Republic of the Philippines

SUPREME COURT
Manila

NERI
COLMENARES
and
CARLOS
ISAGANI
ZARATE,
Representatives of BAYAN MUNA
PARTYLIST
Petitioners,
- versus G.R. No. ____________
For: CERTIORARI and
PROHIBITION under Rule
65 of the Rules of Court
with application for a
Temporary
Restraining
Order and/or Writ of
Preliminary Injunction.
CESAR V. PURISIMA, in his capacity
as the Secretary of Finance,
METROPOLITAN WATERWORKS
AND
SEWERAGE
SYSTEM
(MWSS),
GERARDO
A.I.
ESQUIVEL, in his capacity as the
Administrator and Acting Chairman
of the MWSS, JOEL YU, in his
capacity as the Chief Regulator of the
MWSS Regulatory Office (MWSSRO), MANILA WATER COMPANY,
INC. (MWCI), and MAYNILAD
WATER SERVICES, INC. (MWSI),
and PRES. BENIGNO SIMEON C.
AQUINO III, President of the
Republic.
Respondents.
x---------------------------------------------x
PETITION for CERTIORARI and PROHIBITION
(with Application for a Temporary Restraining Order
and/or Writ of Preliminary Injunction)
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Petitioners, by counsel, respectfully state:

PREFATORY
OF ABSURDITIES AND INJUSTICE
Imagine this Your Honors.
The Regulator, in accordance with its regulatory function
under the law, denies a rate increase application by
Concessionaires. Despite the fact that the denial is a
regulatory issue, Concessionaires go to a private arbitration
panel on the basis of a Concession Agreement. The
arbitration panel reverses the Regulator, a mere concession
agreement amends, nay, TRUMPS the law. THE HAPLESS
PUBLIC PAYS.
This is an absurdity and an injustice.
What would be far worse than this absurdity and injustice?
Well, if by a stroke of luck, the arbitration panel affirms the
Regulator and denies the rate increase application, the
Concessionaires go to the government and asks that it be
compensated through sovereign guarantee under their
Letter of Undertaking. The government approves, a mere
letter amends the law and TRUMPS not only the regulator
but even the arbitration panel. THE HAPLESS PUBLIC
PAYS.
By the stroke of a presidential pen, the people still pay even
if they won their case against rate increases at all levels.
This is an unjust absurdity and an absurd injustice.
This is the issue that confronts the people, and this
Honorable Court, in the current water rate hike
controversy.
This absurd injustice is an attack on the legal doctrine of
the supremacy of the law over a mere contract, because
while the law empowers and confers to a Regulator the
power to regulate, the concession agreement, drafted
without the scrutiny of Congress, but privately by the
Concessionaires and MWSS, amends the law and transfers
that power to a private entity in the arbitration panel.
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This absurd injustice is a direct assault on the peoples

constitutional right to due process, because the people who
will be burdened by the arbitration panels decision, are not
allowed the opportunity to participate in an arbitration
proceedings that has become a private affair between the
parties to an agreement. Worse, even if despite the
handicap the people win, they still lose out in the end
because they will shoulder the cost through the sovereign
guarantee. This is one for the books, where a party the
people wins a case but is still made to pay through the
execution of a judgment in the very case where it won.
The issue in this Petition could be reduced to a simple
question: Should the exercise of a regulatory function by the
government be the subject of, or subordinated to, a mere
arbitration proceedings or by sovereign guarantee?
More importantly, should this Honorable Court allow such
an absurdity and injustice to continue? Or should this
Honorable Court strike an historic blow for the people and
against greed and banish this absurdity and injustice
forever.
NATURE OF THE PETITION
1.
This is an original action for Certiorari and Prohibition under
Rule 65 of the Rules of Court, with an application for the issuance of a writ
of preliminary injunction and/or temporary restraining order (TRO),
questioning the legality and constitutionality of, and asking this Honorable
Court to void, the Arbitration Clause in the Concession Agreements
entered into between Respondents MWSS and the Concessionaires as well
as the Sovereign Guarantee embodied in the Letter of Undertaking
executed by the Republic in relation to said Concession Agreements and
seeking to prohibit:
(1) President Benigno Simeon C. Aquino III from approving the
recommendation of Finance Secretary Cesar Purisima to grant the
claims of Concessionaires against the Republics Letters of
Undertaking;
(2) Finance Secretary Cesar Purisima from pursuing the processing,
facilitating the and/or granting the unfounded and unlawful claims
of the Concessionaires against the Republics Letters of
Undertaking and Order the withdrawal of his recommendation
for the grant of the same;
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(3) the MWSS, MWSS Administrator Esquivel, and MWSS-RO

Chief Regulator Yu, from implementing two contradictory
regulatory regimes in the lone MWSS franchise area resulting
from two conflicting arbitration awards pursuant to
constitutionally-infirm arbitration clause in the Concession
Agreements.
2.
The patent unconstitutionality and legal infirmity of the
Arbitration Clause in the Concession Agreements and the Republics
Letter of Undertaking, coupled with flagrant violations of the law by the
respondents, all committed with grave abuse of discretion amounting to lack
or excess of jurisdiction, leave petitioners with no other plain, speedy, and
adequate remedies in the ordinary course of law. Petitioners are therefore
constrained to seek direct relief with this Honorable Court.
3.
The President of the Philippines, Maynilad and Manila Water
are impleaded as necessary parties so as to accord complete relief and for a
complete determination or settlement of the claim subject of this Petition.
PARTIES
4.
The Petitioners are NERI COLMENARES and CARLOS
ISAGANI ZARATE, Representatives of Bayan Muna Partylist, with
office address at Room 210 Northwing Building, House of Representatives,
Quezon City. They are citizens, taxpayers and water consumers in Metro
Manila. They can be served with orders, decisions, and other court process
through their counsels-of-record, Atty. Maria Cristina Yambot and Atty.
Jeffrey Aguilar, at No. 45 K-7th St., Bgy. West Kamias, Quezon City.
5.
HON. CESAR V. PURISIMA is the Secretary of Finance who
is tasked to process the approval and grant of Respondent Concessionaires
claims against sovereign guarantees of the Republic of the Philippines. He
may be served with orders, decisions and other court processes at the
Department of Finance, Roxas Boulevard corner Pablo Ocampo, Sr. Street,
Manila.
6.
The
METROPOLITAN
WATERWORKS
AND
SEWERAGE SYSTEM (MWSS) is a government owned and controlled
corporation which was organized pursuant to Republic Act No. 6234. MR.
GERARDO A.I. ESQUIVEL is the Administrator of MWSS, and MR.
JOEL YU is the Chief Regulator of the MWSS Regulatory Office (MWSSRO). They may be served with orders, decisions and other court processes at
4th Floor MWSS Building, Katipunan Road, Balara, Quezon City.
7.
The MANILA WATER COMPANY, INC. (MWCI) (Manila
Water hereafter) is a corporation organized and existing under Philippine
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laws and is the Concessionaire of MWSS for the East Zone. It may be
served with orders, decisions and other court processes at 2nd Floor MWSS
Administration Building, 489 Katipunan Road, Balara, Quezon City 1105.
8.
The MAYNILAD WATER SERVICES, INC. (MWSI)
(Maynilad hereafter) is a corporation organized and existing under
Philippine laws and is the Concessionaire of MWSS for the West Zone. It
may be served with orders, decisions and other court processes at MWSS
Engineering Building, 489 Katipunan Road, Balara, Quezon City 1105.
9.
PRES. BENIGNO SIMEON C. AQUINO III, who is tasked
with approving and granting Respondent Concessionaires claims against
sovereign guarantees of the Republic, is the President of the Republic of the
Philippines. His office is at the Office of the President, New Executive
Building, Malacanang Palace, J.P. Laurel St., San Miguel, Manila, where he
may be served notices, orders, and other processes of this Honorable Court.
JURISDICTIONAL AVERMENTS
THERE ARE EXCEPTIONAL
AND
COMPELLING
CIRCUMSTANCES WHICH
WARRANT
DIRECT
RECOURSE
TO
THIS
HONORABLE COURT
10. The Supreme Court is the proper forum for this Petition since it
is the final arbiter of all issues involving questions of law, especially of
national significance. Under the circumstances, invocation of this Honorable
Courts power is warranted considering that the arbitral awards and the
sovereign guarantee may be imposed at any time causing immediate damage
to the Petitioners and the people.
11. The issues raised herein pervasively affect the social and
economic well-being of the twelve (12) million consumers of water in Metro
Manila, most especially the poor.
12. Billions of pesos in public funds are threatened to be illegally
disbursed in this case which threat arises from the illegal and
unconstitutional sovereign guarantee of the Government in favour of the
Concessionaires.
13. Clearly, the resolution of this case has an overarching
significance to the nation, which thus warrants direct resort to this
Honorable Court.

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14. This Honorable Court is again being asked to intervene in a

public interest issue. In terms of prudence, the present situation is awash
with urgency because of the acts of Respondents to enforce an illegal and
unconstitutional arbitral award stemming from a similarly illegal and
unconstitutional arbitration clause contained in the Concession Agreements.
The Petitioners have to take action and bring the legal battle to this
Honorable Court given the levels of power and authorities involved and
given the greater scope of the outcomes influence.
15. This Court has constantly and consistently met the moment in
this countrys history of fledgling rule of justice. It cannot do otherwise
now. There should thus be no doubt that this Court is the appropriate
and significant forum.
PETITIONERS POSSESS
LOCUS STANDI
16. In the case of David vs. Macapagal-Arroyo, 489 SCRA 160
(2006), the Honorable Supreme Court summarized and laid down the rules
on standing to sue. In said case, the Supreme Court declared that
Taxpayers, voters, concerned citizens, and legislators may be accorded
standing to sue, provided that the following requirements are met: (1) cases
involve constitutional issues; (2) for taxpayers, there must be a claim of
illegal disbursement of public funds or that the tax measure is
unconstitutional; (3) for voters, there must be a showing of obvious interest
in the validity of the election law in question; (4) for concerned citizens,
there must be a showing that the issues raised are of transcendental
importance which must be settled early; and (5) for legislators, there must
be a claim that the official action complained of infringes upon their
prerogatives as legislators. (Emphasis and underlining supplied)
17. Petitioners are taxpayers claiming damage through the illegal
disbursement of public funds through the approval of the call on the
Republics sovereign guarantee. Petitioners are concerned citizens who
consider the issues of sovereign guarantee and arbitration in relation to the
regulatory functions of MWSS, of transcendental importance which must be
settled early.
Petitioners are consumers within the jurisdiction of
Respondent Concessionaires, who will suffer damage in the imposition of
the arbitral awards.
18. The Petitioners have standing under the normal rules of
standing and public interest standing. As water consumers and covered by
the franchise area of Respondents Maynilad/Manila Water, they are the ones
directly affected by decisions, misjudgements, non-feasance, errors, abuses
by Respondents since water consumers ultimately carry the burden of such
decisions, misjudgements, non-feasance, errors and abuses.
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19. The Respondents collective interference with the public right

against illegal, incorrect, unreasonable, and biased administrative procedure
and outcome, specifically on the impending implementation of arbitral
awards resulting from the constitutionally infirm arbitration clause in the
Concession Agreements and the implementation of the Republics sovereign
guarantee, has infringed each of the Petitioners right to be treated fairly and
to be accorded due observance of the rule of law. The Petitioners have also
suffered prejudice arising from the Respondents assailed actions and
deliberate inactions.
20. As taxpayers and citizens, Petitioners are concerned with the
spending of public funds for illegal purposes and, considering the social and
economic impact of the basic necessity of water, are ultimately affected by
the contradictory arbitral awards and the sovereign guarantee provision.
There is nexus or directness and causal relationship between the
Respondents conduct and the Petitioners injury in the form of either their
violated private right or their damage or prejudice.
21. The issues raised in this suit are justiciable and serious ones.
They center on assertions that the Respondents have conducted themselves
illegally, and improperly, that this Court may assess not in terms of policy
context and implications but in terms of the Respondents duty to follow the
relevant statutes and constitutional provisions and to act with decency, good
faith, and obedience to the principles of what is legal, just, and reasonable.
22. The Petitioners have genuine interest in the issues raised. The
Petitioners are part of the water consuming public. The Petitioners are part
of a network of activists who have to the present compelled the government
to a dialogue on its otherwise inscrutable actions. This Court may refer to
many of its decisions where the petitioners actively prosecuted, and in some
if not most of them won on the merits of, the cases brought by them.
23. As in previous cases initiated by the Petitioners, the instant case
does not compromise scarce judicial resources. Rather, they invoke the
Supreme Courts judicial power to finally settle a question of law that may
be raised time and again in the future with other concessionaires or operators
of public utilities. The Petitioners history has shown that they are not mere
kibitzers or busybodies. This Court may also be assured that the
determination of the issues raised in this Petition is informed by the views
and submissions of the litigants who are most directly affected by such
issues.

