The MWSS Board of Trustees approved a downward adjustment of 2.42% for Manila Water Company, Inc. (Manila Water) and an upward adjustment of 4.19% for Maynilad Water Services, Inc. (Maynilad). The average water charge of Manila Water is seen to go down by Php0.63 per cubic meter (cu.m.) while that of Maynilad is expected to go up by Php1.35 per cu.m.

 The rate adjustment for Manila Water is the net effect of the implementation of the annual inflation adjustments that were suspended for 2014 and 2015, the provisional rate increase of 3.2% in 2013, and the implementation of the Final Award in the arbitration between MWSS and Manila Water.

The rate adjustment in Maynilad’s water charges is attributed to two factors. One, a 7.52% increase in the average basic charge or Php2.35 per cu.m. due to the implementation of the annual inflation adjustments that were suspended for 2014 and 2015. Two, a decrease in water charges due to the discontinuance of the Php1.00 per cu.m. Currency Exchange Rate Adjustment.

Changes in Monthly Water Bills

The MWSS Regulatory Office stated that the concessionaires will publish the adjusted rates in compliance with the requirement of the MWSS Charter. Rates and fees shall be effective and enforceable 15 days after publication in a newspaper of general circulation. The adjusted rates are seen to take effect in June 2015.

The MWSS Regulatory Office estimated that the monthly bill of lifeline customers of Manila Water will go down by about Php2.00. Those consuming 10 cu.m. per month can expect their monthly water bills to decrease by Php3.30. The bills of customers with monthly usage of 20 cu.m. and 30 cu.m. will decline by Php7.30 and Php14.90, respectively.

The monthly bill of lifeline customers of Maynilad will go down by Php5.45 per month. In contrast, the monthly bills of those consuming 20 cu.m. and 30 cu.m. are seen to rise by Php3.37 and Php21.56, respectively.

Manila Water disallowed to recover corporate income tax

Earlier, the MWSS Board of Trustees approved and confirmed the resolution of the MWSS Regulatory Office to disallow the recovery of corporate income tax (CIT) following the decision rendered by the Appeals Panel in the arbitration with Manila Water.

In 2013, Manila Water filed an arbitration case against MWSS and the Regulatory Office, disputing the third rate rebasing determination. Eventually, the disputed issues were resolved except for the question on the recoverability of CIT. This remaining issue was submitted for resolution by the Appeals Panel.

The Appeals Panel rendered its Final Award in favor of MWSS and the Regulatory Office disallowing the recovery of CIT by Manila Water. The Appeals Panel recognized that the proper interpretation of the Concession Agreement leads to the conclusion that CIT is not part of the recoverable expenditures.

Until the third rate rebasing in 2013, CIT has been treated as part of “Philippine Business Taxes” in the eventual calculation of water tariffs. This practice assumes that CIT is part of “Philippine Business Tax” mentioned in the Concession Agreement. But the Panel concludes that “Philippine Business Tax” does not refer to an income tax which is separately treated under the Philippine law, particularly the National Internal Revenue Code.

Manila Water a public utility

 In the same Arbitral Award, the Appeals Panel found that Manila Water is in law a public utility. As such, the decision of the Supreme Court in the Meralco Case applies.

In  2002, the Supreme Court ruled that Meralco, as a public utility, could not pass on its income tax obligations to consumers. In its ruling, the Supreme Court maintained that the former Energy Regulatory Board correctly ruled that “income tax should not be included in the computation of operating expenses of a public utility.”

The Appeals Panel rendered a decision that CIT is not an allowed expenditure under the Concession Agreement by virtue of the application of the principles enunciated in the Meralco case to the effect that the people of the Philippines should not be burdened directly or indirectly with CIT which has to be paid by Manila Water as a result of profits made from its business operations.

The Appeals Panel has strong reservations as to whether the contractual intention of the parties, whether explicit or presumed, on an Agreement that is not purely private in nature or character but one imbued with public interest, can be controlling even in respect of matters or aspects that concern the latter more than the former.

“Legal issues like tax liabilities and the concept of public utilities could well be beyond the full contract autonomy of contracting parties that otherwise can be freely exercised,” the Appeals Panel said.

 Maynilad Arbitral Panel: CIT can be recovered

In 2013, Maynilad contested the rate rebasing determination of MWSS and filed a rate rebasing dispute. Similar to Manila Water, the disputed issues of Maynilad were eventually limited to the recoverability of CIT. This remaining issue was submitted for resolution by the Appeals Panel.

In December 2014, the Appeals Panel approved an increase of Php4.06 per cu.m. or 13.41% of the 2012 average basic charge of Php30.28 per cu.m. The Appeals Panel rendered its decision that CIT can be recovered by the Concessionaire: Maynilad “is entitled to include its Corporate Income Tax in its Future Cash Flows for each year of operations.”

The Appeals Panel found that “Maynilad is not a public utility itself, but only the agent and contractor of MWSS. As a necessary consequence thereof, the Majority (of the Appeals Panel) finds that the Meralco ruling and the 1985 State Audit Manual, both of which can only be applied to public utilities, are not applicable” to Maynilad.

The regulatory challenge

In view of the conflicting decisions of the two Panels for the arbitration with Maynilad and with Manila Water, the MWSS decided not to implement the Award for the former.

The MWSS found it prudent to hold the implementation of Maynilad’s Final Award to ensure consistency in tariff setting. The MWSS Regulatory Office maintains that it has to be consistent in the exercise of its regulatory mandate under the Concession Agreement.

Dr. Joel C. Yu, Chief Regulator of the MWSS Regulatory Office, stated that the Office “has the moral and the legal obligation to uniformly apply the general rate setting policy under the Concession Agreements.”

“As a government entity, the Regulatory Office has the overriding duty to protect and defend the constitutional guarantee to equal protection.”

“The identical issues raised by the Concessionaires involve matters of law and public policy.”

“The MWSS has the plain legal duty under its Charter to set just and equitable rates.”

The recoverability of the CIT is a legal issue that has to be resolved with finality in a court with proper jurisdiction.

Meanwhile, the Office of the Government Corporate Counsel, the statutory legal counsel of the MWSS, filed a Manifestation to the Supreme Court requesting to note in the pending cases filed before it the conflicting decisions of the two Arbitral Panels on the recoverability of the CIT.

Improving regulatory systems and processes

The MWSS Regulatory Office highlighted that the Resolution of the MWSS Board of Trustees includes a number of directives to improve the regulatory systems and processes.

The MWSS Regulatory Office was directed to revise the Key Performance Indicators and Business Efficiency Measures Framework, develop Concession Accounting and Audit Guidelines, and establish guidelines in determining the Appropriate Discount Rate.

These reforms are meant to strengthen the Concession Agreement and to promote stability in the conduct of regulatory mandates.