ASG Law

Tag: Independent Power Producers

  • Navigating Real Property Tax Assessments: Insights from the Supreme Court’s Ruling on Independent Power Producers

    Key Takeaway: The Supreme Court Upholds Validity of Real Property Tax Assessments While Applying EO No. 173 for Independent Power Producers

    Province of Nueva Vizcaya v. CE Casecnan Water and Energy Company, Inc., G.R. No. 241302, February 01, 2021

    Imagine a scenario where a company, committed to powering homes and businesses, finds itself entangled in a web of tax assessments that threaten its financial stability. This is not just a hypothetical; it’s the real story of CE Casecnan Water and Energy Company, Inc., an independent power producer (IPP) in the Philippines. The company faced a significant challenge when the Province of Nueva Vizcaya demanded over P250 million in real property taxes (RPT) for its power generation facilities. The central legal question in this case was whether the assessments were valid and if Executive Order (EO) No. 173, which condones and reduces RPT for IPPs under Build-Operate-Transfer (BOT) contracts with government-owned and/or -controlled corporations (GOCCs), could be applied to CE Casecnan’s situation.

    Legal Context: Understanding Real Property Tax and Executive Orders

    Real property tax (RPT) is a crucial revenue source for local governments in the Philippines, as mandated by the Local Government Code (LGC). The LGC empowers local government units (LGUs) to levy taxes on real properties within their jurisdiction, subject to certain guidelines and limitations. The assessment level, which determines the taxable value of a property, is set by local ordinances but capped at maximum levels specified in the LGC.

    However, certain exemptions and privileges exist, particularly for GOCCs involved in power generation. Section 234 of the LGC exempts machinery and equipment used by GOCCs for generating and transmitting electric power from RPT. Additionally, EO No. 173, issued by President Benigno S. Aquino III, extends similar benefits to IPPs operating under BOT contracts with GOCCs, reducing and condoning RPT liabilities up to 2014.

    Key provisions of EO No. 173 state: “All liabilities for real property tax on property, machinery and equipment… actually and directly used by IPPs for the production of electricity under Build-Operate-Transfer contracts… assessed by LGUs… for all years up to 2014… are hereby reduced to an amount equivalent to the tax due if computed based on an assessment level of fifteen percent (15%) of the fair market value of said property, machinery and equipment depreciated at the rate of two percent (2%) per annum, less any amounts already paid by the IPPs.”

    Case Breakdown: CE Casecnan’s Journey Through the Courts

    CE Casecnan’s legal battle began when it received RPT demands from Nueva Vizcaya for the years 2003 to 2005. The company had entered into a BOT contract with the National Irrigation Administration (NIA), a GOCC, to deliver water and generate electricity. Despite paying the demanded amount under protest, CE Casecnan sought to challenge the assessments, arguing that no valid tax ordinance supported them and that they should be exempt under the LGC or EO No. 173.

    The case traversed through the Local Board of Assessment Appeals (LBAA), the Central Board of Assessment Appeals (CBAA), and finally the Court of Tax Appeals (CTA). The LBAA and CBAA initially upheld the assessments, rejecting CE Casecnan’s exemption claims. However, the CBAA later declared the assessments void due to the absence of a supporting tax ordinance.

    The CTA, in its decision, agreed with the CBAA on the lack of a valid ordinance but applied EO No. 173 to reduce CE Casecnan’s RPT liability. The Supreme Court, in its ruling, upheld the validity of the assessments, stating that the absence of an updated ordinance did not negate the Province’s power to levy RPT based on existing schedules. The Court emphasized:

    “The ruling of the CTA En Banc invalidating the assessment of the RPT in the absence of an ordinance fixing the assessment levels and fair market values is dangerous and it is tantamount to curtailing the power of local governments to levy RPT.”

    Despite upholding the assessments, the Supreme Court affirmed the application of EO No. 173, ordering a remand to the CBAA to calculate any refund due to CE Casecnan based on the reduced tax liability:

    “The provisions of EO No. 173… are applicable in this case… Section 1 of EO No. 173 is clear that the reduced amount of RPT under the executive order should be deducted from whatever is paid by the IPP.”