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THERE EXISTS AN ACTUAL

CASE OR CONTROVERSY
WHICH IS RIPE FOR
ADJUDICATION
24. Petitioners submit that this case presents an actual case or
controversy.
25. Petitioners allege that the arbitration clause appearing in the
Concession Agreements is unconstitutional and illegal; and that the
sovereign guarantee is likewise unconstitutional and illegal.
26. These allegations are neither political nor theoretical, but
require interpretation of constitutional and statutory provisions and concepts.
27. Petitioners also submit that herein case or controversy is ripe
for judicial determination because:
a. The MWSS and Maynilad and Manila Water pursued separate
arbitration proceedings;
b. These arbitration proceedings resulted in arbitration awards, albeit
with conflicting results;
c. Maynilad, having won in its arbitration, seeks implementation
through the sovereign guarantee. Petitioners became aware of the
same sometime in the middle of June 2015;
d. Respondent Purisima wrote to Respondent President Aquino
favourably endorsing the claims of Maynilad;
e. Manila Water, despite having lost its own arbitration proceeding,
still seeks recovery or compensation through the sovereign
guarantee.
28. In view of the foregoing, it is clear that the case is ripe for
judicial review.
FACTS
29. In 1971, then President Ferdinand Marcos signed into law
Republic Act 6234, abolishing the National Waterworks & Sewerage
Authority (NAWASA) and creating the Metropolitan Waterworks and
Sewerage System (MWSS). R.A. 6234 granted MWSS a legislative
franchise to, among others, construct, maintain and operate such
waterworks infrastructures for the purpose of supplying water to the
inhabitants of Metropolitan Manila, including the province of Rizal and a
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portion of Cavite, and to fix periodically water rates and sewerage service
fees as it may deem just and equitable in accordance with the standards
outlined in Section 12 of this Act1.
30. In 1995, beset by an alleged water crisis in MWSS-serviced
areas, Republic Act 8041, also known as the National Water Crisis Act of
1995, was signed into law, empowering then President Fidel V. Ramos to
reorganize MWSS and the Local Waterworks & Utilities Administration
(LWUA). R.A. 8041 likewise authorized the privatization of any and all
segments of these agencies, operations or facilities if necessary2
31. Implementing R.A. 8041, President Ramos issued Executive
Order No. 286, Series of 1995 and Executive Order No. 311, Series of 1996,
directing MWSS to enter into arrangements that will result in the
involvement or participation of the private sector in any or all of (its)
segments, operations, and/or facilities.
32. Pursuant to this policy of privatization, MWSS-serviced areas
were divided into two the East and West Service Zones. After biddings, the
West Service Area concession was ultimately awarded to Maynilad while the
East Service Area to Manila Water, MWSS executing two separate but
identical Concession Agreements both dated 21 February 1997 with said
Concessionaires.
Faithful reproductions of these Concession Agreements with
Maynilad and Manila Water, respectively, are hereto attached as Annexes
A and B for the perusal and ready reference of this Honorable Court.3
33. The Concession Agreements designated the Concessionaires as
contractor for the operation of MWSS franchise in the respective Service
Zones and agent in the exercise of certain rights and powers granted
MWSS in the provision of waterworks and sewerage services.
34. Under Article 9.4 of the Concession Agreements, the maximum
rates for water and sewerage services for the first five years were set out in
Schedule 5 to said Agreements. Following said period, rate rebasing
exercises were to be conducted every five years.
35. Article 9.4 provides, among others, that from and after the
second rate Rebasing Date, the rates for water and sewerage services
provided by the Concessionaire shall be set at a level that will permit the
Concessionaire to recover over the 25-year term of the Concession x x x
operating, capital maintenance, and investment expenditures efficiently
and prudently incurred, Philippine business taxes and payments
corresponding to debt service x x x. Article 9.1, on the other hand, provides
1

Section 3, R.A. No. 6234, emphasis and underlining supplied.

Section 7, R.A. No. 8041.
3
Copies of these Concession Agreements are also available online at
ro.mwss.gov.ph
2

9| Page

that the standard rates may be adjusted from time to time subject to the
limitation that the Concessionaires rate of net return shall not exceed twelve
percent (12%) per annum, as required in Section 12 of the MWSS Charter
(R.A. No. 6234).
36. During the first rate rebasing exercise in 2002, the
Concessionaires were allowed to include Corporate Income Tax (CIT) as
part of their expenditures and pass it on to consumers by way of tariff.
37. Meanwhile, on 15 November 2002, the Honorable Supreme
Court rendered a decision in Republic of the Philippines vs. Meralco, G.R.
Nos. 141314 and 141369, 391 SCRA 700, ruling that public utilities cannot
include their corporate income tax in their expenses and pass this on to
consumers, declaring that in rate determination of a public utility, income
tax payments are not expenses which contribute to or incurred in connection
with the production of profit of a public utility.
38. On 9 April 2003, acting on Meralcos Motion for
Reconsideration, the Honorable Supreme Court affirmed its 15 November
2002 Decision.
39. Consequently, on 31 March 2004, the MWSS Regulatory Office
(MWSS-RO) issued a Notice of Extraordinary Price Adjustment (NEPA) to
both Concessionaires, declaring that pursuant to Art. 9.3.1 of the
Concession Agreement, a Ground for Extraordinary Price Adjustment has
occurred consisting in a change in law, government regulation, rule or order
or interpretation thereof, that affects or is likely to affect the Cash Flow of
the Concessionaires, referring to the Meralco decision.
40. Expectedly, the Concessionaires opposed the Notice and
requested that it be set aside on the ground, among others, that (1) they are
not public utilities but merely agents and contractors of MWSS, and that (2)
their income tax payments are considered expenditures under the Concession
Agreements.
41. In view of the Concessionaires strong opposition, the MWSS
Board of Trustees (MWSS BOT) created on 02 June 2004 a Joint Technical
Working Group (TWG) to study and determine whether the Concessionaires
are public utilities.
42. In its Final Report dated 20 July 2004, the TWG concluded that
the Concessionaires are not public utilities but mere agents and contractors
of MWSS, which is the public utility, thus barring the applicability of the
Meralco Decision.
43. On 30 July 2004, the MWSS-RO issued Resolution No. 04006-CA, approving and adopting the findings and recommendations of the
10 | P a g e

TWG in toto. On the same date, the MWSS BOT issued Resolution No.
2004-201, approving MWSS-RO Resolution No. 04-006-CA.
Faithful reproduction of MWSS-RO Resolution No. 04-006-CA and
MWSS BOT Resolution No. 2004-201 are hereto attached as Annexes C
and D for the perusal and ready reference of this Honorable Court.
44. Consequently, during the Second Rate Rebasing Exercise in
2007, the Concessionaires were once again allowed to recover their
Corporate Income Taxes by way of tariff.
45. On 29 September 2010, with lingering doubts as to the status of
the Concessionaires as public utilities, MWSS-RO issued Office Order No.
066, Series of 2010, creating a Technical Working Group (2010 TWG)
tasked to study the legality of including Corporate Income Taxes in the
operating expenditures of the Concessionaires and the possibility of
applying the Meralco Decision.
46. On 26 October 2010, the 2010 TWG rendered an opinion,
declaring that the Concessionaires are public utilities by virtue of the
services they provide and that even if they are considered as mere agents of
MWSS, they could not benefit from more rights than their principal.
47. Meanwhile, the Concessionaires filed with the MWSS-RO their
petitions for the determination of their respective Rate Adjustment for the
fourth Rate Rebasing Period (2013-2017). Maynilad proposed an upward
adjustment of 28.35% of its average basic water charge, or an equivalent
increase of Php8.58 per cubic meter, while Manila Water proposed an
upward adjustment of 22.9% or an equivalent increase of Php5.83 per cubic
meter increase in its basic water charge.
48. On 7 June 2013, MWSS-RO issued Resolution No. 13-005-CA,
deciding finally, among others, to exclude Corporate Income Tax streams in
the Cash Flows of the Concessionaires.
49. Subsequently, on 10 September 2013, MWSS-RO issued
Resolution No. 13-010-CA, denying Maynilads petition for an upward
adjustment and approving instead a negative adjustment of 4.82% of its
2012 average basic water charge. On 12 September 2013, the MWSS-Board
of Trustees (MWSS-BOT) approved such MWSS-RO determination through
Resolution No. 2013-100-RO.
Faithful reproduction of MWSS-RO Resolution No. 13-010-CA and
MWSS BOT Resolution No. 2013-100-RO are hereto attached as Annexes
E and F for the perusal and ready reference of this Honorable Court.
50. Similarly, on 10 September 2013, MWSS-RO issued
Resolution No. 13-009-CA denying Manila Waters petition for an upward
11 | P a g e

adjustment and approving instead a negative adjustment of 29.47% of its

2012 average basic water charge. On 12 September 2013, the MWSS-Board
of Trustees (MWSS-BOT) approved such MWSS-RO determination through
Resolution No. 2013-101-RO.
Faithful reproduction of MWSS-RO Resolution No. 13-009-CA and
MWSS BOT Resolution No. 2013-101-RO are hereto attached as Annexes
G and H for the perusal and ready reference of this Honorable Court.
51. Expectedly, the Concessionaires expressed their disagreement
with the ROs determination. Failing to reach an amicable settlement to their
respective disputes, the Concessionaires signified to bring their issues to
arbitration.
52. Thus, on 24 September 2013, Manila Water filed its Request for
Arbitration with the International Chamber of Commerce (ICC). Maynilad,
on the other hand, registered its Dispute Notice on 7 October 2013. The
respective arbitration proceedings focused on two main questions: (1)
whether the Concessionaire is a public utility, and (2) whether Corporate
Income Tax is a recoverable operating expenditure.
53. On 29 December 2014, an arbitral award was issued in favor of
Maynilad, the Appeals Panel upholding Maynilads proposed alternative
Rebasing Adjustment for the fourth Rate Rebasing Period (1 January 2013 to
31 December 2017) of 13.41% of the West Zones 2012 average basic water
charge of P30.28/cu.m., equivalent to an increase of P4.06/cu.m. or an
adjusted average basic water charge of P34.34/cu.m.4
54. Banking on said award, Maynilad insisted on implementing the
rate increase while expressing its willingness, subject to MWSSs approval,
to implement on a staggered basis Maynilads alternative rebasing
adjustment upheld in the Arbitral Award.5
55. In response to Maynilads demand for implementation of the
arbitral award, MWSS & MWSS-RO stated that it decided to await the final
outcome of its arbitration with Manila Water before making any official
pronouncements on the applicable resulting water rates.6
56. On 20 February 2015, in a Disclosure Notice to the Philippine
Stock Exchange (PSE) and the Securities and Exchange Commission (SEC),
Maynilads parent company, Metro Pacific Investments Corporation (MPCI),
reported that it wrote the Philippine Government, through the Department of
4
Rivera, Danessa, Intl arbitration panel upholds Maynilad water rate hike, 6
January
2015,
http://www.gmanetwork.com/news/story/399543/economy/companies/intl-arbitrationpanel-upholds-maynilad-water-rate-hike last accessed on 6 June 2015.
5
Ibid.
6
Feliciano, Claire Ann, Maynilad tariff hike to take more time, 16 February
2015, http://www.bworldonline.com/content.php?section=TopStory&title=Mayniladtariff-hike-to-take-more-time&id=102835 last accesed on 6 June 2015.

