to residential
customers only,” in the manner already adverted to. It is not disputed that the
appeals of the Republic and the City have been taken within thirty (30) days
from notice of said order of July 16, 1965. Consequently, MERALCO’s objection to
the timeliness of said appeals, as well as to that of Ricardo Rosal, should be,
as it is hereby overruled.

Referring now to the merits of
the rate increases authorized in the appealed decision of March 15, 1965, as
amended by the order of July 16, 1965, the issues raised may be summarized as
follows, namely: (1) Are rate increases proper considering the circumstances
obtaining in these cases? (2) What rate of earnings should be allowed? (3) What
shall be the basis for the computation of said earnings? (4) Is the reduction of
rates directed in the order of July 16, 1965, legally justifiable?

On the first issue, the Republic,
the City and Ricardo Rosal submit a negative answer, upon the ground that, from
1956 to 1964, the MERALCO has consistently made net profits ranging from over
P14,000,000.00 to over P28,000,000,00 a year, which, it is claimed, constitute a
fair and reasonable return for the capital invested in said enterprise. The bulk
of their arguments refers, however, to the manner or method of determining the
amount of said capital and/or the value of the assets of the MERALCO. Indeed,
the question whether or not the net profits in previous years constitute a fair
return depends upon the amount of the investment made and/or the appraisal of
the assets of the institution, which are the subject matter of the issues
hereinafter to be taken up. For the time being, it will suffice to quote the
following passage of the decision of March 15, 1965, which has not been sought
to be refuted by any of the parties herein.

“In approving as we hereby do, a
slight in crease of rates in favor of Meralco, we desire to make it clear that
except for minor blackouts, the service of Meralco has been and is considered by
the PSC and by the public in general as adequate and satisfactory up to the
present, but unless proper precautions are taken, few years from now the service
may be different, the wear and tear, the rust, the passing of time, the increase
of population and the ever growing needs of industry and commerce, are
inevitable, and so the service of Meralco will deteriorate to the prejudice of
the public service unless proper measures are taken to meet such situation.
The Commission would like to avoid a
repetition of the state of affairs of PLDT; the unpleasant deterioration of the
PLDT’s public service, its apparent failure to cope with the situation and to
satisfy the demands of the public since 1959 or earlier, should not be repeated.
The situation was so alarming, that in 1963, the PSC had no other alternative
but to accede to and approve a 47% rate increase for commercial and 40% increase
for residential telephones , over and above the rates already increased by 50%
since 1950 (PSC Case No. 16533) for the purpose of enabling the PLDT to obtain a
large foreign loan which it could not obtain locally in order to prosecute an
urgently needed reconstruction and expansion program to Improve the service and
to meet demands of the public. The same thing will happen to Meralco’s service a
few years from now, unless some bold step is taken to meet the demands of public
service; it is therefore our considered opinion that it is better to
approve now a modest increase (23% for residential service and approximately 25%
for General Services and General Powers) than to have to approve later on a 50%
increase plus another 40% and 47% increase, as it happened with the PLDT,
with the added advantage that the
satisfactory and adequate service rendered by Meralco today will not be
interrupted. It is therefore the considered opinion of the undersigned that a
modest increase may be approved, with the express condition that a substantial
portion of the increased revenues resulting from the revision of rates
authorized herein shall be devoted exclusively to the acquisition of equipment,
accessories and supplies to meet the demands of public service in the future, to
avoid a possible deterioration of the present adequate and satisfactory
service”. (Underscoring ours.)

In short, the exigencies of the
present and the future-viewed in the light of recent developments and the
experience gained in connection with the operation of another public utility
analogously situated – imperatively require, not only that measures be taken to
offset the effects of the wear and tear upon MERALCO’s lines, equipment and
other facilities (already strained by the needs of the unprecedented increase of
population and the rapid expansion of trade, commerce and industry in the City
of Manila and its environs, and the impact of modern electric appliances) and to
avoid a deterioration of the adequate and satisfactory services it has
heretofore rendered, but, also, that additional and improved equipment and
facilities be acquired, installed and used to meet the ever growing demands for
electricity in all fields of endeavor.

