Tag: Electric Power Industry

Navigating the Electric Power Industry Reform Act: Clarifying PSALM’s Liability for NPC’s Post-EPIRA Obligations

The Supreme Court ruled that the Power Sector Assets and Liabilities Management Corporation (PSALM) is not liable for the local business taxes assessed against the National Power Corporation (NPC) for the years 2006-2009. This decision clarifies that PSALM only assumed NPC’s liabilities existing as of June 26, 2001, the effective date of the Electric Power Industry Reform Act (EPIRA). This means local governments cannot claim tax liens on assets transferred to PSALM for taxes accruing after this date.

Whose Liabilities? Delving into NPC’s Post-EPIRA Tax Assessments and PSALM’s Responsibility

The case revolves around the question of whether PSALM, as the entity that took over NPC’s assets and certain liabilities under the EPIRA, should be held responsible for local business taxes assessed against NPC for the years 2006 to 2009. The Municipality of Sual, Pangasinan, assessed these taxes against NPC based on its power generation function. However, NPC argued that it ceased such operations after the EPIRA took effect on June 26, 2001, transferring its assets and related obligations to PSALM. The Municipal Treasurer then filed a third-party complaint against PSALM to recover these taxes, leading to the legal battle that ultimately reached the Supreme Court.

The legal framework for this case is rooted in the EPIRA, specifically Sections 49, 50, 51, and 56, which define the creation, purpose, powers, and claims against PSALM. Section 49 is particularly crucial, as it stipulates that PSALM takes ownership of NPC’s existing generation assets, liabilities, and IPP contracts. The central question, therefore, is whether the local business taxes assessed for 2006-2009 constitute “existing liabilities” that were transferred to PSALM under the EPIRA. The Municipal Treasurer argued that PSALM should assume these liabilities due to the local government’s tax lien on properties acquired from NPC, citing Section 173 of the Local Government Code (LGC). However, PSALM countered that it is a separate entity from NPC and only assumed liabilities existing at the time of EPIRA’s effectivity.

The Supreme Court sided with PSALM, affirming the Court of Appeals’ decision to set aside the Regional Trial Court’s order that denied PSALM’s motion to dismiss the third-party complaint. The Court emphasized that the EPIRA intended to limit the liabilities transferred from NPC to PSALM to those existing when the law took effect. Citing its previous ruling in NPC Drivers and Mechanics Association (DAMA) v. The National Power Corporation, the Court reiterated that it would be “absurd and iniquitous” to hold PSALM liable for obligations incurred by NPC after the EPIRA’s effectivity. This is because NPC continued to exist and perform missionary electrification functions, acquiring new assets and liabilities in the process. To hold PSALM liable for NPC’s post-EPIRA obligations would contradict the declared policy of the EPIRA, which aimed to liquidate NPC’s financial obligations and stranded contract costs within a defined timeframe.

In the same manner that “existing” modifies the assets transferred from NPC to PSALM, the liabilities transferred from NPC to PSALM under Section 49 of the EPIRA are also limited to those existing at the time of the effectivity of the law. In this regard, we consider significant the purpose and objective of creating PSALM, the powers conferred to it, and the duration of its existence.

The Court also addressed the Municipal Treasurer’s reliance on Section 173 of the LGC, which establishes a local government’s lien on properties for unpaid taxes. The Court clarified that this lien cannot apply to properties that no longer belong to the taxpayer at the time the tax becomes due. Since NPC’s power generation assets were transferred to PSALM by operation of law on June 26, 2001, the local business taxes that accrued from 2006 to 2009 could not be enforced as a lien on these assets. The Court further noted that NPC’s power generation function ceased on June 26, 2001, by operation of law, and the Municipal Treasurer’s assessment effectively ignored this legal reality.

SECTION 173. Local Government’s Lien. — Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of privilege with respect to which the lien is imposed. The lien may only be extinguished upon full payment of the delinquent local taxes, fees and charges including related surcharges and interest.

The Court distinguished the present case from NPC DAMA, where PSALM was held liable for separated employees’ entitlement to separation pay and backwages. In that case, the liability was already existing at the time of the EPIRA’s effectivity and was specifically transferred from NPC to PSALM. In contrast, the local business taxes in the present case accrued after the EPIRA took effect and were not existing liabilities at the time of the transfer. Thus, the Court concluded that PSALM could not be held liable for these post-EPIRA tax assessments.