12 | P a g e

Finance, of its intention to call upon the Undertaking Letters which the
Republic issued in favor of Maynilad on 31 July 1997 and 17 March 2010.
Faithful reproduction of MPCIs Disclosure to PSE and SEC is hereto
attached as Annex I for the perusal and ready reference of this Honorable
Court.7
57. Petitioners do not have copies of said Undertaking Letters.
However, in the various communications by Respondents in this case, they
constantly refer to the Undertaking Letters executed by the Republic.
Nevertheless, Petitioners already wrote to Respondent Purisima requesting
for official copies of letters referred to in this Petition.
58. The Exhibit D contained in the Concession Agreements is a
form entitled Form of Undertaking Letter of Republic. Section 4 thereof
states:
4. Standard Rates Reduction.
The Republic shall not interfere with the mechanisms contained
in Article 9 of the Agreement relating to the setting of rates and
connection charges for water and sewerage services provided
by the Concessionaire within the Service Area. In this regard,
the Republic hereby confirms that if the Republic or any
Government-owned agency shall cause MWSS or the
Regulatory Office to reduce Standard Rates below the level that
would otherwise be applicable in accordance with the
Agreement, or to defer implementation of any increase in
Standard Rates beyond the date for implementation thereof in
accordance with the Agreement, the Republic shall indemnify
the Concessionaire in respect of any loss to the Concessionaire
occasioned by such action.
59. In said 20 February 2015 Disclosure, Maynilad claimed that the
deferment of the implementation of the rate adjustment has caused it
significant amounts in lost revenues.
60. On the same date, 20 February 2015, Secretary Purisima,
according to information, wrote the President, apprising him of the letter
from Maynilad. Secretary Purisima stated that a call on the Undertaking
Letter may potentially result in the National Government having to pay
Maynilad over P5 billion for the period 1 January 2013 to 31 January 2015
and P208 million for every subsequent month of delay.
61. Meanwhile, MWSS and MWSS-RO submitted to Secretary
Purisima their position on Maynilads claim stating that the latter will not
7

MPICs Disclosure is available at http://edge.pse.com.ph/downloadHtml.do?

file_id=111324.
13 | P a g e

acquire losses as a result of the deferment of the implementation of the water

rates increase in the arbitral award.8
62. In a media briefing on 13 March 2015, the MWSS and MWSSRO reiterated that the provisions of the Concession Agreement on the
matter are quite clear and that the requirements for Maynilad to make a valid
claim are not present. MWSS-RO explained that the Governments
undertaking can be invoked only upon the occurrence of the following: (1)
The Republic interferes with the mechanisms contained in Article 9 of the
Concession Agreement; or (2) The Republic or any government agency
causes the MWSS and the Regulatory Office to defer the implementation of
the Standard rate. MWSS and MWSS-RO maintain that none of the
foregoing has come to fore and the Republic has obviously not interfered
with any of the processes or mechanisms in the determination and
implementation of the Standard Rates. Moreover, neither the Republic nor
any government-owned agency has caused MWSS and the RO to await the
Manila Water ruling.9
63. On 4 March 2015, Secretary Purisima submitted to the
President, according to information, the Department of Finances position
regarding the obligations of the Republic in light of Maynilads call on the
Governments guarantees. Secretary Purisima maintained that deferment of
the implementation of the Arbitral Award by MWSS and MWSS-RO may
result in the payment of approximately P5 Billion for the period 1 January
2013 to 31 January 2015 and P208 Million for every month of delay.
64. Contrary to MWSSs position and determination as the utility
regulator, Secretary Purisima, who should rely on MWSS on issues such as
this, in said 4 March 2015 letter to the President, favourably endorsed
Maynilads claims, contending that:
a. The Arbitral Award is final and binding upon MWSS. xxx
b. Maynilad may call on the Government under the Undertaking
Letters in this specific situation. xxx
c. The Undertaking Letters clearly guarantee against delays in
legitimate rate increases and do not foresee recovery of delays over
the concession period.
d. Non-compliance with the Arbitral Award will reverse significant
gains made by Administration in inspiring confidence in both
privatization efforts and the public-private partnership program.
65. Curiously, the amount of supposed revenue losses being
claimed by Maynilad for the period 1 January 2013 to 28 February 2015
8

MWSS-RO on P3.44B Revenue Losses: Maynilad Erroneously invokes the

Republics Undertaking, 16 March 2015, http://ro.mwss.gov.ph/?m=201503 last
accesed on 6 June 2015.
9
Ibid.
14 | P a g e

amounts to only P3.44 Billion while Secretary Purisimas letters to the

President indicate a payment of P5 Billion, a whopping difference of P1.56
Billion.
66. Petitioners, in exercise of prudence, wrote Secretary Purisima
on 28 July 2015 to validate the above-said information, requesting for copies
of the (a) Notice/s of Claim for sovereign guarantee filed by Maynilad and
Manila Water; (b) the Department of Finances endorsement letter/s to the
President; and the (c) Undertaking Letters executed by the Republic in favor
of Maynilad and Manila Water. To date, however, Petitioners have yet to
receive a reply from Secretary Purisima.
Faithful reproduction of Petitioners 28 July 2015 letter to Secretary
Purisima is hereto attached as Annex J10 for the perusal and ready
reference of this Honorable Court.
Petitioners likewise attach unofficial copies of the letters/notice of
claim sent by Maynilad to Secretary Purisima dated 20 February 2015 and
09 March 2015, and Secretary Purisimas letters of endorsement to the
President dated 20 February 2015 and 04 March 2015 as Annexes K, L,
M and N, respectively.
67. Finally, on 27 March 2015, Maynilad sent the Department of
Finance (DOF) a Notice for Arbitration and Statement of Claim based on
demand letters it filed between February and March of 2015, claiming for
the sovereign guarantee for supposed losses it incurred in the postponement
of the increase in its basic charge as awarded during the previous ICC
arbitration.11
68. Meanwhile, on 21 April 2015, the arbitration proceeding
between MWSS and Manila Water was finally disposed of in a diametrically
opposing manner. The Appeals Panel ruled that Manila Water is a public
utility and the prohibition on the recovery of corporate income tax as an
operating expenditure as laid out in the Meralco ruling applies.12
69. Shortly thereafter, on 23 April 2015, Manila Water filed a notice
of claim with the Department of Finance (DOF), erroneously invoking the
Letter of Undertaking (issued by the government on 31 July 1997 and
reiterated on 19 October 2009) to recover indirectly from the DOF what was
prohibited in the Arbitral Award which ruled against it. Manila Water
maintained that DOF must compensate it for over P79 Billion of potential
revenue losses from 2015 up to the end of its 25-year contract or until 2037
10

The registry receipt and the facsimile Sending Report are likewise attached
as Annexes J-1 and J-2, respectively.
11
Valencia, Czeriza. Maynilad seeks new arbitration vs government, 22 March
2015,
http://www.philstar.com/business/2015/03/31/1439242/maynilad-seeks-newarbitration-vs-govt last accessed on 6 June 2015.
12
MWSS Wins In Its Arbitration Case Against Manila Water, 22 April 2015,
http://ro.mwss.gov.ph/?p=3316 last accessed on 6 June 2015.
15 | P a g e

resulting from having to lower water rates following the unfavorable

decision from the arbitration panel.13
ISSUES
70. This case presents the following novel issues for resolution of
this Honorable Court:
a. Whether the Concessionaires are public utilities subject to the rules
and requirements set forth by the Meralco Decision and the general
public service law;
b. Whether Article 12 of the Concession Agreements which
respectively provides for the submission of disputes to arbitration
(the Arbitration Clause) and the express waiver of the States right
to appeal are unconstitutional and/or void for being:
i.

violative of Section 6, Article XII of the 1987 Philippine

Constitution insofar as these prevent the State in the exercise
of its duty to promote distributive justice and to intervene
when the common good so requires;

ii.

violative of Section 1, Article III of the 1987 Philippine

Constitution insofar as these contravenes the water consuming
publics right against deprivation of property without due
process;

iii. violative of Section 1, Article VIII of the 1987 Philippine

Constitution insofar as it thwarts the Honorable Courts power
of judicial review;
iv. violative of Section 19, Article XII of the 1987 Philippine
Constitution insofar as these contravenes the States bounden
duty to subject monopolies to strict State regulation;
v.

violative of Republic Act 6234 (the MWSS Charter) insofar as

arbitration effectively takes away MWSSs power and duty to
regulate the water sewerage system;

vi. contrary to Public Policy.

c. Whether the regulation of a public utility can be subject to
arbitration.

13

Olchondra, Riza, Manila Water seeks billions in compensation for water rate
losses, 23 April 2015, http://business.inquirer.net/190707/manila-water-seeks-billionsin-compensation-for-water-rate-losses last accessed on 6 June 2015.
16 | P a g e

d. Whether the Sovereign Guarantee as embodied in the Letters of

Undertaking executed by the Republic in relation to the
Concession Agreements are unconstitutional for being:

i.

violative of Section 1, Article III of the 1987 Philippine

Constitution insofar as it contravenes the publics right against
deprivation of property without due process;

ii. violative of Section 1, Article VIII of the 1987 Philippine

Constitution insofar as it thwarts the Honorable Courts power
of judicial review;

iii.

violative of MWSS right and duty to regulate the water

sewerage system.

e. Whether the Concessionaires can overcharge in their water rates by

declaring corporate income taxes as expenditures and,
consequently, passing these on to the water consumers within their
respective Service Areas.
GROUNDS
I
THE CONCESSIONAIRES ARE PUBLIC UTILITIES
GOVERNED BY THE MERALCO DECISION AND
THE GENERAL PUBLIC SERVICE LAW
II
ARTICLE 12 (ARBITRATION CLAUSE) OF THE CONCESSION
AGREEMENTS IS UNCONSTITUTIONAL AND ILLEGAL
III
PUBLIC UTILITY REGULATION IS A STATE POLICY
WHICH CANNOT BE SUBJECT TO ARBITRATION
IV

THE SOVEREIGN GUARANTEE EMBODIED

IN THE REPUBLICS LETTER OF UNDERTAKING IS
UNCONSTITUTIONAL AND ILLEGAL
V

17 | P a g e

CORPORATE INCOME TAX IS NOT A RECOVERABLE

EXPENDITURE UNDER THE CONCESSION AGREEMENTS
DISCUSSION/ARGUMENTS
THE CONCESSIONAIRES ARE
PUBLIC
UTILITIES
PERFORMING
PUBLIC
SERVICE
AND
ARE
THEREFORE GOVERNED BY
THE MERALCO DECISION AND
THE
GENERAL
PUBLIC
SERVICE LAW
71. Adopted by the Honorable Supreme Court in Albano v. Reyes,
G.R. No. 83551, July 11, 1989, 175 SCRA 264, 270, American jurisprudence
defines a public utility in this wise:
A Public utility is a business or service engaged in
regularly supplying the public with some commodity or
service of public consequence such as electricity, gas, water,
transportation, telephone or telegraph service As its name
indicates, the term public utility implies a public use and
service to the public. (Emphasis supplied)
72. Section 13(b) of Commonwealth Act No. 146 or the Public
Service Act, in turn, defines public service in this wise:
(b) The term public service includes every person that now or
hereafter may own, operate, manage or control in the Philippines,
for hire or compensation, with general or limited clientele, whether
permanent, occasional or accidental, and done for general business
purposes, any common carrier, x x x, electric light, heat and power,
water supply and power, petroleum, sewerage system, wire or
wireless communication systems, wire or wireless broadcasting
stations and other similar public services (Emphasis and
underlining supplied)
73. As quoted, the definition of a public utility is broad and
general. It may cover principal and agent, supplier and contractor, service
provider and reseller.
74. Interpreting the Public Service Act (and even its precursor Act
2307), Philippine jurisprudence has always and consistently held that the
true test whether or not a business or service is a public utility is the nature
of the business or service.
18 | P a g e

75. In Kilusang Mayo Uno Labor Center v. Garcia, Jr., G.R. No.
115381, December 23, 1994, 239 SCRA 386, 391, public utilities had been
defined as privately owned and operated businesses whose services are
essential to the general public. They are enterprises which specially cater
to the needs of the public and conduce to their comfort and
convenience. (Emphasis supplied.)
76. On the other hand, the primary determining characteristic of a
public utility was first laid out by the Court in Iloilo Cold Storage Co. vs.
Public Utility Board, 44 Phil. 551. In said case, the Court laid down three
criteria: (a) whether the public may enjoy its services by right or only by
permission; (b) it is not confined to privileged individuals but is open to the
indefinite public; and (c) all persons have the right to the use or service
under the same circumstances.
77. Following the pronouncements in Iloilo Cold Storage Co. vs.
Public Utility Board, the High Court held in JG Summit Holdings, Inc. vs.
Court of Appeals, G.R. No. 124293, September 24, 2003, that a public utility
is a business or service engaged in regularly supplying the public with
some commodity or service of public consequence such as electricity, gas,
water, transportation, telephone or telegraph service. The Honorable Court
eloquently furthered:
To constitute a public utility, the facility must be necessary for
the maintenance of life and occupation of the residents.
However, the fact that a business offers services or goods that
promote public good and serve the interest of the public does
not automatically make it a public utility. Public use is not
synonymous with public interest. As its name indicates, the
term public utility implies public use and service to the public.
The principal determinative characteristic of a public utility
is that of service to, or readiness to serve, an indefinite public or
portion of the public as such which has a legal right to demand
and receive its services or commodities. Stated otherwise, the
owner or person in control of a public utility must have devoted
it to such use that the public generally or that part of the public
which has been served and has accepted the service, has the
right to demand that use or service so long as it is continued,
with reasonable efficiency and under proper charges. Unlike a
private enterprise which independently determines whom it will
serve, a public utility holds out generally and may not refuse
legitimate demand for service. Thus, in Iloilo Ice and Cold
Storage Co. vs. Public Utility Board, this Court defined
public use, viz:
Public use means the same as use by the public. The
essential feature of the public use is that it is not
19 | P a g e

confined to privileged individuals, but is open to the

indefinite public. It is this indefinite or unrestricted
quality that gives it its public character. In determining
whether a use is public, we must look not only to the
character of the business to be done, but also to the
proposed mode of doing it. If the use is merely optional
with the owners, or the public benefit is merely
incidental, it is not a public use, authorizing the exercise
of jurisdiction of the public utility commission. There
must be, in general, a right which the law compels the
owner to give to the general public. It is not enough that
the general prosperity of the public is promoted. Public
use is not synonymous with public interest. The true
criterion by which to judge the character of the use is
whether the public may enjoy it by right or only by
permission. (Emphasis supplied)
78. In the case at bar, the Concession Agreements clearly provide
for the Concessionaires role in the conduct of waterworks and sewerage
operations. Section 2.1 of the Concession Agreements provides:
2.1

