Case Summary (A.M. No. 14-11-350-RTC)
Concession Agreements and Operational Framework
• MWSS, a government corporation, retained ownership of water/sewerage assets; divided Metro Manila into East (Manila Water) and West (Maynilad) service areas
• Concession Agreements grant concessionaires the exclusive right to manage, operate, maintain and bill customers, subject to MWSS-RO rate approvals and MWSS Board of Trustees’ ratification
• Rate setting: Standard Rates adjusted annually; five-year “rebasing” to permit recovery of prudent expenditures (including “Philippine business taxes”) and an “Appropriate Discount Rate,” but subject to Section 12’s 12% return cap in MWSS Charter
• Dispute resolution: mutual consultation; UNCITRAL arbitration; awards “final and binding,” waiving appeals to courts
NWRB Jurisdiction and Succession of Public Service Commission
• NWRB is successor to Board of Power & Waterworks, National Water Resources Council, and ultimately Public Service Commission with respect to water rates
• Section 12 of RA 6234 vests exclusive original jurisdiction in PSC (now NWRB) over challenges to MWSS-fixed rates; decisions appealable to Regional Trial Courts per Model Law and Rule 43 (overruling BF Northwest)
• Concessionaire rates, though set via Concession Agreement, must be approved by MWSS Board and are “rates and fees fixed” within the meaning of Section 12, thus subject to NWRB review
Status as Public Utilities
• Public utility: private business regularly supplying a service of public consequence (water) to an indefinite public, subject to public regulation
• MWSS Charter and Concession Agreements characterized Manila Water and Maynilad as contractors/agents, but substance reveals they operate the public‐service system and bill customers directly
• Legislative franchise need not underlie public utility status where enabling law (RA 8041, E.O. 286 & 311) authorizes private operation of MWSS facilities; operation, not ownership, confers public utility status
• Conclusion: Manila Water and Maynilad are public utilities under 1987 Constitution Article XII, Section 11
12% Rate of Return Cap & Exclusion of Income Tax from Expenses
• Section 12 of RA 6234 caps MWSS’s net rate of return at 12% of a defined rate base; cap applies also to concessionaire rates under Concession Agreement Article 9.1
• MERALCO (2002) held that public utilities may not include corporate income tax as an operating expense when computing rates; tax on privilege of earning income benefits the utility, not customers
• Philippine law distinguishes income taxes (excise on privilege) from business taxes (indirect, pass-through), so income taxes cannot qualify as “Philippine business taxes” reimbursable via tariff
• Manila Water and Maynilad must exclude income tax from recoverable expenditures; no refund remedy exists where no timely challenge was filed with NWRB
Arbitration Proceedings & Divergent Awards
• Following denial of rate-rebasing petitions to MWSS-RO and MWSS Board, Manila Water and Maynilad invoked Concession Agreement arbitration
• Appeals Panel in UNC 136/CYK (Manila Water) held income tax not recoverable; in UNC 141/CYK (Maynilad) held income tax recoverable, resulting in divergent cost outcomes between service areas
• Maynilad sought confirmation of UNC 141/CYK award; MWSS petitioned to vacate as violative of public policy and equal protection
Confirmation of Maynilad Award & Public Policy Exception
• Special ADR Rules (Rule 19.10) permit courts to refuse confirmation of awards contrary to public policy—i.e., offending fundamental tenets of justice, morality, or injurious to public interest
• Confirming UNC 141/CYK award would exempt Maynilad’s charging of income tax
Case Syllabus (A.M. No. 14-11-350-RTC)
Procedural Posture
- Eight consolidated petitions before the Supreme Court En Banc: G.R. Nos. 181764, 187380 (Maynilad and MWSS-RO v. NWRB); G.R. Nos. 207444, 208207, 210147, 213227 (various citizen groups v. MWSS, Manila Water, Maynilad); G.R. No. 219362 (Bayan Muna reps. v. Secretary of Finance, MWSS, concessionaires); G.R. No. 239938 (MWSS v. Maynilad on arbitral award confirmation).
- Remedies invoked include petitions for certiorari, prohibition, mandamus, quo warranto and petitions for confirmation of arbitral awards.
- Issues of statutory interpretation, constitutionality of concessions, regulatory jurisdiction, public utility status, recoverability of corporate income tax, arbitration and sovereign guarantees.
Facts
- 1971: Republic Act No. 6234 creates the Metropolitan Waterworks and Sewerage System (MWSS) as a government corporation with power to fix rates, subject to a 12% rate-of-return cap and review by the Public Service Commission (now NWRB).
- 1995–96: National Water Crisis Act (RA 8041) and Executive Orders 286 and 311 encourage privatization of MWSS operations; define franchising, concessions and build-operate-transfer schemes.
- February 21, 1997: MWSS enters 25-year Concession Agreements with Manila Water (East Service Area) and Maynilad (West Service Area).
- Concession highlights:
• Grant of concession as contractor/agent (Art. 2.1)
• Service obligations and coverage targets (Art. 5.1)
• Rate setting tied to 12% cap; annual adjustments; five-year “rebasing” (Arts. 9.1, 9.2, 9.3.4)
• MWSS Regulatory Office established to review rates; Board of Trustees has final authority (Art. 11)
• Disputes subject first to consultation, then UNCITRAL arbitration; awards final and binding (Art. 12)
• Concessionaires responsible for taxes (Art. 6.2); MWSS retains property ownership; concessionaires act in MWSS’s name for easements/eminent domain (Art. 7.2) - Letters of Undertaking: Republic guarantees MWSS’s performance and financial obligations under the concessions.
Key Legal Provisions
- Republic Act No. 6234, Sec. 12: 12% rate-of-return cap; exclusive original jurisdiction of Public Service Commission (now NWRB) over rate contests.
- Republic Act No. 8041 (National Water Crisis Act): authorizes privatization of MWSS segments; empowers President to reorganize MWSS and LWUA.
- EO 286 and EO 311: respectively revamp MWSS’s structure and promote private sector participation via concession, franchise, BOT.
- Special ADR Rules (A.M. 07-11-08-SC) and RA 9285: endorse party autonomy and arbitration; narrow public policy ground for vacating awards.
- Republic v. MERALCO (440 Phil. 389, 2002): public utilities cannot include corporate income tax in operating expenses.
Prior Rulings and Administrative Actions
- 2002 MERALCO ruling prohibits public utilities (EPCOs) from passing on income tax to consumers.
- COA audit (1999 data): Manila Water ROI 40.92%, Maynilad ROI 7.71%.
- 2004 MWSS Regulatory Office Notice of Extraordinary Price Adjustment cites MERALCO, excludes corporate income tax from rate rebasing.
- MWSS technical working group and Board reversals restore income tax inclusion in 2007 rate rebasing.
- Freedom from Debt Coalition v. MWSS (564 Phil. 566, 2007): SC dismisses challenge to MWSS rate decisions for lack of exhaustion of NWRB remedy and for being factual.
Contentions
- Petitioners (M