These measures, in turn,
represent a financial outlay of such magnitude ^[10] that – it seems
conceded – the MERALCO is incapable of making with its present resources.
Although it may raise the funds necessary therefor, either by increasing its
capitalization or through loans, the first alternative is fraught with the
danger – which is clear and present, owing to the scarcity and timidity of local
capital – that foreigners may eventually, if not surely, control an industry so
vital to our economy and national security. Hence, the only alternative left,
consistently with the policy of nationalism and independence underlying our
political and legal system, is to secure foreign loans.

It is obvious, however, that
foreign capitalists would not extend their credit facilities without a
reasonable assurance that the borrower is financially able to comply with its
obligations under the corresponding contract of loan. This simply means that the
revenues of the borrower must be such as to justify the expectation that it
could and would seasonably meet said obligations. Such revenues, in the case of
the MERALCO, depend upon its rate schedules. Hence, the need of revising the
same.^[11]

This brings us to the main
question in this case, namely: What is the fair rate of return or profit upon
which the schedule of rates chargeable by the MERALCO should be based? The PSC
has fixed it at 12% of the present value of the MERALCO assets devoted to public
service. The Republic, the City and Ricardo Rosal assail this conclusion of the
PSC on several counts. They maintain that: (1) 12% is too high a rate of
earning, and should be lowered; (2) the basis for the computation should be
other than the present value of said assets; and (3) the assessment of said
present value is excessive, and should be reduced.

With respect to the return
allowable to the MERALCO it is urged that the rate authorized by the PSC is
higher than that prevailing in the United
States. It is well settled, however,
that the rate of return permissible depends upon existing conditions.^[12] In the Philippines,
our decisions have consistently adopted the 12% rate for public utilities and
the PSC has done no more than adhere to the established jurisprudence thereon.
Indeed, the GAO report concedes that 12% is the fair rate of return for the
MERALCO. This is not the proper occasion to inquire into the wisdom of such
jurisprudence, although it is a matter of common knowledge that the prevailing
rates of interest on loans in the Philippines are generally higher than those
charged in the United
States. The fact is that, in view of
this circumstance, nobody would lend the
necessary funds to the MERALCO, if its returns were fixed at a lower rate.
The reason is obvious: capitalists would prefer to lend their
resources to other public utilities, because the latter would, generally, be in
a better position to pay a higher rate of interest and offer a greater assurance
of stability and capacity to meet its obligations, all other things being
equal.^[13]

Then, also, the interest due to
the lenders would have to be paid by the MERALCO out of its net earnings. As a
consequence, the same would have to be somewhat higher than otherwise, in order
that the borrower could reasonably warrant to the lender it’s (borrower’s)
ability to pay the debt, and still retain
a margin of earnings sufficient to encourage or justify it’s (borrower’s)
investment in the enterprise. Otherwise, the stockholders of the
public utility would prefer, either to withdraw their investment and shift the
same to another more profitable venture, or to refrain, at least, for the time
being, from embarking on a program of replacement of its old lines,
installations, equipment and other facilities-, as well as of expansion and
improvement of his services. In either case, the public would suffer
thereby.

For this reason, the decision
appealed from, as amended, provides that the increase therein sanctioned is
subject to

“x x x the express condition that a
substantial portion of the increased revenues resulting from the revision of
rates authorized herein shall be devoted exclusively to the acquisition of
equipment, accessories and supplies to meet the demands of public service in the
future, to avoid a possible deterioration of the present adequate and
satisfactory service.”

If the MERALCO were not
constrained to borrow for the purpose of financing the undertakings it proposes
and is required by the circumstances to pursue, the rate of return for its
investment could, in all probability, be reduced. Indeed, before it had decided
to initiate said undertakings, MERALCO had, not only never increased its rates –
despite the fact that almost all other enterprises^[14] have raised their
rates – but, also, volunteered to reduce the same.

It goes without saying that the
rates of return are understandably lower in the United States where there is a
comparative abundance of capital and it is, therefore, relatively easier to
raise funds locally, either by increasing the capitalization – without the
danger adverted to above – or through loans, under conditions less onerous than
those usually obtaining in the Philippines.

The next question for
determination is the basis upon which the rate of earnings allowable to the
MERALCO shall be computed, in order to fix the schedule of rates chargeable by
said enterprise. MERALCO maintains that said schedule should be premised upon
the present value of its assets as of the year 1963. The Republic and the City
have, in effect, accepted this theory, in principle, although they do not agree
with the method used in the assessment of MERALCO’s assets. Upon the other hand,
Ricardo Rosal urges that the rates should be founded upon the amount of the
investment made by MERALCO’s stockholders or the “historical cost” formula. The
PSC has adopted the present or market value theory, as the basis for the
computation of the earnings allowable to and the rate schedule chargeable by the
MERALCO, as well as the method of valuation used and the appraisal made by the
same, after making therefrom some deductions recommended by
GAO.