What is the Electric Power Industry Reform Act (EPIRA)?	The EPIRA, or Republic Act No. 9136, enacted in 2001, reorganized the electric power industry, dividing it into generation, transmission, distribution, and supply sectors. It mandated the privatization of NPC assets, except for those of the Small Power Utilities Group (SPUG).
What is the role of the Power Sector Assets and Liabilities Management Corporation (PSALM)?	PSALM was created to manage the orderly sale, disposition, and privatization of NPC’s assets and IPP contracts. Its primary objective is to liquidate all NPC’s financial obligations and stranded contract costs in an optimal manner within its 25-year term.
What was the key issue in this case?	The key issue was whether PSALM is liable for local business taxes assessed against NPC for the years 2006-2009, considering that NPC’s power generation functions ceased after the EPIRA took effect in 2001.
When did the EPIRA take effect?	The EPIRA took effect on June 26, 2001.
What does it mean for NPC and PSALM in regard to tax responsibility?	As of June 26, 2001, EPIRA relieved NPC of its power generation obligations and transferred existing liabilities to PSALM. However, liabilities that incurred by NPC after this date are not to be shouldered by PSALM.
What liabilities were taken over by PSALM based on the EPIRA Law?	All outstanding obligations of NPC arising from loans, issuances of bonds, securities and other instruments of indebtedness shall be transferred to and assumed by PSALM within one hundred eighty (180) days from the approval of this Act.
What was the basis for the Municipal Treasurer’s claim against PSALM?	The Municipal Treasurer filed a third-party complaint against PSALM, seeking to recover local business taxes assessed against NPC for the years 2006-2009. The Municipal Treasurer premised its claim on the local government’s tax lien over the properties that PSALM acquired from NPC.
What was the main argument of PSALM against the claim?	PSALM contended that it is a separate and distinct entity from NPC and that it assumed only the properties and liabilities of NPC existing at the time of the EPIRA’s effectivity on June 26, 2001. Consequently, PSALM argued that it had no obligation to pay NPC’s local business taxes from 2006 to 2009.

This ruling reinforces the importance of adhering to the provisions of the EPIRA and clarifies the extent of PSALM’s responsibilities in managing NPC’s assets and liabilities. It provides guidance to local government units in assessing and collecting taxes related to the power sector, ensuring that such actions are aligned with the established legal framework.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: NATIONAL POWER CORPORATION VS. POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, G.R. No. 229706, March 15, 2023

March 15, 2023

Universal Charge Under EPIRA: Balancing Regulatory Power and Consumer Protection

The Supreme Court upheld the constitutionality of Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA), which imposes a Universal Charge on all electricity end-users. The Court ruled that the Universal Charge is not a tax but an exaction under the State’s police power, aimed at ensuring the viability of the electric power industry. This decision clarifies the scope of regulatory power delegated to the Energy Regulatory Commission (ERC) and its impact on electricity consumers.

Powering Progress or Burdening Consumers? Examining the Universal Charge Under EPIRA

The case of Gerochi v. Department of Energy revolves around the challenge to the Universal Charge imposed by Section 34 of the EPIRA. Petitioners argued that this charge, collected from all electric end-users, is an unconstitutional tax and that the delegation of the power to determine and fix this charge to the ERC is an undue delegation of legislative authority. The respondents, including the Department of Energy (DOE) and the ERC, countered that the Universal Charge is not a tax but a regulatory exaction under the State’s police power. The central legal question is whether the Universal Charge constitutes an impermissible tax and whether the delegation of authority to the ERC is constitutional.

The Supreme Court began its analysis by distinguishing the State’s power of taxation from its police power. The power to tax is rooted in necessity, providing the government with the means to fulfill its mandate of promoting the general welfare. Conversely, police power allows the State to regulate liberty and property to promote public welfare. The critical distinction lies in the purpose of the charge. If the primary purpose is to generate revenue with regulation being incidental, it is a tax. But if regulation is the primary aim, the incidental generation of revenue does not transform it into a tax.

