Water concessionaires Manila Water and Maynilad, as public utilities, cannot recover their corporate income taxes as operating expenses from consumers.

Thus ruled the Supreme Court En Banc, in a 102-page Decision penned by Senior Associate Justice Marvic M.V.F. Leonen, which resolved consolidated petitions involving Manila Water Company, Inc. (Manila Water) and Maynilad Water Services, Inc. (Maynilad).

In G.R. Nos. 181764 and 187380, the High Court denied the Petition for Review on Certiorari filed by Maynilad claiming it is not a public utility whose rates may be questioned by the National Water Resources Board (NWRB).

In G.R. Nos. 207444, 208207, 210147, 213227, and 219362, the Supreme Court upheld the respective Concession Agreements entered into by the Metropolitan Waterworks and Sewerage System (MWSS) with Manila Water and Maynilad, including the Agreements’ arbitration clause.

In G.R. No. 239938, the Court granted the Petition for Review on Certiorari and set aside the Court of Appeals’ ruling which had affirmed and confirmed the arbitral award in favor of Maynilad.

To address the national water crisis in the 1990s, waterworks and sewerage operations in Metro Manila were privatized in 1997, with the east area awarded to Manila Water and the west to Maynilad. The terms were set in the Concession Agreements entered into by the MWSS with Manila Water and Maynilad, respectively.

Under the Concession Agreements, in exchange for the exclusive right to operate the waterworks and sewerage in the east and west areas of Metro Manila, Manila Water and Maynilad shall pay the MWSS concession fees. In turn, the water concessionaires may bill consumers standard rates subject to the 12% limit on the rate of return under Republic Act (RA) No. 6234, the law creating the MWSS.

The Concession Agreements also provide that Manila Water and Maynilad may recover, by way of tariff, operating, capital maintenance, and investment expenditures as well as business taxes, among others.

The rates proposed by the water concessionaires are reviewed by the MWSS Regulatory Office, a five-person committee established under the jurisdiction of the MWSS Board of Trustees. Under the Concession Agreements, in case disputes are not resolved through mutual consultation and negotiation, they shall be submitted to arbitration before an appeals panel whose decisions shall be final and binding upon the parties.

Initially, the corporate income taxes paid by Manila Water and Maynilad were considered business taxes and part of operating expenses that may be recovered from consumers. However, on November 15, 2002, the Supreme Court, in Republic v. Meralco, ruled that public utilities are prohibited from including income taxes as operating expense for purposes of computing the rates chargeable to consumers. 

The SC ruling in Meralco prompted the MWSS Regulatory Office to issue a Notice of Extraordinary Price Adjustment to Manila Water and Maynilad, which the water concessionaires disputed on the ground that they are not public utilities.

However, the MWSS Board of Trustees subsequently adopted the findings of a technical working group (TWG) made up of the MWSS Regulatory Office and the water concessionaires. The TWG held that the Meralco ruling does not apply to Manila Water and Maynilad because the intention of the Concession Agreements is for the MWSS to remain the public utility and Manila Water and Maynilad its agents and contractors. As a result, the water concessionaires were again allowed to recover corporate income taxes by way of tariff.

In 2009, the Concession Agreements were extended for an additional 15 years.

In 2013, the MWSS Board of Trustees approved the recommendation of the MWSS Regulatory Office to deny the water concessionaires’ petition for tariff increase on the ground that they are prohibited from including their corporate income taxes as expenditures recoverable from consumers. This was objected to by Manila Water and Maynilad, prompting their respective submissions of the dispute to arbitration.

The separate arbitrations, however, resulted in different rulings. In the arbitration instituted by Manila Water, the Appeals Panel ruled that corporate income tax was not an allowable expenditure. On the other hand, in the arbitration instituted by Maynilad, it was held that Maynilad may recover its corporate income tax by way of tariff.

When the MWSS refused to enforce the arbitral award in favor of Maynilad, the latter demanded compensation for revenue losses of over PHP6,000,000,000.00 arising from the delay in the implementation of the adjusted rates. This became another subject of arbitration. 

Meanwhile, the arbitral award in favor of Maynilad was confirmed by the Regional Trial Court and the Court of Appeals, prompting the MWSS to go to the Supreme Court.

In resolving the consolidated petitions, the Supreme Court held the following:

On the jurisdiction of the NWRB

The NWRB, as the successor of the now defunct Public Service Commission with respect to water regulation, has jurisdiction on cases contesting water rates set by the MWSS, including the rates determined through the rate rebasing mechanism under the Concession Agreements.