With respect to the “historical
cost” formula urged by Rosal, it should be noted that the present or market
value theory adopted by the PSC is in consonance with the practice consistently
adhered to in this jurisdiction and upheld in an uninterrupted line of decisions
of this Court.^[15]

And said decisions are borne out
by the weight of authority in other jurisdictions. ^[16]

Rosal argues that the market
value theory may be acceptable under normal conditions, but not when the same
are abnormal – as, he claims, they are now in the
Philippines – when the prices are high,
because of the present rate of exchange of the American dollar in relation to
our peso. Although, during the operation of our foreign exchange control law,
the official rate of exchange was two pesos to a dollar, such was not, however,
the true rate of exchange in actual practice. In fact, one of the most potent
factors in favor of the removal of said control was the artificiality of the
effects thereof. Then too, there is nothing to indicate that the prevailing rate
of exchange will, in the foreseeable future, vary materially in our favor.
Again, if and when there should be a substantial change for the better, insofar
as we are concerned, the PSC could take such measures as may be meet and proper
under the new conditions then existing.

The revised schedule of rates of
the MERALCO was determined by the PSC as follows:

A. Utility plant net value………………………………………………	P415,427.353.00
1. Average according to MERALCO……P438,024.00
B. Plus working capital (according to GAO)…………………….	10,739,132.00
C. Average base rate…………………………………………………	P426,166,485.00
D. Multiplied by percentage of fair return………………………	12%
E. Fair return on present value……………………………………	P51,131,978.20
F. Plus Franchise Tax…………………………………………………	1,438,216.00
G. Plus Operating Expenses……………………………………….	80,555,436.00
H. Plus depreciation………………………………………………….	5,562,527.00
I. Allowable revenue………………………………………………..	P138,696,157.00
1. PSC computation is…………P138,366,702
J. Deduct Actual Operating revenue…..111,850,743
K. This represents……………………….. P26,515,959
1. 23.71% of actual revenue rates
2. 6.22% of invested capital (according to MERALCO)

 

The main target of attack in this
computation is its first item, namely the net value of MERALCO’s utility plants,
which was fixed by the PSC at P415,427,353.00. The appraisal thereof by the
MERALCO was P420,275,000.00 at the beginning of 1963 and P455,772,000.00, at the
end of the year, or an average of P438,024,000.00 for the whole year. Upon the
other hand, the Republic relies upon the GAO report fixing the value of said
utility plants at P340,471,251.00. The difference between the MERALCO is
appraisal and that made by GAO is due mainly to the method used by each in
determining the present or market value of said plants.

The MERALCO appraiser applied
what is known as the “trending method.” in its decision of March 15,
1965, the
PSC described this method, as follows:

“Meralco’s principal witness with
respect to the present value of its property and equipment, other than land, was
Mr. E. C. Edgar, Manager of the Economic Engineering Department of Gilbert
Associates, Inc., a U.S. engineering firm originally
organized in 1906. Mr. Edgar testified that he had specialized in public utility
valuation matters since his graduation from Massachusetts Institute of
Technology in 1935; that he had been familiar with Meralco’s properties since
1946; that, in June, 1962, he had initiated the studies the result of which he
presented at the hearing; and that he had determined the December 31, 1962
present cost for Meralco’s power plants by employing the so-called ‘trending
method”. Mr. Edgar described this method as follows: He had first segregated
each type of such expenditures by kind of material, labor and the like, going
into the manufacture of the particular property item; this segregation was
audited by the firm of Sycip, Gorres, Velayo and Company so that there would be
no question as to the segregation by virtue of such independent review, check
and verification; he then developed and applied specific price increase factors
for each of such groupings; and in this way, he repriced basic peso costs in
accordance with the increase in cost of the various peso materials utilized and
the appropriate peso labor employed and, similarly, he repriced dollar items in
accordance with the increase in their costs.