In this case, the Court found that the Universal Charge, as outlined in Section 34 of the EPIRA, is an exercise of the State’s police power. The EPIRA’s declaration of policy underscores regulatory purposes, such as ensuring the quality, reliability, security, and affordability of electric power. Section 34 enumerates the specific purposes for which the Universal Charge is imposed, including:

SECTION 34. Universal Charge. – Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;

(b) Missionary electrification;

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

The Court emphasized that the taxing power can be used as an implement of police power. The Universal Charge, with its Special Trust Fund (STF) administered by PSALM, shares characteristics with the Oil Price Stabilization Fund (OPSF) and Sugar Stabilization Fund (SSF), which were previously upheld as valid exercises of police power. The STF ensures the attainment and perpetuity of the purposes for which the Universal Charge is imposed, namely, to ensure the viability of the country’s electric power industry.

Turning to the issue of undue delegation of legislative power, the Court reiterated the principle that what has been delegated cannot be delegated further (potestas delegata non delegari potest). However, it also recognized that delegation to administrative agencies is permissible when the law is complete in itself and contains sufficient standards to guide the delegate’s discretion. This is satisfied through the completeness test and the sufficient standard test.

The Court found that the EPIRA, read in its entirety, meets both tests. While Section 34 does not specify the exact amount of the Universal Charge, the amount is made certain by the legislative parameters within the law. Section 43(b)(ii) of the EPIRA tasks the ERC with determining, fixing, and approving the Universal Charge after due notice and public hearings. Furthermore, Section 51(d) and (e) of the EPIRA mandate PSALM to calculate the stranded debts and stranded contract costs of NPC, which then form the basis for the ERC’s determination of the Universal Charge.

The Court emphasized that the ERC’s discretion is not unfettered. The EPIRA provides sufficient standards, such as ensuring the total electrification of the country, the quality and affordability of electric power, and watershed rehabilitation and management, to guide the ERC in formulating the IRR. These standards provide limitations on the ERC’s power, preventing it from acting arbitrarily.

The Supreme Court underscored the importance of the ERC’s role in regulating the electric power industry, citing previous cases that affirmed the ERC’s broad jurisdiction and the necessity of its power to respond to changes affecting public utilities. The Court concluded that the EPIRA aims to attract private investment and address the shortcomings of the electric power industry. Every law carries a presumption of constitutionality, and the petitioners failed to demonstrate a clear violation of the Constitution that would warrant nullifying Section 34 of the EPIRA and its IRR.

In summary, the Court found that the Universal Charge is a valid regulatory exaction under the State’s police power, and the delegation of authority to the ERC is constitutional because the EPIRA provides sufficient standards and limitations on the ERC’s power.

FAQs

What was the key issue in this case?	The key issue was whether the Universal Charge imposed under Section 34 of the EPIRA is a tax and whether there was an undue delegation of legislative power to the ERC. The petitioners argued the charge was an unconstitutional tax, while the respondents maintained it was a regulatory exaction under the state’s police power.
What is the Universal Charge?	The Universal Charge is a fee imposed on all electricity end-users to fund various initiatives, including missionary electrification, environmental programs, and payment for stranded debts and contract costs. It is collected by distribution utilities and remitted to the PSALM Corp.
Is the Universal Charge a tax?	No, the Supreme Court ruled that the Universal Charge is not a tax but an exaction under the State’s police power. The primary purpose is regulation, ensuring the viability of the electric power industry, rather than generating revenue.
What is the role of the ERC in relation to the Universal Charge?	The ERC is responsible for determining, fixing, and approving the Universal Charge, as well as ensuring its proper utilization for the purposes outlined in the EPIRA. It conducts public hearings and considers the calculations provided by PSALM to determine the appropriate charge.
What is PSALM’s role in the Universal Charge?	PSALM (Power Sector Assets and Liabilities Management Group) calculates the amount of stranded debts and contract costs of NPC, which serves as the basis for the ERC’s determination of the Universal Charge. PSALM also administers the Special Trust Fund where the collected charges are deposited.
What are the stranded debts and contract costs mentioned in the EPIRA?	Stranded debts refer to the unpaid financial obligations of NPC that have not been liquidated by the proceeds from the sales and privatization of NPC assets. Stranded contract costs refer to the excess of the contracted cost of electricity over the actual selling price.
What is missionary electrification?	Missionary electrification refers to the provision of basic electricity service in unviable areas with the goal of making operations in these areas viable. The Universal Charge helps fund these initiatives to extend electricity access to underserved communities.
What is the Special Trust Fund (STF)?	The STF is a fund created by PSALM to manage the proceeds from the Universal Charge. It is disbursed for the purposes specified in the EPIRA, such as missionary electrification, environmental programs, and payment of stranded debts.
Was there an undue delegation of legislative power to the ERC?	No, the Supreme Court held that there was no undue delegation of legislative power to the ERC. The EPIRA provides sufficient standards and limitations to guide the ERC in determining the Universal Charge.
What are the implications of this ruling for electricity consumers?	The ruling means that the Universal Charge, as imposed under the EPIRA, remains valid. Electricity consumers will continue to pay this charge, which is intended to ensure the long-term viability and stability of the country’s electric power industry.