Grant of Concession

On the terms and subject to the conditions set forth herein,

MWSS hereby grants to the Concessionaire, as contractor to
perform certain functions and as agent for the exercise of rights
and powers under the Charter, the sole right to manage, operate,
repair, decommission and refurbish the Facilities in the Service
Area, including the right to bill and collect water and sewerage
services supplied in the Service Area (the Concession). x x x
79. It cannot be disputed, therefore, that under the Concession
Agreement, the operation, maintenance, and investments for water and
sewerage system in the service areas became the Concessionaires respective
responsibilities.
80. The public use and public service character of the
Concessionaires business of providing water supply/delivery and sewerage
service to the public is evident from the very language of their service
obligations under Article 5 of the respective Concession Agreements, which
underscore their mandatory character by the use of the word shall.
5.1. As to water supply/delivery:
5.1.1 Water Supply: New Connections
The Concessionaire shall offer water supply services to all
existing Customers in the Service Area on the
20 | P a g e

Commencement Date and, in addition, the Concessionaire shall

make at least sufficient connections (net of any
disconnections) to meet the coverage target x x x
5.1.3 Obligation to Make Connections to a Water Main
Upon request from the owner or occupant of premises
located in the Service Area for a connection to a water
main, the Concessionaire shall make such a connection as
soon as reasonably practicable. x x x
5.1.6 Provision of Water Other Than Through a Water Main
The Concessionaire shall make a supply of water available
to Customers other than through a water main in
circumstances where (i) supplies through a water main have
been or will be interrupted for more than 24 hours, or (ii)
supplies through a water main have been or will be subject to
contamination. x x x. (Emphases supplied.)
5.2. As to sewerage service:
5.2.1 Supply of Sewerage Service: New Connections
The Concessionaire shall offer to supply sewerage services
to all Customers in the Service Area who have sewerage
connections on the date hereof for domestic sewage and
industrial effluents compatible with available treatment
processes and, in addition, the Concessionaire shall meet the
coverage target percentages of the total population in the
designated municipality connected to the Concessionaires
water system at the time of the targets set out in Schedule 3
below by the dates specified in that Schedule.
5.2.2 Obligation to Make Connections to a Public Sewer
Upon request from the owner or occupant of premises
located in the Service Area for a connection to a public
sewer, the Concessionaire shall make such a connection as
soon as reasonably practicable. x x x (Emphases supplied.)
81. Indeed, from the foregoing, Concessionaires have undertaken
to provide the water and sewerage services to all customers in the service
areas without discrimination. As such, the Concessionaires, without doubt,
have assumed the role, and acquired the status, of a public utility. Article 1
of the Concession Agreement defines customers after the date of the
Concession Agreements execution to be the Concessionaires own
customers (and not MWSS). Thus: Customer means (i) as of the date
21 | P a g e

hereof, any customer of MWSS or (ii) thereafter, any customer of the

Concessionaire, in each case for the supply of water and/or sewerage
services in the Service Area.
82. Further, Article 5.4 of the Concession Agreement shows that
the Concessionaires deal directly with the public, which is one of the
essential features of a public utility. Thus:
5.4

Other Customer Service Standards

At all times, the Concessionaire shall provide the highest

quality services to its Customers that are practically
achievable subject to guidelines issued by the Regulatory
Office, including, but not limited to:
(i)
(ii)
(iii)

(iv)

(v)
(vi)

giving prompt responses to Customer inquiries and

complaint;
giving notices to Customers at least 48 hours in
advance of any planned interruptions in water supply:
making alternative water supplies for any unplanned
interruptions in service to schools, hospitals and key
public buildings, and to all Customers for
interruptions in service of more than 24 hours;
effecting urgent restoration of water supplies for any
unplanned interruptions in service and informing
Customers on progress in making necessary repairs
and treatment of potentially contaminated supplies;
taking measures to prevent sewage flooding from
sewerage network; and
providing invoices to Customers which clearly
identify services, charges, period covered, forms of
payment and penalties for late or non-payment.

83. Manifestly then, the essential features of public use, as

described in Iloilo Ice and Cold Storage Company, squarely apply to the
Concessionaires duty under the terms of the Concession Agreement to
provide water and sewerage service to the indefinite public in their
respective service areas.
84. That the Concessionaires are rendering water supply and
sewerage services to the general public without a legislative franchise does
not militate against a finding that the Concessionaires are public utilities
engaged in the business of rendering service to the general public.
85. As sufficiently elaborated in Albano vs Reyes, a franchise
specially granted by Congress is not necessary for the operation of a
public utility. In said case, petitioner claimed that since the Manila
International Container Port (MICP) is a public utility, it needs a legislative
22 | P a g e

franchise before it can legally operate as a public utility, pursuant to Article

12, Section 11 of the 1987 Constitution. Finding such contention as devoid
of merit, the Honorable Supreme Court elaborated:
A review of the applicable provisions of law indicates that a
franchise specially granted by Congress is not necessary for the
operation of the Manila International Container Port (MICP) by
a private entity, a contract entered into by the PPA and such
entity constituting substantial compliance with the law.
Thus, while the PPA has been tasked, under E.O. No. 30, with
the management and operation of the Manila International Port
Complex and to undertake the providing of cargo handling and
port related services thereat, the law provides that such shall be
in accordance with P.D. 857 and other applicable laws and
regulations. On the other hand, P.D. No. 857 expressly
empowers the PPA to provide services within Port Districts
whether on its own, by contract, or otherwise [See. 6(a) (v)].
Therefore, under the terms of E.O. No. 30 and P.D. No. 857, the
PPA may contract with the International Container Terminal
Services, Inc. (ICTSI) for the management, operation and
development of the MICP.
Xxx xxx

xxx

Even if the MICP be considered a public utility, or a public

service on the theory that it is a wharf or a dock as
contemplated under the Public Service Act, its operation would
not necessarily call for a franchise from the Legislative Branch.
Franchises issued by Congress are not required before each and
every public utility may operate. Thus, the law has granted
certain administrative agencies the power to grant licenses for
or to authorize the operation of certain public utilities. (See
E.O. Nos. 172 and 202)
That the Constitution provides in Art. XII, Sec. 11 that the
issuance of a franchise, certificate or other form of
authorization for the operation of a public utility shall be
subject to amendment, alteration or repeal by Congress
does not necessarily, imply, as petitioner posits that only
Congress has the power to grant such authorization. Our
statute books are replete with laws granting specified agencies
in the Executive Branch the power to issue such authorization
for certain classes of public utilities.
The contract between the PPA and ICTSI, coupled with the
President's written approval, constitute the necessary
23 | P a g e

authorization for ICTSI's operation and management of the

MICP.
86. Indeed, a reading of Section 11 of Article XII (National
Economy and Patrimony) of the 1987 Constitution reveals that operating a
public utility may be authorized even without a formal declaration from the
legislative branch through a franchise. Said provision reads in part:
Sec. 11. No franchise, certificate, or other form of
authorization for the operation of a public utility shall be
granted except to citizens or corporations or associations
organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens, nor shall
such franchise, certificate, or authorization be exclusive in
character for a longer period than fifty years (Emphasis
supplied)
87. Certainly, a contract, like the Concession Agreement between
MWSS and the Concessionaires falls within the ambit of other form of
authorization contemplated in Section 11, Article XII.
88. On the above point, the early case of North Negros Sugar Co.
vs Hidalgo, G.R. No. L-42334, October 31, 1936, is likewise worth citing at
length, to wit:
. . . Whether or not a given business, industry, or service is a
public utility does not depend upon legislative definition,
but upon the nature of the business or service rendered . . .
(51 C. J., sec. 3, p. 5.)
The circumstance that the plaintiff is not the holder of a
franchise or certificate of public convenience or that the
state has not as yet assumed control or jurisdiction over the
operation of the road in question by the plaintiff, does not
preclude the idea that the said road is a public utility.
The touchstone of public interest in any business, its practices
and charges, clearly is not the enjoyment of any franchise from
the state. (Munn vs. Illinois [94 U. S., 113; 24 L. ed.,
77, supra.) (Nebbia vs. New York,supra.)
The fact that a corporation may not have been given power
to engage in the business of a public utility is not conclusive
that it is not in fact acting as a public utility and to be
treated as such. (51 C. J., p. 5.)
The question whether or not it is such does not necessarily
depend upon whether it has submitted or refused to submit
24 | P a g e

to the regulatory jurisdiction of the state, nor upon whether

or not the state has as yet assumed control and jurisdiction,
or has failed or refused so to do. (51 C. J., p. 6.)
The fact that a corporation does other business in addition to
rendering a public service does not prevent it from being a
public utility, and subject to regulation as such, as to its public
business. (51 C. J., p. 6.)
Xxx xxx

xxx

When private property is devoted to public use in the

business of a public utility, certain reciprocal rights and
duties are raised by implication of law between the utility
and the public it undertakes to serve, and no contract
between them is necessary to give rise thereto. . . . (51 C. J.,
sec. 12 p. 6.) (Emphasis supplied)
89. In the language of North Negros Sugar Co., the
Concessionaires are obligated by the nature of their business to furnish its
service or commodity to the general public in the service areas, which
they have undertaken to serve, without arbitrary discrimination, and it must,
to the extent of its capacity, serve all who apply, on equal terms and without
distinction, so far as they are in the same class and similarly situated.
90. The mere possession of a legislative franchise is certainly not
the controlling, much more determinative, factor in determining whether or
not an entity is a public utility. To adhere to the mistaken view that a
legislative franchise is necessary is to make an entity operating a public
utility without a franchise thereby more privileged, compared to one with a
franchise or any form of authorization for that matter, in the sense that the
former, unlike the latter, cannot be made subject of laws governing, and
obligations attached to, public utilities. To do this will certainly open the
floodgate for circumvention of the law.
91. Neither is ownership of assets or physical facilities used in the
operation of a public utility determinative whether or not an entity is a
public utility. In Tatad vs. Garcia,14 the Honorable Supreme Court
emphatically declared that what constitutes a public utility is not their
ownership but their operation their use to serve the public.
92. In view of all the foregoing, there is no sense in arguing that the
Concessionaires are only agents. In determining whether an entity is a
public utility or not, it is not the status of the entity much less the selfserving status which a private party confers upon itself that counts but, as
very well elucidated above, the NATURE OF the business OR SERVICE
RENDERED. The Concession Agreements are not ordinary commercial
14

G.R. 114222, 6 April 1995.

25 | P a g e

contracts but ones heavily imbued with public interest, and the
Concessionaires perform public utility functions. Also, water cannot be
considered a mere private commercial good, but a natural resource that must
be made available to every Filipino as a basic human right.
93. Thus, to limit and construe the Concession Agreements in terms
of commercial interests would be a big disservice to water consumers at
best, and a nullity at worst. To treat Concessionaires (a holder of another
form of authorization, i.e., concession) differently, if not better, than those
with franchise or certificate of convenience, is to seriously misread the
Constitution and emasculate the laws governing public utilities.
94. The nature of the service of water supply was categorically
explained by the Supreme Court in the case of Initiatives for Dialogue and
Empowerment Through Alternative Legal Service, Inc. (IDEALS), et al vs.
Power Sector Assets and Liabilities Management Corporation (PSALM), et
al, G.R. No. 192088, 09 October 2012, that (t)here can be no doubt that the
matter of ensuring adequate water supply for domestic use is one of
paramount importance to the public.
95. Verily, the fact that the Concessionaires had been referred to as
agent and contractor under their respective Concession Agreement is
immaterial. The parties, by stipulating in a contract, cannot vest and
determine for themselves that an entity is of some other status, such as being
a mere contractor and/or agent, when the law itself provides for its nature
and status. As in this case, law and jurisprudence prescribes the test and the
definition for a public utility against which the concessionaires will be
measured.
96. Even if Concessionaires are considered as mere agents of the
MWSS, they are still bound by the nature of their principal as a public utility
and cannot therefore escape regulation and other provisions governing
public utilities.
97. It is undisputed that MWSS is a public utility, being a business
or service which is engaged in regularly supplying the public with some
commodity or service which is of public consequence and need, such as
electricity, gas, water, transportation, or telephone or telegraph service. 15
The powers, attributes and functions of MWSS defined under R.A. No.
623416 confirm this.
98. By virtue of the Concession Agreements, MWSSs functions as
a public utility were transferred to the Concessionaires and as a result, the
Concessionaires effectively became and are now the public utility, since:
(a) they regularly supply water and provide sewerage services to the public;
15
16

Blacks Dictionary, p. 1123. See also Commonwealth Act 146, Section 13(b).
RA6234, Section 3.
26 | P a g e