“He emphasized that his valuation
for Meralco’s power plant (and the other Meralco property which he valuated) was
designed to express the value of all Meralcois property in service in terms of
the 1963 purchasing power of the peso; that Meralco can only collect revenues
from its customers in pesos of current purchasing power; that,by expressing its
property in terms of pesos with 1963 purchasing power, a correct matching of
Meralco’s revenues derived from the use of its facilities and the value of such
facilities in terms of the same monetary unit is achieved; and that the property
which he was evaluating was that actually in
service.”

Upon the other hand, the GAO
fixed the value of MERALCO’s utility plants by ascertaining the cost of
production per kilowatt and multiplying the same by the total capacity of said
plants, less the corresponding depreciation. In the language of the decision
appealed from:

“The appraisal-method employed by
the GAO for Meralco’s power plants does not seem to be satisfactory. It used as
its base for determining the current cost of Meralco’s steam generating stations
the cost per kilowatt to Meralco of installing its Rockwell Station Unit No. 8
which was placed in service in 1963. This unit is a 66,000 KW Unit. The first
five Rockwell units are 27,000 KW units and units Nos. 6 and 7, as well as No.
8, are 66,000 KW units. The five Blaisdel’ units range in size from 4,000 KW to
12,000 KW. The net effect of the GAO’s method is to substitute, for the current
cost of the 13 steam generating units actually in service the cost per kilowatt
which would result if Meralco’s thermal power plants consisted of 5.51
generating units, each with a capacity of 66,000 KW and each installed in 1963.
From this theoretical cost figure thus developed by the GAO, it then subtracted
the depreciation reserve (restored on a present value basis) which had been
accumulated with respect to the 13 units actually in
existence.

“The cost of Rockwell Unit No. 8
is not the complete cost of
the unit because this was an incremental
addition to an existing station and did not take account of the cost of some of
the facilities previously installed in the Station in connection with earlier
units which are properly assignable in part to Unit No. 8. Meralco has
demonstrated that the cost per kilowatt for Rockwell Unit No. 8,
should be increased by about 10% if it were to be used as the kind of standard
suggested by the GAO Committee, and about P14,000,000.00 of the difference
between the Meralco and GAO determination of present value of steam power plants
would be eliminated.

“Meralco also questions the
propriety of the deduction by the GAO of the depreciation reserve of
approximately 20% from the value per kilowatt assigned by the GAO Committee on
the basis of the cost of Rockwell Unit No. 8. It urges that there is virtually
no depreciation applicable to that Unit and that it is inconsistent to use the
cost of that Unit as a standard of value and then to deduct the accumulated
depreciation applicable to the other 12 units. Meralco points out that if no
such deduction is made, and if the 10% increase in cost per kilowatt of Rockwell
Unit No. 8 referred to in the preceding paragraph is taken into account, then
the GAO’s method would produce a total present value for Rockwell and Blaisdell
station in excess of that claimed by Meralco. We believe that there is merit in
Meralco’s position on this matter.

“We have also noted Meralco’s
argument that acceptance of the GAP Committee’s method would necessitate greatly
increased depreciation allowance in the early lives of facilities and, in the
case of rapidly growing utilities, would lead to higher consumer
rates.

“Since, as noted above, the GAO’s
method of determining the present value of Meralco’s power plants is basically not acceptable because it involves
substituting the value of theoretical facilities not in service for the value of
actual facilities which are in service and because it accords insufficient
recognition to the underlying purpose of present value
determinations, we find it unnecessary to discuss further the claimed defects in
the application of the GAO’s method.

“The reasonableness of the
valuation of Meralco’s steam power plants developed by Gilbert Associates, Inc.,
is attested by data released by the U. S. Federal Power Commission. Such data
indicate that the recent cost per kilowatt in the
United
States for units of the 50,000 to
75,000 KW size is $199 and for units of the 22,000 to 49,000 KW size is $228.
Expression of such costs in pesos at a P3.91 per $1 conversion rate would result
in current costs for such unit of P778 and P891, respectively. These are costs
in the United
States where labor construction costs
are higher than in the Philippines but such elements as ocean
freight, import duties, etc. are not present. The average current costs for
Rockwell Units 1-5, inclusive, each of which is a 27,000 KW unit, as determined
by Gilbert Associates, Inc. is P697 or well below the comparable P891 per KW
figure derived from the Federal Power Commission data. The average current cost
of Rockwell Units 6 and 7, each of which is a 66,000 KW unit, as determined by
Gilbert Associates, Inc. is P563 per KW, or again well below the P778 per KW
comparable figure derived from the Federal Power Commission data. The Federal
Power Commission data do not include units as small as those in the Blaisdell
Station, but the average current cost of P1,016 per KW for the units in this
station, as determined by Gilbert Associates, Inc., appears to be in line,
bearing in mind the fact that the cost per kilowatt in small units is
substantially greater than in large ones.

