G.R. No. 204639 - San Francisco Inn vs. San Pablo City Water District

Petitioner San Francisco Inn (SFI) is a hotel business operating in Barangay San Francisco Calihan, San Pablo City. In 1996, it constructed two deep wells for its water needs, each capable of producing four liters per second.
Respondent San Pablo City Water District (SPCWD) is a local water utility established in 1973 and operating under the oversight of the National Water Resources Board (NWRB). SPCWD manages the water supply within San Pablo City.
In 1977, SPCWD promulgated the "Rules Governing Groundwater Pumping and Spring Development," later approved by the NWRB in 1978, including provisions for production assessment fees for deep well users.
In 1997, NWRB deputized SPCWD to handle water permit applications, monitor wells, and coordinate with relevant agencies.

On January 26, 1998, SPCWD’s General Manager invited SFI and other deep-well users to a meeting discussing the legality and imposition of production assessment fees. The meeting held on February 19, 1998, had no agreement but resulted in the submission of position papers opposing the fees.
SFI filed a water permit application with the NWRB on September 11, 1998; however, it did not complete all clearance requirements, though it submitted a certification from SPCWD’s Engineering and Production Division Manager indicating no adverse effect on existing water supply but without prejudice to possible future production fees.
SPCWD offered an MOA proposing a production assessment fee of P0.50 per cubic meter on June 1, 1999, which SFI refused to sign despite follow-up requests.
In July 2001, SPCWD's Board created an Investigating Board to hear violations of the Water Code; this board investigated SFI for operating wells without a permit and considered issuing a cease and desist order.
SFI sought judicial intervention in November 2001 to enjoin further investigation and possible closure of its deep wells, claiming irreparable damage to its hotel operations.

The Regional Trial Court (RTC) of San Pablo City (Branch 32) conducted hearings, admitted evidence from both parties, and heard testimonies from key witnesses including SPCWD officials and SFI representatives.
The RTC found no written determination by SPCWD’s Board of Directors that SFI’s groundwater extraction was injuring or reducing the district’s financial condition.
The Investigating Board’s Report and Resolution recommended a cease and desist order and collection of unpaid production fees but had not been acted upon by SPCWD’s Board.
The RTC ruled that SPCWD had no legal basis to impose production assessment fees without the required board resolution and findings. It noted that while other deep well users had signed MOAs and were bound by contract to pay fees, SFI had neither signed any MOA nor had SPCWD complied with statutory preconditions for imposing fees on it.
The RTC dismissed SFI’s petition seeking to enjoin SPCWD’s imposition of fees, essentially upholding SPCWD’s authority to impose production fees subject to compliance with legal preconditions.

The Court of Appeals (CA) in September 2011 overturned the RTC’s ruling, finding that SPCWD had complied with due process by holding meetings and consultations with deep well users including SFI.
The CA ruled that although there was no explicit Board Resolution fixing the production fee rates, the consultations and the signed MOAs by other users amounted to valid administrative practice and practical construction of the law.
It upheld SPCWD’s right to impose production charges and demand payment with interest from the time of their imposition starting in 1998.
The CA dismissed SFI’s objection that impairment of groundwater supply must be proven before fees could be imposed, emphasizing instead only the financial condition of the district need be shown.
SFI’s motion for reconsideration of the CA decision was denied in November 2012.

SFI petitioned the Supreme Court for review, questioning the legality of SPCWD’s imposition of production assessment fees absent any finding or proof that SFI’s groundwater use injured SPCWD’s financial condition or impaired its groundwater source.

Whether the Court of Appeals erred in upholding SPCWD’s right to impose production assessment fees on SFI despite the absence of any board resolution or concrete findings that SFI’s extraction of groundwater was injuring or affecting SPCWD’s financial condition and groundwater source, as required under Section 39 of Presidential Decree No. 198 and Section 11 of the Rules Governing Groundwater Pumping and Spring Development.