(b) they collect fees for such services; and (c) they are the recipients of
income for and are deriving profit from such operations.
99. By undertaking to operate and control water facilities which
serve the community at large, under the terms and conditions set forth in
their respective Concession Agreements, consistent with their respective
avowed primary purpose, the Concessionaires hold themselves out to the
general public and render indiscriminate service to residents in their
respective Service Zones. Without an iota of doubt, the Concessionaires here
squarely fall under a public utilitys definition.
ARTICLE 12 (ARBITRATION
CLAUSE)
OF
THE
CONCESSION AGREEMENTS
IS UNCONSTITUTIONAL AND
ILLEGAL
100. Petitioners posit that the Arbitration Clause (Article 12)
contained in the Concession Agreements constitute an unconstitutional
conferment or delegation to a private entity of strictly government functions,
and at the same time an unconstitutional denial of the rights of the water
consumers safeguarded by the due process clause.
101. By virtue of Republic Act No. 6234, the MWSS was given
several important powers with respect to the governance of the waterworks
system. Under Section 2 of the said law, the MWSS:
shall own and/or have jurisdiction, supervision and control
over all waterworks and sewerage system in the territory
comprising the cities of Manila, Pasay, Quezon, Cavite and
Caloocan, and the municipalities of Antipolo, Cainta, Las Pias,
Makati, Malabon, Mandaluyong, Marikina, Montalban,
Navotas, Paraaque, Pasig, Pateros, San Juan, San Mateo,
Taguig, Taytay, all of Rizal Province, the municipalities of
Bacoor, Imus Kawit, Noveleta, Rosario, all of Cavite province
and Valenzuela, Bulacan. All other waterworks and sewerage
systems now under the supervision and control of National
Waterworks and Sewerage Authority (NWSA), shall remain
with the System unless the provinces, cities and municipalities
concerned shall elect to separate from the System, in which
case, they shall communicate their decision to the System and
the separation shall take effect upon agreement of the System
and the local government not later than thirty (30) days from
the time the System receives the notice of the decision.
102. In addition, the law has given MWSS the following attributes,
powers and functions:
27 | P a g e

Section 3. Attributes, Powers and Functions. The System shall

have the following attributes, powers and functions:
Xxx xxx

xxx

(h) To fix periodically water rates and sewerage service fees

as the System may deem just and equitable in accordance
with the standards outlined in Section 12 of this Act;
Xxx xxx xxx
(n) To approve, regulate, and supervise the establishment,
operation and maintenance of waterworks and deepwells
within its jurisdiction operated for commercial, industrial
and governmental purposes and to fix just and equitable
rates or fees that may be charged to customers thereof;
(o) To assist in the establishment, operation and maintenance of
waterworks and sewerage systems within its jurisdiction under
cooperative basis;
(p) To approve and regulate the establishment and
construction of waterworks and sewerage systems in
privately owned subdivisions within its jurisdiction;
(q) To have exclusive and sole right to test, mount, dismount
and remount water meters within its jurisdiction;
(r) To render annual reports to the President of the Philippines
and the Presiding Officers of the two Houses of Congress not
later than January thirty-first of every year. (Emphases
supplied)
*

Section 12. Review of Rates by the Public Service

Commission. The rates and fees fixed by the Board of Trustees
for the System and by the local governments for the local
systems shall be of such magnitude that the Systems rate of net
return shall not exceed twelve per centum (12%), on a rate base
composed of the sum of its assets in operation as revalued from
time to time plus two months operating capital. Such rates and
fees shall be effective and enforceable fifteen (15) days after
publication in a newspaper of general circulation within the
territory defined in Section 2 (c) of this Act. The Public Service
Commission shall have exclusive original jurisdiction over all
cases contesting said rates or fees. Any complaint against such
28 | P a g e

rates or fees shall be filed with the Public Service Commission

within thirty (30) days after the effectivity of such rates, but the
filing of such complaint or action shall not stay the effectivity
of said rates or fees. The Public Service Commission shall
verify the rate base, and the rate of return computed therefrom,
in accordance with the standards above outlined. The Public
Service Commission shall finish, within sixty (60) calendar
days, any and all proceedings necessary and/or incidental to the
case, and shall render its findings or decisions thereon within
thirty (30) calendar days after said case is submitted for
decision.
In cases where the decision is against the fixed rates or fees,
excess payments shall be reimbursed and/or credited to future
payments, in the discretion of the Commission.
103. The foregoing enumeration of powers clearly shows that
Congress has vested upon the MWSS the duty to regulate the waterworks
and sewerage system in Metro Manila and other areas. In fact, it is the
declared state policy to control the establishment, operation and
maintenance of the system, thus:
Section 1. Declaration of Policy. The proper operation and
maintenance of waterworks system to insure an uninterrupted
and adequate supply and distribution of potable water for
domestic and other purposes and the proper operation and
maintenance of sewerage systems are essential public services
because they are vital to public health and safety. It is therefore
declared a policy of the state that the establishment,
operation and maintenance of such systems must be
supervised and controlled by the state. (Emphasis supplied)
104. It is through the MWSS, a public entity which exercises
delegated legislative powers, that the state retains control over a very
important and vital public service, all for the benefit of the public. In fact,
even the Concession Agreement recognizes this regulatory function through
an office called the MWSS Regulatory Office.
105. However, the Arbitration Clause contained in the assailed
Concession Agreements unconstitutionally and illegally stripped the MWSS
of the above enumerated regulatory powers with respect the concessionaires.
Article 12 of the Concession Agreements provides:
Article 12. DISPUTE RESOLUTION
12.1 Consultation

29 | P a g e

The parties hereto agree to use reasonable efforts to resolve any

disagreements or disputes concerning the interpretation or
implementation of this Concession Agreement through mutual
consultation and negotiation.
12.2 Arbitration
All disagreements, disputes, controversies or claims arising out
of or relating to this Agreement or the interpretation hereof or
any arrangements relating hereto or contemplated herein or the
breach, termination or invalidity hereof (including all decisions
by the Regulatory Office with respect to the Concession) which
cannot be resolved through consultation and negotiation among
the parties hereto shall be finally settled by an arbitration panel
consisting of three members (the Appeals Panel) appointed
and conducting proceedings in accordance with the arbitration
rules of the United Nations Commission on International Trade
Law as in effect on the date of this Agreement (the Rules),
except insofar as the Rules conflict with the provisions of this
Agreement.
12.3 Composition of Appeals Panel
Xxx xxx

xxx

12.4 Procedures
The Appeals Panel shall decide Disputes in accordance with the
following procedures:
(i) Disputes may be referred to the Appeals Panel by any party
hereto by providing written notice to the Appeals
Chairman of the Appeals Panel and other parties hereto
(each a Dispute Notice) setting out in a reasonable detail
the circumstances of such dispute.
(ii) Disputes related to (A) a Rebasing Dispute (described
below), (B) an appeal of the determination of a GEA or
Extraordinary Price Adjustment pursuant to Section 9.3.3,
(C) an appeal of the calculation of the Termination Amount
pursuant to Section 10.3.3, (D) the amount and price of
Bulk Water transported from Service Area West to Service
Area East, (E) the delegation of responsibilities between
the Concessionaire and the Other Operator in the Joint
Venture or (F) a contested notice of termination pursuant to
Section 10.3.1 (each a Major Dispute) shall be referred
to an Appeals Panel constituted under the chairmanship of
a Appeals Chairman appointed by the President of the
30 | P a g e

International Chamber of Commerce. All Disputes other

than Major Disputes (each a Minor Dispute) shall be
referred to the Appeals Panel as provided in Section 12.3
above.
(iii) Dispute Notices referred by the Concessionaire relating to
Rate Rebasing Adjustments (each a Rebasing Dispute)
shall include a detailed description of the Concessionaires
alternative proposal for a Rate Rebasing Adjustment for
the next Rate Rebasing Period, together with information
as to how such Adjustment was calculated. The Regulatory
Office shall have 15 days after receipt of notice of a
Rebasing Dispute in which to submit to the Appeals Panel
the Rate Rebasing Adjustment for the next Rate Rebasing
Period determined by the Regulatory Office in accordance
with Section 9.4.2 above, together with information as to
how such Adjustment was calculated. After making such
investigation and conducting such hearings into the matter
as the Appeals Panel deems appropriate, the Appeals Panel
shall, by not later than September 30 of the year in which a
Rebasing Dispute is referred to it, accept either the Rate
Rebasing Adjustment as determined by the Regulatory
Office or the alternative Rate Rebasing Adjustment
proposed by the Concessionaire.
(iv) Dispute Notices may be referred by the Concessionaire or
the Other Operator in connection with matters arising
under the Interconnection Agreement or the supply of Raw
Water pursuant to Section 3.9 (each a Raw Water
Dispute). The Raw Water Agreement shall contain a
dispute resolution provision submitting all disputes under
that Agreement to the Appeals Panel in a manner
consistent with this Article 12.
(v) All disagreements, disputes, controversies or claims
referred to the Appeals Panel, other than those involving a
Rebasing Dispute, shall be decided in such manner as the
Appeals Panel determines in its sole discretion to be
appropriate.
(vi) Except as otherwise set forth herein, the Appeals Panel
shall make a decision on any matter referred to it within a
period of 90 days from receipt of a Dispute Notice. Such
decision period may be extended by mutual agreement of
the parties to the dispute. Each decision must have the
written concurrence of at least two of the three members of
the Appeals Panel.
31 | P a g e

(vii) The Appeals Panel may stay any termination of the

Concession as notified pursuant to Section 10.2.2 pending
its determination of the validity of such termination.
(viii) The Appeals Panel may retain the services of legal,
economic and technical consultants as the Panel deems
appropriate.
(ix) The Appeals Panel proceedings shall be held in English,
and the place for the proceedings shall be Manila.
(x) The Appeals Panel may from time to time adopt procedural
rules or guidelines consistent with the terms of this
Concession Agreement, and such rules or guidelines shall
be binding on the parties thereto.
Article 12.5 Waiver of Right to Appeal
Any decision or award of the Appeals Panel shall be final and
binding upon the parties thereto. To the maximum extent
permitted by applicable law, each party hereby waives any right
to seek any interlocutory or other relief from any judicial or
regulatory body, or to appeal or seek the review of an Appeals
Panel award by any court, regulatory body or other tribunal.
Each of the parties hereto agrees that an award of the Appeals
Panel may be enforced against it or its assets wherever they
may be found and that judgment upon such award may be
entered in any court having jurisdiction thereof. Each such
party hereby waives and agrees not to plead any immunity
(whether on the basis of sovereignty or otherwise) to which
such party or its assets might otherwise be entitled in
connection with any such enforcement proceeding.
12.6 Costs of the Panel
(i) The out-of-pocket incurred by the Appeals Panel in
connection with any proceeding brought before it relating
solely to the Concession (including the fees and expenses
of panel members and legal, economic or technical
consultants retained by the Appeals Panel), shall be
apportioned between the parties as the Appeals Panel
shall direct and the Concessionaires share of such costs
shall be treated as an Expenditure. (underscoring
supplied) One half of the estimated costs of each
proceeding (as determined by the Appeals Panel) shall be
due prior to the commencement of such proceeding. The
Appeals Panel shall invoice the appropriate party or parties
for the balance of such costs within 30 days of delivering
32 | P a g e

its decision in respect of each proceeding and such balance

shall be payable within 10 days after receipt of the invoice.
(ii) The Appeals Chairman shall be entitled to a per diem
compensation at such rate as the President of the
International Chamber of Commerce may recommend. The
other members of the Appeals Panel shall each be entitled
to a per diem compensation equal to 2,500 Pesos per day
(or portion of a day) while in session. This per diem rate
shall automatically be adjusted on January 1st of each year
by the percentage change in the Consumer Price Index for
the preceding year.
(iii) In any proceeding in which the Concessionaire, the Other
Operator or MWSS are parties, the Appeals Panel shall
assess costs ratably to the parties to such proceeding.
(iv) In the event the Concessionaire does not make timely
payment of any charges payable by it pursuant to this
Section 12.6, the US dollar equivalent of such unpaid
amount may be drawn under the Performance Bond in
accordance with Section 6.9 above.
(v) The Appeals Panel shall be entitled to use the secretarial
and administrative support services of the Regulatory
Office free of charge.
106. As illustrated in the statement of Facts above, the MWSS has in
2013, following the Meralco decision, decided to exclude Corporate Income
Tax streams in the Cash Flows of the Concessionaires, denied the
Concessionaires petition for upward adjustment, and ordered a negative
adjustment in both cases.
107. These separate decisions are obviously an exercise of
regulatory function by MWSS.
108. However, by virtue of the Arbitration Clause, the private
respondents brought the issue to arbitration. The separate decisions of the
MWSS were then subjected to a review by an Appeals Panel, which was
composed of private individuals. The Appeals Panel thus have the power of
judicial review to review, revise, reverse, modify or affirm the MWSS
decisions in exercise of its regulatory functions. This review is made not by
any court of law or state entity, but by a mere private entity without public
accountability.
109. In fact, this private arbitration panel is so powerful that it has
the power to remove a member or all the members of the Regulatory Office,
33 | P a g e

who are public officers, as provided under Sec. 2 Organization and

Operation of the Regulatory Office, page A-1, Exhibit A of the Concession
Agreement.
110. The privatization of public service as a state policy has been
questioned and opposed by Petitioners in other instances and elsewhere.
There are certain important governmental functions and services that cannot
be privatized because they endanger the publics rights, welfare and security.
111. The Constitution conferred legislative powers to the Congress,
judicial power to the judiciary, and the people are guaranteed their due
process rights. However, the present regulatory framework under the
assailed arbitration clause poses a grave threat, not only to the welfare and
rights of the public, but also to the very principles of a democratic and
republican state.
112. The Appeals Panel is a private entity created by contract; its
members are neither elected by the people, nor appointed by the
government, nor employed therein. The Appeals Panel and its members have
no public accountability. It should therefore not be given any authority to
replace the exercise of discretion and wisdom of the MWSS in its regulatory
function.
113. The presence of the arbitration clause removes any meaningful
exercise of governmental oversight; it renders the principle of separation of
powers ineffective and inutile. It prevents the judiciary from exercising its
power of judicial review.
114. In short, the arbitration provision excludes the very people who
will be affected by the issue in arbitration, and trumps the decision of the
regulator. Worse, the people will be made to pay for the cost of the very
proceeding from which they are excluded!
115. The arbitration clause in the Concession Agreements is a
derogation, an affront in broad daylight, of the Courts power and duty of
judicial review. Said provision is illegal and unconstitutional as it
essentially gives a privately-organized arbitration panel or tribunal the power
to supplant and reverse a Supreme Court decision (that is, Republic vs.
Meralco) as the Appeals Panel actually did in the Maynilad arbitration.
116. Indeed, the Supreme Court is the highest court of the land and
no court, much less a privately-organized body or individuals, can reverse its
decision. But the Appeal Panel did and this violates the very fundamental,
paramount and supreme law granting judicial power to the Supreme Court.
Section 1, Article VIII of the 1987 Philippine Constitution is explicit: The
judicial power shall be vested in one Supreme Court and in such lower
courts as may be established by law.
34 | P a g e