“What has been said with respect
to Meralco’s steam generating stations is even more applicable to its Botocan
hydro-electric station. Gilbert Associates, Inc. valued Botocan by trending the
surviving peso and dollar components of the cost of Botocan into 1963 peso and
dollar costs. The GAO, on the other hand, based its determination of the value
of Botocan on the cost of the National Power Corporation’s much larger Binga
hydro-electric project. Yet the data presented by GAO with respect to Binga
demonstrate that the cost per kilowatt
for one hydroelectric project will not accurately measure the cost of another
hydro-electric project – even one built by the same agency on the
same river. Hydro project costs are
greatly affected by site conditions, permissible water storage.available haad
and the like. The cost of one hydro-electric does not measure the cost or value
of another – at least so long as both are economically advantageous
in the electric systems of which they are a part.

“For the reasons stated, we are
inclined to accept the valuation of Meralco’s power plants as determined by
Gilbert Associates, Inc.” (Underscoring
ours.)

We find no cogent reason to
disturb either the facts upon which the foregoing conclusions of the PSC are
premised or the conclusions drawn from said facts, both being, by and large,
supported by the records.

It is urged that the present
value theory is now an obsolete doctrine, it having been rejected by the Supreme
Court of the United States in Federal Power Commission vs. Hope Natural Gas Co.
(320 U. S. 591, 88 L. ed. 333), in which the prudent investment or modified
original cost theory was allegedly adopted. This assertion is inaccurate. In
said case the Court did not reject the present or fair market value theory. It
merely refused to interfere with the action taken by the Federal Power
Commission in applying said prudent investment or modified original cost
theory.^[17]

As regards the working capital of
the MERALCO, we note that the latter claimed therefor P17,884,000.00, which was
reduced by the PSC to P10,739,132.00, after making some deductions recommended
by the GAO. Similarly, the MERALCO had fixed its operating expenses at
P81,020,337.00, which, in line with the opinion of the GAO, was reduced by the
PSC to P80,558,039.00. Thus, MERALCO’s working capital and operating expenses
were assessed by the PSC in accordance with the view taken by the
GAO.

In other words, the revised rates
authorized in the decision of March 15,
1965,
were substantially supported by the policy of authorizing the MERALCO to secure
a net return of 12% on the present or market value, as of 1963, of its property
actually devoted to public service. But, then, MERALCO alleges, the PSC had
acted arbitrarily in establishing exceptions and directing a reduction in the
rates for residential customers, as provided in the order of July 16,
1965. The
reasons given in said order were:

“Hardest hit by the rate increase
are the poor people who consume electric currents of from 1 to 100 kwh. Those
who use from 1 to 14 kwh., under the decision sought to be reconsidered, pay an
increase of 16% while those who consume from 14 kwh. to 20 kwh. pay an increase
of 22%. The full 23% is charged for consumption starting from 30 kwh. and
upwards, and up to 28% increase for a consumption of 90
kwh.

“According to data available, of
the 348,943 total residential customers of the Meralco, one-half are those who
consume from 1 to 100 kwh. The consumers of from 100 kwh to 300 kwh. may safely
be classified as well-to-do customers since their capacity already involves the
use of electrical appliances, like TV sets, radios, electric ranges, air
conditioners, electric fans, electric irons, etc.

“It is on behalf of the poor
people that the Solicitor General and Mayor Villegas are loyally battling for.
They have used all iota of arguments, legal or logical, to convince the
Commission of the wisdom of their thinking and the justice due the total of
348,943 residential consumers of Manila, suburbs and part of a few
surrounding towns of Manila. Even our very own Chief
Executive has expressed his deep concern for these less fortunate ones with whom
he is so significantly identified. His battle-cry: ‘Fight
Poverty’.

“Of course, in a democracy the
instrumentality of the State favors not only one segment of society, like
favoring only the poor, or favoring only the rich; it must favor the public good
or well-being, the reason for its existence. And so it is that in determining a
reasonable compensation for the services of a public utility, it should be just
to the public and just to the Company; but the more enlightened reason is that
if it cannot be just to both …. it must in any event be just to the
public.”