This case affirms the government’s authority to impose regulatory charges to support critical sectors like the electric power industry. It also reinforces the principle that administrative agencies can be granted the power to implement laws as long as sufficient standards are in place to guide their discretion. While the Universal Charge may represent an added cost for consumers, this ruling underscores its importance in achieving the broader goals of reliable and sustainable electricity supply for the Philippines.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Romeo P. Gerochi, et al. vs. Department of Energy, et al., G.R. No. 159796, July 17, 2007

July 17, 2007

The Universal Charge: Balancing Public Welfare and Legislative Authority in the Power Industry

In Gerochi v. Department of Energy, the Supreme Court upheld the constitutionality of Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA), which imposes a Universal Charge on all electricity end-users. The Court ruled that the Universal Charge is not a tax but an exaction under the State’s police power to ensure the viability of the electric power industry. This decision clarified the extent of legislative power delegation to administrative bodies like the Energy Regulatory Commission (ERC) and affirmed the State’s role in regulating vital public utilities.

Powering Progress or Taxing the People? Examining the Universal Charge Under EPIRA

The case of Romeo P. Gerochi v. Department of Energy arose from a challenge to the constitutionality of the Universal Charge imposed under Section 34 of the EPIRA. Petitioners argued that the charge, collected from all electricity end-users, was essentially a tax, the power to levy which was unconstitutionally delegated to the ERC. They also contended that its imposition was oppressive and confiscatory, amounting to taxation without representation. The respondents, including the Department of Energy (DOE), ERC, and National Power Corporation (NPC), countered that the Universal Charge was not a tax but a regulatory exaction under the State’s police power, designed to ensure the stability and development of the electric power industry.

At the heart of the legal debate was the distinction between the State’s power of taxation and its police power. The power to tax is an inherent attribute of sovereignty, used to generate revenue for public purposes. In contrast, police power is the State’s authority to regulate liberty and property to promote public welfare. The Supreme Court emphasized that the primary purpose of an imposition determines its nature. If the primary goal is revenue generation with regulation being incidental, it is a tax. However, if the main objective is regulation, the incidental raising of revenue does not transform it into a tax.

The Court elucidated the regulatory purposes behind the Universal Charge, referencing Section 2 of the EPIRA, which outlines the State’s policy to ensure the quality, reliability, security, and affordability of electric power. It also aims to promote the utilization of indigenous and renewable energy resources and to establish an independent regulatory body to protect consumers. Given these objectives, the Court concluded that the Universal Charge was levied primarily to regulate the electric power industry and ensure its viability, falling squarely within the ambit of the State’s police power.

SECTION 34. Universal Charge. – Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes: (a) Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry; (b) Missionary electrification; (c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels; (d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and (e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

Building on this principle, the Supreme Court addressed the issue of undue delegation of legislative power to the ERC. The principle of non-delegation of powers dictates that what has been delegated cannot be further delegated. However, delegation to administrative bodies is permissible if the law is complete in itself and sets sufficient standards to guide the delegate. The Court applied the completeness test and the sufficient standard test to Section 34 of the EPIRA.

The completeness test requires that the law be complete in all its terms and conditions when it leaves the legislature, leaving the delegate only to enforce it. The sufficient standard test mandates adequate guidelines or limitations in the law to define the boundaries of the delegate’s authority. The Court found that the EPIRA, when read in its entirety, satisfied both tests. Although Section 34 did not specify the exact amount of the Universal Charge, the law provided legislative parameters for its determination. Section 43(b)(ii) of the EPIRA tasks the ERC with determining, fixing, and approving the universal charge after due notice and public hearings.