117. Additionally, Article 12.2, by allowing arbitration, practically

amended the law vesting to MWSS and its Regulatory Office the power to
regulate the Concessionaires. Clearly, said provision now allows an
Arbitration Panel to reverse the decision of a duly empowered regulator to
fulfill its function under the law. It supplanted the law by granting another
entity the power to regulate rate increase as it did in fact granted the
arbitration panel the control over the decisions of the MWSS, as if it has the
power to regulate the regulator.
118. Worse, after an unreasonable and/or unlawful rate hike is
imposed through the arbitration proceedings, the consuming public seem to
be left with no further recourse as the Concession Agreement itself, under
Article 12.5, waives the regulators right to appeal the decision or award,
viz:
12.5. Waiver of Right to Appeal
Any decision or award of the Appeals Panel shall be final and
binding upon the parties hereto. To the maximum extent
permitted by applicable law, each party hereby waives any
right to seek any interlocutory or other relief from any
judicial or regulatory body, or to appeal or seek the review
of an Appeals Panel award by any court, regulatory body or
other tribunal. Xxx (Emphasis supplied)
119. The Constitution further ensures the due process rights of the
citizens, that no person shall be deprived of property without due process of
law. (Article III, Sec. 1) The Arbitration Clause removes this constitutionally
guaranteed right of the public.
120. The consumers, while non-party to the Concession Agreements,
are nevertheless, and ultimately, the party who will be benefited or injured
by any decision with respect to the waterworks and sewerage system.
However, the arbitration mechanism assailed herein prevents the consumers
from participating in the process, especially with respect to water rate hikes;
it deprives them of the opportunity to be heard. This is a clear interference of
both the substantive and procedural due process rights of the people.
121. This situation must not be countenanced.
PUBLIC UTILITY REGULATION
IS A STATE POLICY WHICH
CANNOT BE SUBJECT TO
ARBITRATION

35 | P a g e

122. The operation and maintenance of the water and sewerage

system, and the regulation thereof, are undeniably undertakings imbued with
public interest. As previously argued, Concessionaires are public utilities.
123. That the State, through its authorized agencies, has the
inherent power and duty to regulate the conduct and business of public
utilities is a settled rule.
124. In Republic v. MERALCO, G.R. No. 141314, April 9, 2003, the
Court declared:
The business and operations of a public utility are imbued
with public interest. In a very real sense, a public utility is
engaged in public service providing basic commodities
and services indispensable to the interest of the general
public. For this reason, a public utility submits to the
regulation of government authorities and surrenders certain
business prerogatives... It is the imperative duty of the State
to interpose its protective power whenever too much profits
become the priority of public utilities. (Emphasis and
underling supplied)
125. In Philippine Communications Satellite Corporation v. Alcuaz,
G.R. No.84818, December 18, 1989, the Court declared that regulation of
the rates charged by public utilities is an inherent power and authority of the
State or its authorized agent.
The power to regulate is not the power to destroy useful and
harmless enterprises, but is the power to protect, foster,
promote, preserve, and control with due regard for the
interest, first and foremost, of the public, then of the utility
and of its patrons
Hence, the inherent power and authority of the State, or its
authorized agent, to regulate the rates charged by public
utilities should be subject always to the requirement that the
rates so fixed shall be reasonable and just. A commission has
no power to fix rates which are unreasonable or to regulate
them arbitrarily. This basic requirement of reasonableness
comprehends such rates which must not be so low as to be
confiscatory, or too high as to be oppressive. (Emphasis
supplied)
126. Arbitration, as an alternative mode of dispute resolution, is
recognized in this jurisdiction as designed to level the playing field among
the parties in pursuit of a mutually acceptable solution to their conflicting
claims.17
17

Magellan Capital Management Corporation vs. Zosa, 355 SCRA 157(2001)

36 | P a g e

127. But a regulator, such as the MWSS, is inherently placed, by

law and public policy, above the public utilities it is supposed and dutybound to regulate. MWSS therefore stands on a ground higher than the water
Concessionaires it is duty-bound to regulate. MWSS decisions on rate
increases are in the exercise of its regulatory function and cannot be subject
to arbitration.
128. Blacks Law Dictionary defines the term regulation as (t)he
act or process of controlling by rule or restriction. To regulate is to control
or direct according to a rule, to adjust in conformity to a specification or
requirement, or to adjust for accurate and proper functioning. In Samson
vs. City Mayor of Bacolod, G.R. No. L-28745, October 23, 1974, the
Honorable Court stressed that the term means and includes the power to
control, to govern and to restrain.
129. That arbitration on a pure question of law, such as whether or
not an income tax must be passed on to the public, is anathema to the State
policy of public utility regulation is fairly easy to see. Thus, allencompassing arbitration agreements (including pure questions of law) and
any arbitration award resulting from arbitration proceedings involving public
interest and public utilities should be struck down as void for being contrary
to public policy.
130. Under the Special Rules of Court on Alternative Dispute
Resolution (A.M. No. 07-11-08-SC) promulgated by the Honorable Supreme
Court on 1 September 2009, a petition questioning the existence, validity
and enforceability of an arbitration agreement may be granted only if it is
shown that the arbitration agreement is, under the applicable law, invalid,
void, unenforceable or inexistent (Rule 3.2 and Rule 3.5).
131. For International Commercial Arbitration (ICA) awards, in
particular, the UNCITRAL Model Law on International Commercial
Arbitration provides that such an award may be refused recognition or
enforcement on a public policy ground, to wit:
Article 36. Grounds for refusing recognition or enforcement.
(1) Recognition or enforcement of an arbitral award,
irrespective of the country in which it was made, may be
refused only:
(a) Xxx
(b) If the court finds that:
(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law of this
State; or

37 | P a g e

(ii) the recognition or enforcement of the award would

be contrary to the public policy of this State.
(Emphasis supplied)
132. Such rule has, in turn, been adopted by the Honorable Supreme
Court in the Special ADR Rules, to wit:
Rule 12.4. Grounds to set aside or resist enforcement of an
ICA Award.
The court may set aside or refuse the enforcement of the arbitral
award only if:
(a) Xxx
(b) The court finds that:
(1) the subject-matter of the dispute is not capable of
settlement by arbitration under the law of the
Philippines; or
(2) the recognition or enforcement of the award would be
contrary to public policy. (Emphasis supplied)
133. In Korea Technologies Co., Ltd. vs. Lerma, 542 SCRA 1(2008),
the Court dismissed as without merit a partys invocation to have an
arbitration clause, which provided for a final determination of the legal
rights of the parties to the contract by arbitration, be declared as against
public policy, holding that the arbitration clause has not been shown to be
contrary to any law, or against morals, good customs, public order, or
public policy.
134. As could be inferred from such pronouncement, a serious
question on arbitrability that the subject matter in dispute is capable of
settlement by arbitration therefore arises when the very issue raised by the
parties for arbitration involves a pure question of law which deals also on a
matter of public policy, such as State policy of public utility regulation.
135. Evincing the utter absurdity of the situation, the separate
arbitration proceedings undertaken by Respondents resulted to the existence
of having two conflicting arbitration awards pursuant to legally-infirm
arbitration agreements which resulted in two contradictory regulatory
regimes in the lone MWSS franchise area. This absurdity of differences in
decision could have been prevented if only the hierarchy of courts is
followed. As there can only be one decision to be decreed by the Supreme
Court, the absurdity of having different rates for separate but similarly
situated franchise areas and consumers will most definitely be avoided.
136. Moreover, it is an undeniable fact that the water consuming
public was never a party to these Concession Agreements including the
accompanying arbitration clauses. Not being parties to the arbitration
agreement, the people are excluded and barred from participating in a
38 | P a g e

process that in the end ultimately impact on them an utterly unjust

situation to which the Court cannot close its eyes to.
137. As Jonnette Watson Hamilton in Pre- Dispute Consumer
Arbitration Clauses: Denying Access to Justice? (2006), 51 McGill L.J.
693, at p. 734, explained:
Deference to arbitration is largely based on freedom of contract
and the value of personal autonomy. How can such values come
into play in contracts of adhesion where that autonomy is only
exercised by one of the parties? There is no reason to defer to
businesses that seek to advance only their own self-interests
and evade laws not to their liking. (emphasis added)
138. Additionally, and to strengthen Petitioners arguments, the
Concessionaires are a monopoly and the Constitution requires the regulation
of monopolies. As regards the States policy on monopolies, Section 19,
Article XII of the 1987 Constitution provides:
Sec. 19. The state shall regulate or prohibit monopolies when
the public interest so requires. No combinations in restraint of
trade or unfair competition shall be allowed.
139. Clearly, while a monopoly is not prohibited per se, the State
requires that it be strictly regulated to protect the interest of the public.
140. That Respondents Maynilad and Manila Water, herein
Concessionaires, are monopolies in their respective service zones can
hardly be disputed.
141. Blacks Law dictionary18 defines a monopoly as a privilege or
peculiar advantage vested in one or more persons or companies, consisting
in the exclusive right or power to carry on a particular business or trade,
manufacture a particular article, or control the sale or the whole supply of a
particular commodity. It is a form of market structure in which one or only a
few firms dominate the total sales of a product or service.
142. Interpreting Section 19, Article XII, the Honorable Supreme
Court, in the case of Agan, Jr. vs. PIATCO,19 outlined the very evils which the
above-quoted provision seek to prevent, hence, the need for regulation. The
Honorable Court, cognizant of a monopolys great and inherent
susceptibility to abuse, likewise explained and emphasized the States
bounden duty, especially when public interest is at stake, to regulate
monopolies such as herein Concessionaires. Thus:

18
19

6th edition, p.1007.