    Practical Implications: Navigating RPT Assessments for IPPs

    This ruling has significant implications for IPPs and other entities operating under similar contracts with GOCCs. It reaffirms the validity of RPT assessments by LGUs, even in the absence of updated ordinances, but also highlights the potential relief provided by EO No. 173.

    For businesses in similar situations, it’s crucial to:

    • Understand the local tax ordinances and their implications on RPT assessments.
    • Be aware of any exemptions or reductions available under national laws or executive orders.
    • Maintain detailed records of payments made under protest to facilitate potential refunds.

    Key Lessons:

    • IPPs should proactively engage with local governments to clarify their tax obligations and potential exemptions.
    • Legal challenges to RPT assessments should be pursued promptly and strategically to leverage available relief mechanisms.
    • Documentation and timely filing of protests are essential to contesting assessments and securing refunds.

    Frequently Asked Questions

    What is real property tax (RPT)?

    RPT is a tax levied by local government units on real properties within their jurisdiction, including land, buildings, and improvements.

    Can local governments assess RPT without an updated ordinance?

    Yes, as per the Supreme Court’s ruling, local governments can levy RPT based on existing schedules even if ordinances are not updated.

    What is EO No. 173, and how does it affect IPPs?

    EO No. 173 reduces and condones RPT liabilities for IPPs operating under BOT contracts with GOCCs, applying a reduced assessment level and condoning fines and penalties.

    How can IPPs challenge RPT assessments?

    IPPs can file protests with local treasurers and appeal decisions to the LBAA, CBAA, and CTA, ensuring they have paid the tax under protest to preserve their right to a refund.

    What should IPPs do if they believe they are entitled to a refund?

    IPPs should maintain detailed records of payments made under protest and engage legal counsel to pursue refunds based on applicable exemptions or reductions like EO No. 173.

    Can EO No. 173 be applied retroactively to already paid taxes?

    Yes, EO No. 173 applies to RPT liabilities up to 2014, including those already paid, allowing for potential refunds based on the reduced assessment level.

    ASG Law specializes in tax law and real property issues. Contact us or email hello@asglawpartners.com to schedule a consultation and navigate your RPT challenges effectively.

  • Power Delivery Charges: When Can Power Generators Be Exempted?

    The Supreme Court ruled that independent power producers (IPPs) embedded in a distribution network are exempt from paying Power Delivery Service (PDS) charges for ancillary services if they are not using the transmission facilities to deliver power. This decision ensures that IPPs are not subjected to double charging, promoting fairness and cost-efficiency in the electric power industry. By clarifying the applicability of PDS charges, the ruling safeguards the financial interests of IPPs and, consequently, the consumers who benefit from their services.

    Unbundling Power: Are Ancillary Services Subject to Double Charges?

    This case revolves around a dispute between the National Power Corporation (NPC) and two independent power producers, East Asia Utilities Corporation (EAUC) and Cebu Private Power Corporation (Cebu Power). Both EAUC and Cebu Power generate and supply power directly to Visayan Electric Company, Inc. (VECO). NPC sought to impose Power Delivery Service (PDS) charges on EAUC and Cebu Power for ancillary services, specifically Load Following and Frequency Regulation (LFFR) and Spinning Reserve (SR). EAUC and Cebu Power contested these charges, arguing they were already paying for ancillary services and should not be subjected to additional PDS fees. The central legal question is whether IPPs embedded in a distribution network are liable for PDS charges on ancillary services, even if they do not utilize NPC’s transmission facilities to deliver power to their customers.

    The Energy Regulatory Board (ERB), later replaced by the Energy Regulatory Commission (ERC), was tasked with resolving this dispute. The ERB was initially created under Executive Order No. 172 and further empowered by Republic Act (RA) No. 7638, the “Department of Energy Act of 1992,” to regulate power rates. The core issue before the ERB was whether EAUC and Cebu Power, as IPPs embedded within VECO’s distribution network, should pay NPC for firm Power Delivery Services charges related to ancillary services such as Load Following and Frequency Regulation and Spinning Reserve. Additional disputes involved charges for non-firm Back-up service and related energy services provided by NPC.