On the validity of the Concession Agreements

There was no undue delegation of the State’s inherent powers in the execution of the Concession Agreements, which were entered into pursuant to RA 8041 or the National Water Crisis Act. All powers exercised by Manila Water and Maynilad under the Agreements are “in the name, place and stead” of the MWSS.

The extension of the terms of the Concession Agreements is likewise valid since the addition of 15 years to the original 25-year effectivity totals 40 years, well within the 50-year limit required by the Constitution.

On whether Manila Water and Maynilad are public utilities

Public utilities provide basic commodities and services indispensable to the public’s interests. Unlike an ordinary private business, public utilities cannot selectively serve a clientele, but must provide service to an indefinite public. Since Manila Water and Maynilad, under the Concession Agreements, are engaged in regularly supplying water—”the most basic of all necessities for human survival”—to an indefinite public, they are public utilities.

In addition, the fact that it is the MWSS that holds the legislative franchise is not inconsistent with the concessionaires’ status as public utilities. There is no requirement under the National Water Crisis Act that an entity must have a legislative franchise before it may operate the MWSS’ facilities.

Neither does the fact that it is the MWSS that owns the water facilities preclude the concessionaires from being public utilities. As previously held by the Court in Tatad v. Garcia, it is not the ownership, but the operation of the facilities used to provide the public service that vests the status as public utility.

On whether Manila Water and Maynilad can pass on corporate income tax to consumers

As held in Republic v. Meralco, public utilities are prohibited from passing on to consumers their corporate income tax as operating expenses since the privilege of earning income is enjoyed by the public utility, not the consumers.

As public utilities, Manila Water and Maynilad thus cannot recover its corporate income taxes from the consumers.

While the Concession Agreements provide that Manila Water and Maynilad are allowed to recover “Philippine business taxes” and to earn a rate of return on these taxes, this does not apply to corporate income taxes. As established in jurisprudence, corporate income taxes are not business taxes under Philippine law.

However, the income taxes already passed on to consumers may no longer be recovered as the right to a refund, which must be exercised within 30 days after the rates took effect, had long prescribed.

As public utilities, Manila Water and Maynilad are also bound by the 12% limit on the rate of their returns under the MWSS Charter.

On the validity of the arbitration clause in the Concession Agreements

The provision in the Concession Agreements that disputes shall be submitted for arbitration is consistent with the State’s policy to encourage the use of alternative modes of dispute resolution as a means to achieve speedy and impartial justice and unclog court dockets. Such arbitration clause also does not deprive the State of its regulatory powers over the concessionaires since the decisions arising from arbitration are still subject to judicial review.

As the disputes on water rate adjustment submitted for arbitration are not among those which cannot be resolved through alternative dispute resolution under the Alternative Dispute Resolution Act, the disputes were validly submitted for arbitration under the Concession Agreements.

On the validity of the arbitral award in favor of Maynilad

Under RA 6234, the MWSS is mandated to fix “just and equitable rates.”

The arbitral award in favor of Maynilad allows the latter to include its corporate income taxes in the computation of water rates. As discussed, the privilege of earning income is enjoyed by the public utility, not the consumers. Hence, the corporate income taxes do not inure to the benefit of water consumers. A large segment of the water consuming public will be made to pay for something that has no direct benefit to them, while some will enjoy water services without shouldering the same burden. The rates resulting from the arbitral award are thus both unjust and inequitable, in violation of RA 6234.

The award will also result in disproportionate price difference between the water rates of Maynilad and Manila Water since the arbitral ruling in the arbitration instituted by Manila Water held that the latter cannot pass on its corporate income taxes to consumers. Confirming the arbitral award in favor of Maynilad will thus result in a violation of the equal protection clause guaranteed under the Constitution.

Under the Special Rules of Court on Alternative Dispute Resolution, courts may set aside an arbitral award, domestic or international, if recognizing the award will amount to a violation of public policy.

The arbitral award in favor of Maynilad, which results in water rates that are unjust and inequitable and violates the equal protection clause, must thus be set aside.

FULL TEXT OF G.R. No. 181764 dated December 7, 2021 at: https://sc.judiciary.gov.ph/181764-187380-207444-208207-210147-213227-219362-239938-maynilad-water-services-inc-vs-national-water-and-resources-board-et-al-metropolitan-waterworks-and-sewerage-system-and-metropolitan-waterw/

(Courtesy of the Supreme Court Public Information Office)