G.R. No. 155001, May 5, 2003.
39 | P a g e

The 1987 Constitution strictly regulates monopolies,

whether private or public, and even provides for their
prohibition if public interest so requires. Article XII, Section 19
of the 1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies
when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the
Constitution but may be permitted to exist to aid the
government in carrying on an enterprise or to aid in the
performance of various services and functions in the interest of
the public... As monopolies are subject to abuses that can
inflict severe prejudice to the public, they are subject to a
higher level of State regulation than an ordinary business
undertaking.
Xxx xxx

xxx

The operation of an international passenger airport terminal is

no doubt an undertaking imbued with public interest. In
entering into a Build-Operate-and-Transfer contract for the
construction, operation and maintenance of NAIA IPT III, the
government has determined that public interest would be served
better if private sector resources were used in its construction
and an exclusive right to operate be granted to the private entity
undertaking the said project, in this case PIATCO. Nonetheless,
the privilege given to PIATCO is subject to reasonable
regulation and supervision by the Government through the
MIAA, which is the government agency authorized to operate
the NAIA complex, as well as DOTC, the department to which
MIAA is attached.
This is in accord with the Constitutional mandate that a
monopoly which is not prohibited must be regulated. While it
is the declared policy of the BOT Law to encourage private
sector participation by providing a climate of minimum
government regulations, the same does not mean that
Government must completely surrender its sovereign power
to protect public interest in the operation of a public utility
as a monopoly. The operation of said public utility can not
be done in an arbitrary manner to the detriment of the
public which it seeks to serve. The right granted to the
public utility may be exclusive but the exercise of the right
cannot run riot. (emphasis supplied)

40 | P a g e

143. That herein Concessionaires are monopolies in their respective

service zones can hardly be disputed. The Concession Agreements granted
Concessionaires the EXCLUSIVE right to operate and provide water
and sewerage services in their respective service zones the East Service
Area to Manila Water and the West Service Area to Maynilad, thus:
Article 2.1 Grant of Concession
On the terms and subject to the conditions set forth herein,
MWSS hereby grants to the Concessionaire, as contractor to
perform certain functions and as agent for the exercise of rights
and powers under the Charter, the sole right to manage,
operate, repair, decommission and refurbish the Facilities in
the Service Area, including the right to bill and collect water
and sewerage services supplied in the Service Area (the
Concession). The Concessionaire shall perform its functions
and exercise its rights under this Agreement directly or, in
respect of functions and rights delegated to the Joint Venture.
The rights and benefits of the Concessionaire under this
Agreement shall be deemed to apply with equal force to the
Joint Venture to the extent that the Joint Venture is performing
functions delegated to it under this Agreement.
xxx xxx xxx
5.3 Exclusivity
Subject to (i) and (ii) below, the Concessionaire shall have the
exclusive right to provide water and sewerage services in the
Service Area: xxx
144. This being the case, the Concessionaires are, therefore, clearly
subject to a higher level of State regulation in accordance with the Agan,
Jr. vs. PIATCO standards.
145. It is the States bounden duty to REGULATE monopolies such
as Concessionaires. Arbitration is a FORM OF PRIVATE JUSTICE which
negates the concept of PUBLIC regulation. Such a situation cannot and
should not be countenanced.
146. The interest and welfare of the water consumers who now
number in tens of millions cannot be left to the mercy of a PRIVATELYorganized Appeals Panel and to the whims, mistakes or prejudices of
PRIVATE individuals who do not have public accountability. Verily, only
through strict State and PUBLIC regulation can the interest of the
water consuming public be truly protected from the evils and greed for
profit of a monopolistic private water and sewerage system provider.
41 | P a g e

147. The fact that water is now considered a right only bolsters
Petitioners assertion that water public utilities and their agents, if any, must
be regulated. Arbitration is antithetical not only to the avowed state
regulation of water resources but more importantly to the nature and
consequences thereto as a human right, a public good and a natural resource.
148. Arbitration is low-profile, private and confidential and as such
will almost certainly inhibit rather than promote wide publicity and thus
deterrence of deceptive and/or unconscionable commercial conduct.20 The
nature of arbitration being a mode of private justice is, as already explained
above, ANTITHETICAL to the normative character and consequences of
State regulation.
149. More importantly, however, arbitration negates the character
and consequences of water and access to it as a human right, a public good
and a natural resource.
150. International treaties and declarations, international human
rights declarations and resolutions, international environmental and labor
law treaties, international humanitarian law treaties, international criminal
law treaties, findings of United Nations treaty monitoring bodies, regional
human rights treaties, regional declarations and resolutions, regional
environmental law treaties21 recognize explicitly and implicitly the human
right to water and sanitation. This distinct form of human right derives from
the right to an adequate standard of living and is inextricably related to the
right to the highest attainable standard of physical and mental health, as well
as the right to life and human dignity. This human right includes the human
right to:
a. access to the water resource itself, that is, its availability and
allocation,
b. public participation and transparency,
c. access to information,
d. accountability,
e. affordability of water and sanitation, and
f. water quality and hygiene
151. The more reason therefore that the issue at hand be subject to
strict regulation by regulatory bodies instead of private arbitration
proceedings.
152. To stress and sum up thus far, private arbitration and public
regulation are a contradiction in terms and practice for these reasons: (1)
20

See eg Seidel v TELUS Communications Inc., [2011] 1 SCR 531, 2011 SCC
15 (Supreme Court of Canada).
21
For a comprehensive summary of the relevant international instruments,
see Wash United et al., The Human Right to Safe Drinking Water and Sanitation in
Law and Policy A Sourcebook (2012).
42 | P a g e

State protection of the consuming public; (2) protection and preservation of

the jurisdiction of State regulatory agencies as well as courts of law and
equity on judicial review; (3) concept and practice of arbitration as a
medium of private justice that excludes the public, a private remedy, in
contrast with the public interest remedy that State regulation affords.
153. Clearly, by the rule of laws expression of and statement on the
only and exclusive means to fix rates or otherwise govern the affairs of
public utilities, which is by State regulation, no one can prescribe a different
means of doing so, most especially the private parties, herein respondents,
cannot specify a private remedy such as arbitration for the rate fixing and
other concerns of a monopolistic private utility.
THE SOVEREIGN GUARANTEE
EMBODIED IN THE REPUBLICS
LETTERS OF UNDERTAKING IS
UNCONSTITUTIONAL
AND
ILLEGAL
154. In the same vein, the Sovereign Guarantee embodied in the
Letters of Undertaking executed by the Republic through the Secretary of
Finance in relation to the Concession Agreements is likewise
unconstitutional and illegal because it violates the peoples constitutionally
assured due process rights and essentially thwarts the powers of the Supreme
Court and the MWSS to regulate public utilities. It gives away in one hand,
what the Supreme Court and MWSS said cannot be given by the other hand.
155. Through the sovereign guarantee, even if the MWSS or the
Appeals Panel (or even the Honorable Supreme Court in a proper case) finds
a rate increase unjust, and therefore prohibits its imposition on the public,
said MWSS or Appeals Panels decision may be thwarted and practically
voided. This is best exemplified by Manila Waters filing of Notice of Claim
before the Department of Finance on 23 April 2015, calling on the
Republics Letter of Undertaking as soon as it received the arbitral award
disapproving its proposed rate increase.
156. Clearly, even despite a Supreme Court decision prohibiting the
imposition of an unjust rate increase, the sovereign guarantee imposes the
same on the public since public funds will be paid to the Concessionaires
even if they have lost the case.
157. Worse, while a rate imposition will be paid by Metro Manila
consumers, a sovereign guarantee will be paid by the public at large
including those in Visayas and Mindanao who are not even privy to the
Concession Agreement. These innocent public suddenly pays the sovereign
guarantee, in a case which it never was involved in, for services which it
never even had, from an agreement which it never was a party.
43 | P a g e

158. Ultimately, it is as if there is no regulation at all since any rate

increase, even if found unjust, will be imposed anyway. Even if the water
consuming public opposes a proposed increase before the MWSS or files a
case before the Supreme Court and wins, the sovereign guarantee thwarts
this victory by simply imposing it indirectly. IN THE END, THE HAPLESS
PUBLIC STILL PAYS.
159. So while the people is given the token opportunity to oppose a
rate increase and procedurally exercise its due process rights, the sovereign
guarantee essentially takes away whatever victory gained by the people in
the exercise of their right to oppose, by rewarding the losing party to the
injury and loss of the winning party. That, in any language is not due
process.
160. The exercise of regulatory function, as in this case, cannot be
the subject of sovereign guarantee.
161. In sum, the sovereign guarantee violates the Constitution for
practically reversing a Supreme Court decision and for usurping the
regulatory power of the MWSS and voiding its decision.
162. Worse, the sovereign guarantee violates the publics right to due
process, the publics right to redress of grievances, and to oppose unjust
impositions and rate increases. It is a guarantee set up against the peoples
funds for which they have not been consulted either in its constitution or
creation and in its enforcement. The sovereign guarantee therefore in
theory and practice is an imposition and a deprivation against the
people without their consent. The violation is an affront not only against
the Constitution but also the civil laws which require a special agency in
order to bind a third party to a contractual undertaking.
163. Alternatively, the calling against the Undertaking Letter is not
applicable in this instance because the acts of the Republic are still
consistent with the Agreement. The Undertaking Letter is only applicable in
the instance that the government cause MWSS or the Regulatory Office to
reduce Standard Rates below the level that would otherwise be applicable in
accordance with the Agreement, or to defer implementation of any increase
in Standard Rates beyond the date for implementation thereof in accordance
with the Agreement. Hence, the requirement for the triggering of this
undertaking is inexistent.
164. The grant of sovereign guarantee by Pres. Aquino, or the
imposition of the Maynilad arbitral award is made more unjustly absurd
where the grant or imposition is based on an arbitral decision without basis
in fact and law. More so, if the award goes against or essentially reverses
the decision of the Supreme Court in Meralco that income tax is not a
recoverable expenditure that may be passed on to the public.
44 | P a g e

CORPORATE INCOME TAX IS

NOT
A
RECOVERABLE
EXPENDITURE THAT MAY BE
PASSED ON TO THE PUBLIC
165. Even thru a simple reading of the Concession Agreement, the
patent illegality of passing the Concessionaires corporate income tax to the
innocent consumers can already be established.
166. The Concessionaires identical Concession Agreements provide
that they shall be governed by and construed in accordance with Philippine
law.22 Thus:
16.3 Governing Law
THIS AGREEMENT SHALL BE GOVERNED AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE
REPUBLIC OF THE PHILIPPINES.
167. For purposes of rate fixing, Philippine law provides that income
taxes paid by a public utility or the operators of a public utility who are the
recipients of the income, cannot pass on the same to consumers in the form
of operating expenses. This rule applies with equal force whether the utility
is one with a franchise or one with other form of authority.
168. This rule has been in existence even before ratification of the
1987 Constitution. Under the 1985 State Audit Manual, the Commission on
Audit (COA) mandates all regulatory offices, during a rate audit, to disallow
income taxes paid by public utilities or operators of public utilities, viz.:
Section 32.7. Common Disallowances. The following are the
common disallowances in the rate audit:
.
Income tax, since this is a tax on the net profit of operators
who are the recipient of the income or profits realized by the
utility and therefore should not be passed on to the ratepayers in
the form of operating expenses. (Emphases supplied.)
169. Hence, even before the Supreme Court came out with its ruling
in Republic v. Meralco,23 the COA and the Energy Regulatory Board (ERB)
have consistently applied the above rule. The ruling in Meralco merely
confirms that rule and expounds on the rationale for such prohibition. Thus:

22
23

Section 16.3 of the Concession Agreement.

G.R. 141314, 15 November 2002.
45 | P a g e

In determining whether or not a rate yields a fair return to the

utility, the operating expenses of the utility must be considered.
The return allowed to a public utility in accordance with the
prescribed rate must be sufficient to provide for the payment of
such reasonable operating expenses incurred by the public
utility in the provision of its services to the public. Thus, the
public utility is allowed a return on capital over and above
operating expenses. However, only such expenses and in such
amounts as are reasonable for the efficient operation of the
utility should be allowed for determination of the rates to be
charged by a public utility.
The ERB correctly ruled that income tax should not be
included in the computation of operating expenses of a
public utility. Income tax paid by a public utility is inconsistent
with the nature of operating expenses. In general, operating
expenses are those which are reasonably incurred in
connection with business operations to yield revenue or
income. They are items of expenses which contribute or are
attributable to the production of income or revenue. As
correctly put by the ERB, operating expenses should be a
requisite of or necessary in the operation of a utility,
recurring, and that it redounds to the service or benefit of
customers.
Income tax, it should be stressed, is imposed on an individual or
entity as a form of excise tax or a tax on the privilege of earning
income. In exchange for the protection extended by the State to
the taxpayer, the government collects taxes as a source of
revenue to finance its activities. Clearly, by its nature, income
tax payments of a public utility are not expenses which
contribute to or are incurred in connection with the
production of profit of a public utility. Income tax should be
borne by the taxpayer alone as they are payments made in
exchange for benefits received by the taxpayer from the
State. No benefit is derived by the customers of a public
utility for the taxes paid by such entity and no direct
contribution is made by the payment of income tax to the
operation of a public utility for purposes of generating
revenue or profit. Accordingly, the burden of paying income
tax should be Meralcos alone and should not be shifted to
the consumers by including the same in the computation of
its operating expenses.
The principle behind the inclusion of operating expenses in the
determination of a just and reasonable rate is to allow the public
utility to recoup the reasonable amount of expenses it has
incurred in connection with the services it provides. It does not
46 | P a g e

give the public utility the license to indiscriminately charge any

and all types of expenses incurred without regard to the nature
thereof, i.e., whether or not the expense is attributable to the
production of services by the public utility. To charge
consumers for expenses incurred by a public utility which
are not related to the service or benefit derived by the
customers from the public utility is unjustified and
inequitable. (Emphasis supplied)
170. But even assuming that an agency relationship exists between
MWSS and the Concessionaires, still, the latter cannot recover their
Corporate Income Taxes as operating expenses. The MWSS, as the
principal, could not validly extend to an agent or a contractor a privilege
it does not and never did have.
171. Likewise, even if it were to be declared that the
Concessionaires are not public utilities, relevant provisions of the
Concession Agreements reveal that Corporate Income Taxes (CIT) are not
included among the recoverable expenses for the Concessionaires.
172. The Concessionaires recoverability of expenditures and
earning a rate of return thereon can only be found in Article 9.4 of the
Concession Agreement. Thus:
9.4 General Rate Setting Policy/ Rate Rebasing Determination
The maximum rate chargeable by the Concessionaire for water
and sewage services hereunder applicable to the period through
the second Rate Rebasing Date (subject to interim adjustments
as described in Article 9) are set out in Schedule 5 to this
Agreement. It is the intention of the parties that, from and after
the second Rate Rebasing Date, the rates for water and
sewerage services provided by the Concessionaire shall be set
at a level that will permit the Concessionaire to recover over
the 25-year term of the Concession (net of any grants from third
parties and any possible Expiration Payment) operating,
capital maintenance and investment expenditures efficiently
and prudently incurred, Philippine business taxes and
payments corresponding to debt service on the MWSS
Loans and Concessionaire Loans incurred to finance such
expenditures, and to earn a rate of return (referred to
herein as the Appropriate Discount Rate) on these
expenditures for the remaining term of the Concession in line
with the rates of return being allowed from time to time to
operators of long-term infrastructure concession arrangements
in other countries having a credit standing similar to that of the
Philippines. The parties further agree that the maximum rates
chargeable for such water and sewerage services shall be
47 | P a g e