The order appealed from does not
give any specific figures that would permit us to estimate the amount of the
reduction that would thus be effected in the revenues and returns of the
MERALCO, as determined in the original decision, dated March 15,
1965.
Neither has the MERALCO supplied the figures necessary to show that the
modifications provided in the order of July 16, 1965, are materially
inconsistent with the basic principles or premises established and adopted in
said decision and confirmed in the order appealed from. And, since the findings
of and determinations by administrative organs, in matters which are within
their peculiar competence, should be respected by courts of justice, unless
clearly devoid of factual or legal foundation, and no such flaw has been shown
in the cases at bar, we deem it improper, at this time, to review the
modifications thus effected by said order. At any rate, it should always be
understood that if, after having been in operation long enough to reasonably
ascertain the effects of the contested modifications, the same should prove to
be unjust and unfair, the PSC may, after due notice and hearing, grant such
relief as may be proper to remove the resulting evils, if any, and promote
public interest.

The City maintains, also, that
the appealed decision and the appealed order are null and void for lack of
jurisdiction of the PSC to entertain MERALCO’s application for revision
(increase) of its rate schedules: (1) because said application includes
territories which are beyond the City, for which MERALCO has, allegedly, no
legislative franchise; and (2) because, although possessing a legislative
franchise for the City, MERALCO has no certificate of public convenience to
operate therein, as required by the Public Service Law.^[18]

We find no merit in this
pretense. To begin with, the alleged lack of legislative franchise of the
MERALCO to operate in areas outside the City, but adjoining the same, as well as
the absence of a certificate of public convenience to operate in the City
proper, might affect, not the jurisdiction of the PSC, but MERALCO’s cause of
action, or its right to seek a revision of rates.

Secondly, pursuant to Act No. 484
of the Philippine Commission, approved and effective on October 20, 1902, and
Republic Act No. 150, approved on June 14, 1947, the MERALCO may operate an
electric system in the “City of Manila and its suburbs .” It is true that in PSC
Case No. 23044, the PSC held, in an order dated April 4, 1963, that the term
“suburbs”, in said laws, does not include territory outside the perimeter of the
City, although adjoining the same. However, said order has, in effect,
authorized the continuance of MERALCO’s operation within the disputed area for
one year from the date thereof, by giving the MERALCO said period of time within
which to secure the corresponding legislative franchise and certificate of
public convenience. Besides, the order was set aside by this Supreme Court in G.
R. No. L-21435.^[19]

In fact, even prior thereto, or
on June 20, 1964, Congress had passed Republic Act No. 4159, extending, for 30
years, the time within which the MERALCO may operate “throughout the City of
Manila and its suburbs”, and, according to the Explanatory Note of the Bill^[20] which, upon
approval, became Republic Act No. 4159, its purpose is to extend, for said
period, MERALCO’s authority to operate “throughout the City of Manila and the
Cities and Municipalities now being serviced by it” (underscoring
ours).

Thirdly, in A. L. Ammen
Transportation Co. vs. Golingco (43 Phil. 286), we held that a certificate of
public convenience issued by the PSC is a prerequisite to the operation of a
public utility in the Philippines, unless the same was in operation when our
first law on public utilities (Act No. 2307) went into effect.^[21]The MERALCO was then
in operation, its franchise having been granted by said Act No. 484 of the
Philippine Commission,^[22]and carried into
effect by Ordinance No. 44 of the City in 1903.^[23]

The MERALCO has moved for the
dismissal of the appeal of the Republic upon the ground that its brief had been
filed after the expiration of the reglementary period therefor. Upon submission
of the Republic’s opposition to said motion and of MERALCO’s reply thereto, we
resolved to defer action thereon until after the case is considered on the
merits. Considering the circumstances surrounding the delay in the filing of
said brief, and the fact that the issues therein raised are, likewise, taken up
in the briefs of the City and Ricardo Rosal, as well as the public interest
involved in these cases, we deem it best, in the exercise of our discretion, to
deny the aforementioned motion of the MERALCO.

WHEREFORE, subject to the above-mentioned
qualification, the PSC decision of March 15,
1965, as
amended by the appealed order of July 16,
1965, are
hereby affirmed, without special pronouncement as to
costs.

IT IS SO
ORDERED.

Reyes, J. B. L., Dizon, Regala,
Makalintal, Bengzon, J. P., Zaldivar, Sanchez and Ruiz Castro, JJ., concur.