Moreover, Section 51(d) and (e) of the EPIRA empowers the Power Sector Assets and Liabilities Management Group (PSALM) to calculate the amount of stranded debts and stranded contract costs of NPC, which then forms the basis for the ERC’s determination of the Universal Charge. These provisions, according to the Court, provided sufficient limitations on the ERC’s discretion, preventing it from running riot.

SECTION 51. Powers. – The PSALM Corp. shall, in the performance of its functions and for the attainment of its objective, have the following powers: x x x x (d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC in the determination of the universal charge; (e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property contributed to it, including the proceeds from the universal charge.

This approach contrasts with situations where legislative bodies delegate broad, unfettered discretion without clear guidelines. By establishing specific parameters and requiring public hearings, the EPIRA ensured that the ERC’s authority was appropriately circumscribed. This safeguards against arbitrary decision-making and promotes transparency in the regulatory process.

The Court also highlighted the importance of the ERC’s role in regulating electric power, a vital public utility. Citing previous cases, the Court emphasized that the ERC, as a regulatory body, must have sufficient power to respond to changes and challenges in the electric power industry. Limiting the ERC’s powers would frustrate the objectives of the EPIRA and hinder the State’s ability to ensure a reliable and affordable supply of electricity.

The Supreme Court referenced previous rulings, such as Freedom from Debt Coalition v. Energy Regulatory Commission, where the Court acknowledged the expanded jurisdiction of the ERC under the EPIRA. The Court reiterated that the provisions of the EPIRA must be read in their entirety to understand the intent of Congress in granting broad powers to the ERC to implement reforms in the electric power industry.

Therefore, the Supreme Court concluded that there was no undue delegation of legislative power to the ERC in the EPIRA. The law was deemed complete in its essential terms and conditions and contained sufficient standards to guide the ERC’s exercise of its delegated authority. The Universal Charge, as a regulatory exaction under the State’s police power, was upheld as constitutional.

FAQs

What was the key issue in this case?	The key issue was whether the Universal Charge imposed under Section 34 of the EPIRA was a tax, and if so, whether the power to tax was unconstitutionally delegated to the ERC.
What is the Universal Charge?	The Universal Charge is a fee imposed on all electricity end-users to fund various purposes, including the payment of stranded debts and contract costs of NPC, missionary electrification, and environmental charges.
What is the difference between the power to tax and police power?	The power to tax is used to generate revenue for public purposes, while police power is used to regulate liberty and property to promote public welfare. The primary purpose of the charge determines which power is being exercised.
What is undue delegation of legislative power?	Undue delegation occurs when the legislature gives another branch of government or an administrative agency the power to make laws without providing sufficient guidance or limitations.
What are the completeness test and sufficient standard test?	The completeness test requires that a law be complete in all its terms and conditions when it leaves the legislature. The sufficient standard test mandates adequate guidelines or limitations to define the boundaries of the delegate’s authority.
Why did the Court rule that there was no undue delegation in this case?	The Court ruled that the EPIRA provided sufficient legislative parameters and guidelines for the ERC to determine the Universal Charge, particularly through Sections 43 and 51 of the Act.
What is the role of the ERC in the EPIRA?	The ERC is the regulatory body responsible for promoting competition, encouraging market development, ensuring customer choice, and penalizing abuse of market power in the restructured electricity industry.
What is the role of PSALM in the EPIRA?	PSALM is responsible for managing the assets and liabilities of the NPC, including calculating the stranded debts and contract costs that form the basis for the Universal Charge.

The Supreme Court’s decision in Gerochi v. Department of Energy reaffirms the State’s authority to regulate vital public utilities and clarifies the permissible scope of legislative delegation to administrative bodies. The ruling ensures the continued viability of the electric power industry while upholding constitutional principles of separation of powers. By categorizing the Universal Charge as a regulatory exaction under police power, the Court balanced the need for stable energy funding with the protection of consumer interests. The decision underscores the judiciary’s role in scrutinizing legislative acts to ensure they align with constitutional mandates and serve the public good.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Gerochi v. Department of Energy, G.R. No. 159796, July 17, 2007

July 17, 2007