    In 1997, the ERB approved the Open Access Transmission Services (OATS) tariffs and Ancillary Services (AS) tariffs in ERB Case No. 96-118. This case was crucial as it aimed to allow private sector generating facilities and electric utilities non-discriminatory use of NPC’s transmission grid. A key feature of ERB Case No. 96-118 was the segregation, or “unbundling,” of ancillary services (such as LFFR and SR) from basic transmission and subtransmission services. Before this unbundling, NPC provided electric power service with combined generation, transmission, and distribution charges in a single tariff.

    The Supreme Court reviewed the ERB and ERC’s decisions, focusing on whether NPC could impose separate PDS charges for ancillary services when these services were already accounted for in the AS tariffs. The court emphasized the principle that utilities can only charge for services actually rendered. Since EAUC and Cebu Power did not use NPC’s transmission facilities to deliver power to VECO, imposing PDS charges for ancillary services would contradict this principle and result in unjust double charging. According to the Court, customers are charged separately for power delivery (actual usage of the line in transport) and AS charges (maintenance of grid reliability).

    The Supreme Court ultimately denied NPC’s petition, affirming the Court of Appeals’ decision, which upheld the ERB’s and ERC’s rulings. The Court highlighted that under the approved rates for NPC’s services, there was no provision allowing NPC to charge separate PDS charges on ancillary services. As noted, the AS charges already covered all necessary costs to provide these services. The ruling is grounded in the ERB’s (and later the ERC’s) technical expertise and regulatory authority in fixing and prescribing rates for NPC’s services, which are typically given deference by the courts unless there is a grave abuse of discretion.

    FAQs

    What was the key issue in this case? The key issue was whether independent power producers (IPPs) embedded in a distribution network should pay Power Delivery Service (PDS) charges for ancillary services when they don’t use the transmission facilities for power delivery. The central question was about avoiding double charging for the same services.
    What are Power Delivery Service (PDS) charges? Power Delivery Service (PDS) charges are fees imposed for the use of transmission and sub-transmission facilities to deliver power from the point of generation to the point of consumption. These charges are intended to cover the costs associated with maintaining and operating the transmission infrastructure.
    What are Ancillary Services (AS)? Ancillary Services (AS) are support services necessary to maintain the reliability and stability of the power grid. These services include Load Following and Frequency Regulation (LFFR) and Spinning Reserve (SR), which help balance supply and demand and respond to unexpected outages.
    Why did the IPPs contest the PDS charges? The IPPs contested the PDS charges because they were already paying for the ancillary services. They argued that imposing PDS charges on top of AS charges would result in double charging, as they did not use NPC’s transmission facilities to deliver power to their customers.
    What did the Energy Regulatory Board (ERB) decide? The Energy Regulatory Board (ERB) decided that the IPPs were not liable to pay PDS charges for ancillary services. The ERB found that charging PDS fees in addition to AS fees was unwarranted since the IPPs did not use NPC’s transmission facilities for power delivery.
    How did the Supreme Court rule on the case? The Supreme Court upheld the ERB’s decision, ruling that the IPPs were not subject to PDS charges for ancillary services. The Court emphasized that utilities can only charge for services actually rendered, and since the IPPs did not use NPC’s transmission facilities, the PDS charges were not applicable.
    What is the significance of “unbundling” in this context? “Unbundling” refers to the segregation of different components of electricity tariffs, such as generation, transmission, and distribution. The ERB’s decision in ERB Case No. 96-118 unbundled ancillary services from basic transmission services to promote transparency and prevent cross-subsidization.
    What is the practical implication of this ruling for other IPPs? The ruling provides clarity and assurance for other IPPs embedded in distribution networks, confirming that they should not be charged PDS fees for ancillary services if they do not use the transmission facilities. This helps ensure fair and cost-effective pricing for electricity generation.

    This Supreme Court decision provides clarity on the applicability of Power Delivery Service charges, ensuring fair practices within the power industry. By affirming that independent power producers should not be double-charged for ancillary services when they do not utilize transmission facilities, the ruling supports the economic viability of IPPs and protects consumer interests by avoiding unnecessary cost burdens.

    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. East Asia Utilities Corporation and Cebu Private Power Corporation, G.R. No. 170934, July 23, 2008