Barrera, J., on
leave.

^[1] In G. R. Nos. L-13638-40.

^[2] PSC Case No. 64-5706, which is
the subject-matter of the present appeal.

^[3] Of the PSC, dated
March 15,
1965.

^[4] Suspending ex parte the
effectivity of the rate increases authorized in the PSC decision of
March 15,
1965.

^[5] Associate Commissioners Guinto,
Perfecto, Fornier, Panganiban and De Guzman.

^[6] Who, likewise, signed the order
dated July 16,
1965.

^[7] Section 36. – “Any order,
ruling, or decision of the Commission may be reviewed on the application of any
person or public service affected thereby, by certiorari in appropriate cases or
by petition to be known as Petition for Review, which shall be filed within
thirty days from the notificationof such order, ruling or decision, or in case a
petition is filed in accordance with the preceding section for the
reconsideration of such order, ruling or decision and the same is denied, it
shall be filed within fifteen days after notice of the order denying
reconsideration. Said petition shall be placed on file of the office of the
clerk of the Supreme Court, who shall furnish copies thereof to the Secretary of
the Commission and other parties interested.” (Italics supplied)

^[8] Section 34 – “Any interested
party may request the reconsideration of any order, ruling,
or decision of the Commission by means of a petition filed not later than
fifteen days after the date of the notice of the order, ruling, or decision in
question.”

^[9] An appeal from a final award,
order or decision of the Public Service Commission, the Patent Office, the
Agricultural Invention Board, the Court of Tax Appeals, and the General Auditing
Office shall be perfected by filing with said bodies a notice of appeal and with
the Supreme Court twelve (12) copies of a petition for review of the award,
order or ruling complained of, within the period of thirty (30) days from notice
of such award, order or decision. (Underscoring ours.)

^[10] P840,000,000.00, according to
MERALCO’s petition (paragraph X).

^[11] Indeed, it is alleged in
MERALCO’s petition, and none of the oppositors has denied that:

“IX. Applicant’s forecast of the
electric power requirements of its service area discloses that such requirements
may reasonably be expected to treble in the next 10 years. This will require the
addition to the system of approximately 1,100,000 KW of additional generating
capacity and related additions to applicant’s transmission, subtransmission and
distribution facilities. Almost all of such equipment must be purchased from
foreign sources. In addition, during this period it will be necessary to replace
part of applicant’s existing facilities as such facilities complete their
service lives.

“X. In order to meet this mammoth
construction program for the next decade, applicant will require additional
capital on the order of P840,000,000. The bulk of such capital must come from
foreign sources, not only because capital of this magnitude is not available in
the Philippines but also because, even if it were available, absorption by
applicant of a substantial part of this amount of capital in the Philippines
would greatly restrict the availability of capital for other industries and
businesses.

“XI. Applicant and its
predecessors have successfully met the electric power needs of the
Manila area for approximately 60 years.
With this record of satisfactory performance, applicant has demonstrated in the
past three years that it possesses the standing and reputation with foreign
sources of capital that should enable it to obtain the capital which it will
require provided it is permitted to earn at a rate which will maintain its
financial integrity and cover the interest and dividend requirements of its
securities. Such demonstrations included: (a) Applicant’s borrowing in 1962-63
of dollars $9,400,000 on a Serial Bank loan from a group of 9 U.S. Banks; (b)
applicant’s obtaining in 1963 of $13,400,000 of credit to finance Tegen Station
unit No. 1; and (c) applicant’s issuance and sale in 1964 of $8,000,000 of
20-year bonds to a group of U.S. insurance companies and other U. S.
institutional investors. All of these required the most strenuous efforts over
several months and even then could be achieved only because applicant had a
relatively low debt ratio (about 35%) prior to the first of these transactions
and, therefore, had room in its capital structure to take on the debt
obligations by which such funds were obtained. These transactions have resulted
in increasing applicant’s debt ratio to 48% as of October
1, 1964,
with the consequence that applicant must have substantial additional earnings to
maintain the coverage of its fixed charges (primarily interest) to maintain the
status of applicant’s debt obligations as institutional grade securities.

“XII The primary sources of
external foreign capital from which applicant can expect to obtain funds to
finance its construction program are insurance companies, pension funds, and
other institutional investors of the U.
S. and other parts of the free
world. Such investors generally are not willing to purchase the debt securities
of an electric public utility unless the utility’s operating income available
for interest in recent periods is several times the combined interest
requirements of the utilities outstanding debt obligations and those obligations
which are to be issued. The increased rates here proposed will enable applicant
to meet such a standard.”

^[12] According to Spur:”Many factors
are taken into consideration in determining the reasonableness of the return.
Having fixed the rate based and found the cost of operation, the next question
is related to the percentage of rate of return. Whether a particular percentage,
or rate is reasonable depends upon numerous considerations, the most frequently
mentioned being the risks to which the principal and income from it are
subjected, whether these risks be moral or physical or otherwise, the uniformity
and certainty of the return, the character of the business, the locality in
which it is placed, the density of population, whether competition exists, the
returns secured in the locality from other investments of a similar nature,
whether the return is gross or net, for example, whether it is clear of taxes or
other expenses, the necessity of obtaining money to provide good service, the
size and comparative financial strength of the company, the ability of the
company to borrow money, the demand for money, the prevailing rate of interest
in the community in which the enterprise is located, the desirability of
attracting capital, the necessity of providing surplus for contingencies, the
competency of the management, the advisability of rewarding superior management,
the character of service rendered, the previous financial history of the
company, whether it has been poor or prosperous, and the market value of money.

“It is said that the question of
the reasonableness of the return cannot be determined without reference to the
interest of the public; that the value of the service and the financial
condition of locality served must be taken into account. It is held that no one
element is sufficient in itself, but that all enter as governing factors in the
problem; that there is no inflexible rule as to the rate of return to be
allowed, each case depending upon its own circumstances, x x x” (Guiding
Principles of Public Service Regulation, by Henry C. Spur, 1926 ed., Vol. Ill,
p. 43 et seq.)

^[13]“It has been said that an
electric lighting company should be entitled to at least 12-1/2 per cent on an
investment in additional equipment for electric pumping, to cover the necessary
interest, depreciation, and tax charges.” (Guiding Principles of Public Service
Regulation, by Henry C. Spur, 1926 ed., Vol. Ill, p. 43 et seq.) (Underscoring
ours.)

^[14] (1) Including the
government-owned National Power Corporation, which has increased up to 30% the
cost of electricity it supplies to Meralco.

^[15] Inchausti vs. Public Utility
Commission (42 Phil. 621); Metropolitan Water District vs. PSC (58 Phil. 397);
Municipality of Pagsanjan vs. Cacho (G. R. No. 36544
[1933]); Philippine Railway vs. Asturias (72 Phil. 454); and Halili vs.
Ice & Cold Storage (77 Phil. 823).

^[16] “Notwithstanding the strong
inclination of the Commission towards the investment theory, the rule of the
courts appears to be that public utility companies are entitled to earn a return
upon the value of their property, rather than upon its cost. We are here
concerned merely with the inquiry as to what the law on this subject is — not
whether the one theory or the other is more reasonable. The great weight of
authority is certainly in favor of the standard of present value as the basis of
determining rates.” (Guiding Principles of Public Service Regulation, by Henry
C. Spur, 1924 ed., Vol. I, p. 222)

^[17] Not because the Court was in
favor of the formula applied by the Commission and against the present value
theory, but because the Commission was not bound to use any single formula or
combination of formulas; because it is the result reached not the method
employed that is controlling; because “if the total effect of the rate order
cannot be said to be unjust and unreasonable, judicial inquiry under the Act is
at an end”; because the order of the Commission fixing rates “is the product of
expert judgment which carries a presumption of validity”; because the
rate-making process involves a balancing of the investor and the consumer
interests; because the standard of the return to the equity owner should be
commensurate with returns on investments in other enterprises having
corresponding risks; because such returns should, moreover, be sufficient to
assure confidence in the financial integrity of the enterprise so as to maintain
its credit and to attract capital; and because it is not important to determine
the various permissible ways in which any rate base on which the return is
computed may be arrived at, if the Court is of the view that the end result in
the case cannot be condemned, under the Act as unjust and unreasonable.

^[18] Act No. 3108, as amended by Act
No. 3311.

^[19] Entitled Manila Electric Co. vs.
PSC, decided on February 28, 1966.

^[20] House Bill No.
10633.

^[21] December 19,
1913.

^[22] Approved and effective on
October 20, 1902.

^[23] City of Manila vs. Public
Service Commission, 52 Phil. 517.