subject to general adjustment at five-year intervals commencing

on the second Rate Rebasing Date; provided that the Regulatory
Office may exercise its discretion to make a general adjustment
of such rates on the First Rate Rebasing Date, but, if it does not
do so, the Regulatory Office shall implement the assumptions
set out in paragraph 2 of Exhibit E on the fifth anniversary of
the Commencement Date. It is understood that the
determination of the appropriate rate of return will be made
separately at the time of each generalized rate rebasing.
(Emphasis supplied.)
173. Article 9.4 of the Concession Agreement is clear and leaves no
doubt that there are only six enumerated expenditures that Concessionaires
are allowed to recover, namely:
1. Operating expenditures efficiently and prudently incurred
2. Capital maintenance expenditures efficiently and prudently
incurred
3. Investment expenditures efficiently and prudently incurred
4. Philippine business taxes
5. Payment corresponding to debt service on the MWSS Loans
incurred to finance such expenditures, and
6. Payment corresponding to debt service on the
Concessionaire Loans incurred to finance such expenditures.
174. Certainly, corporate income tax is not one of the six
expenditures. Expressio unius est exclusio alterius. The express mention of
one person, thing, or consequence implies the exclusion of all others.
Expressium facit cessare tacitum What is expressed puts an end to what
is implied. Where a contract or statute is expressly limited to certain
matters, it may not, by interpretation or construction, be extended to other
matters.24
175. Had the parties intent been otherwise, they could have so easily
and conveniently included corporate income taxes in identifying the kinds
of expenditures allowed to be recovered. And since Corporate Income Taxes
were not mentioned in the enumeration, their omission must be held to have
been done intentionally. This conclusion finds support in the rule of casus
omissus pro omisso habendus est, which states that a person, object or
thing omitted from an enumeration must be held to have been omitted
intentionally.25
176. Likewise, as would be observed in Section 9.4, the phrase
efficiently and prudently incurred precedes the term Philippine business
taxes and are actually separated by a comma (,), indicating that such phrase
24

Romualdez vs. Marcelo, G.R. Nos. 165510-33, 28 July 2006, citing Centeno
v. Villalon-Pornillos, G.R. 113092, 1 September 1994.
25
Municipality of Nueva Era, Ilocos Norte vs. Municipality of Marcos, Ilocos
Norte, 547 SCRA 71 (2008)
48 | P a g e

efficiently and prudently incurred would refer to and qualify the phrase
operating, capital maintenance and investment expenditures.
177. Therefore, reading Section 9.4 in relation to the very definition
of Cash Flow, Expenditures and Future Cash Flows as laid out in
Section 1 of the Concession Agreements, Philippine business taxes
which the Concessionaires argue to include Corporate income tax could
not have been contemplated under the definition of Future Cash Flows
(Expenditures efficiently and prudently incurred by the Concessionaire in
the course of carrying out its obligations).
178. Section 1 of the Concession Agreement defines Cash Flows,
Expenditure and Future Cash Flows in this wise:
Cash Flows means (i) in the context of historical cash flows,
both Receipts and Expenditures efficiently and prudently
incurred by the Concessionaire in the course of carrying out its
obligations under this Agreement, and (ii) in the context of
future cash flows, (A) both anticipated Receipts and
Expenditures efficiently and prudently incurred by the
Concessionaire in the course of carrying out its obligations
under this Agreement, and (B) from and after the second Rate
Rebasing Date, any Expiration Payment agreed to be paid by
MWSS to the Concessionaire on the Expiration Date pursuant
to Section 9.4.3; it being understood that Expenditures
efficiently and for (X) Disapproved Assets or (Y) fees for
management or consulting services required by the
Concessionaire in order to carry out its obligations under this
Agreement payable to any shareholder or affiliate of the
Concessionaire to the extent, in the judgment of the Regulatory
Office, that such fees do not represent the best value available
in the market for such services.
****
Expenditures means pre-operating and operating expenditures,
capital maintenance and investment expenditures, Concession
Fees and Philippine business taxes of the Concessionaire
(including the Concessionaires portion of any such items
incurred by the Joint Venture), excluding penalties, interest
charges on late payments, financing costs, bad debt provisions
and depreciation provisions.
****
Future Cash Flows means, for any Rate Rebasing Date, Cash
Flows of the Concessionaire expected to arise after such Rate
Rebasing Date in the course of carrying out its obligations
49 | P a g e

under this Concession Agreement as at such Rebasing Date,

excluding any revision to those obligations that has been the
subject of Extraordinary Price Adjustment determination due to
come into effect on such Rebasing Date.
179. Notably, Cash Flows in the context of Future Cash Flows
under Article 1 of the Concession Agreement only refers to Expenditures
efficiently and prudently incurred by the Concessionaire in the course of
carrying out its obligations under th[e] [CA], which can be found in
Article 5 and 6 of the Concession Agreement on service obligations.
180. Needless to say, corporate income tax is not an expense
incurred in carrying out their service obligations under the Concession
Agreement, as it is an expense incurred much later (after carrying out of the
service obligations) and not in direct relation to carrying out their legal
obligations.
181. Further, it is well to note that the Blacks Law Dictionary
defines operating expense similar to the definition as contained in the
Meralco Case, that is the cost of operating a business, such as rent,
wages, utilities, and similar day to day expenses, as well as taxes, insurance,
and a reserve for depreciation. Also, the rate audit procedure indicated in
the 1985 State Audit Manual indicates that Operating Expenses and Income
Tax are ordinarily considered as mutually exclusive and, in fact, opposing
concepts. In fact, under Section 32.7 of the State Audit Manual, all
regulatory offices are mandated by the Commission on Audit, during a rate
audit, to disallow income tax sought to be recovered by the operator of a
public utility by including the same in its operating expenses.
182. The Honorable Supreme Courts words in the Meralco case is
definitive: by its nature, income tax payments of a public utility are not
expenses which contribute to or are incurred in connection with the
production of profit of a public utility and [n]o benefit is derived by the
customers of a public utility for the taxes paid by such entity and no direct
contribution is made by the payment of income tax to the operation of a
public utility for purposes of generating revenue or profit.
183. More importantly, Articles 16.3 of the Concession Agreements
is categorical when it declared that said Concession Agreements shall be
governed by Philippine Law. The term Philippine Business Tax should,
therefore, be interpreted as it is used and understood under Philippine law.
184. Under Philippine law, Philippine business tax and corporate
income tax are two different types of taxes. The former does not include the
latter. Corporate income tax cannot and will never be subsumed under
Philippine business tax.

50 | P a g e

185. Income taxes and business taxes are different by their

nature and subject matter. They are distinct taxes of different nature and are
in fact treated under different Titles of the 1997 National Internal Revenue
Code Tax on Income is defined and treated under Title II while the ValueAdded Tax (VAT), other Percentage Taxes, Excise Taxes and Documentary
Stamp Tax (collectively known as Business Taxes) are defined and treated
under Titles IV, V, VI and VII, respectively. Even in the curriculum
prescribed by the Legal Education Board, these two taxes are taught as
separate subjects Income Taxation is taught in Taxation 1 while Business
Taxation is handled under Taxation 2.
186. In an early case, the Honorable Supreme Court described
Income tax as a tax on yearly profits arising from property, professions,
trades, and offices, or as a tax on a persons income, emoluments, profits and
the like.26
187. Income, in turn, which is the subject matter of the income tax,
has been defined as the amount of money coming to a person or corporation
within a specified time whether as payment for services, interest or profit
from investment . . . . [e]specially, the annual receipts of a private person or
a corporation from property. It is the return in money from ones business,
labor, or capital invested; gains, profit, or private revenue.27
188. On the other hand, Business or Privilege Tax, in its different
forms (i.e. excise tax, percentage tax, local business taxes, etc.), is basically
a tax for engaging in business. It is a tax laid upon the privilege of engaging
in business or pursuing an occupation, calling, or profession. 28 They are
taxes imposed in the exercise of police power for regulatory purposes and
are deemed as prerequisite for the conduct of business.
189. That income tax and business tax are distinct from one another
finds support in Commissioner of Internal Revenue v. Solidbank Corp.
(Solidbank) and Mobil Phil., Inc. v. City Treasurer of Makati (Mobil).
190. In Solidbank29, the Honorable Supreme Court clearly
distinguished gross receipts tax (a percentage tax which is form of business
tax), as a tax for engaging in business, from income tax, which is a tax on
income derived from engaging in business, and emphasized that the two are
entirely distinct:
The 5% [gross receipts tax or] GRT is included under Title V.
Other Percentage Taxes of the Tax Code and is not subject to
withholding. The banks and non-bank financial intermediaries
liable therefor, shall, under Section 125(a)(1), file quarterly
26
27
28
29

Fisher vs. Trinidad, 43 Phil 973, 981.

Id.
De Leon, The Law on Transfer and Business Taxation, 2009, page 146.
Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA at 443-444,

463.
51 | P a g e

returns on the amount of gross receipts and pay the taxes due
thereon within twenty (20) days after the end of each taxable
quarter.
The 20% [final withholding tax or] FWT, on the other hand,
falls under Section 24(e)(1) of Title II. Tax on Income. It is a
tax on passive income, deducted and withheld at source by the
payor-corporation and/or person as withholding agent pursuant
to Section 50, and paid in the same manner and subject to the
same conditions provided for in Section 51.
A perusal of these provisions clearly shows that two types of
taxes are involved in the present controversy: (1) the GRT,
which is a percentage tax; and (2) the FWT, which is an income
tax.
.
.
.
First, the taxes herein are imposed on two different subject
matters. The subject matter of the FWT is the passive income
generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the
privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the
property; hence, it is an excise rather than a property tax. It is
not an income tax, unlike the FWT. In fact, we have already
held that one can be taxed for engaging in business and further
taxed differently for the income derived therefrom. Akin to our
ruling in Velilla v. Posadas, these two taxes are entirely distinct
and are assessed under different provisions. (Emphasis
supplied)
191. In Mobil30, the Honorable Supreme Court also discussed the
distinction between the local business tax authorized to be imposed by local
government units pursuant to the Local Government Code of 1991 and
income tax, thus:
Prefatorily, it is necessary to distinguish between a business tax
vis--vis an income tax.
Business taxes imposed in the exercise of police power for
regulatory purposes are paid for the privilege of carrying on a
business in the year the tax was paid. It is paid at the beginning
of the year as a fee to allow the business to operate for the rest
of the year. It is deemed a prerequisite to the conduct of
business.
30

Mobil Phil., Inc. v. City Treasurer of Makati, 463 SCRA at 384.

52 | P a g e

Income tax, on the other hand, is a tax on all yearly profits

arising from property, professions, trades or offices, or as a tax
on a person's income, emoluments, profits and the like. It is tax
on income, whether net or gross realized in one taxable year. It
is due on or before the 15th day of the 4th month following the
close of the taxpayer's taxable year and is generally regarded as
an excise tax, levied upon the right of a person or entity to
receive income or profits. (Emphasis supplied)
192. The distinction between the two, however, does not end there.
It is worthy to note that income and business taxes also differ in terms of the
person who pays for, or bears the burden of the tax. Income tax such as
corporate income tax is a direct tax, while business taxes are indirect taxes.31
193. In distinguishing between a direct tax and an indirect tax, the
Supreme Court in Maceda v. Macaraig32 held that the burden of direct
taxes, like the corporate income tax falls on the person directly liable for
the same:
Classifications or Kinds of Taxes:
According to persons who pay or bear the burden:
a.
Direct Tax that where the person supposed to pay the
tax really pays it, WITHOUT transferring the burden to
someone else.
Examples: Individual income tax, corporate income tax,
transfer taxes (estate tax, donor's tax), residence tax,
immigration tax
b.
Indirect Tax that where the tax is imposed upon goods
BEFORE reaching the consumer who ultimately pays for it, not
as a tax, but as a part of the purchase price.
Examples: The internal revenue indirect taxes (specific tax,
percentage taxes, VAT) and the tariff and customs indirect taxes
(import duties, special import tax and other dues).33
194. As a direct tax, income tax must be paid by the person
statutorily liable to pay it who is also the same person who actually
bears the burden of such tax. In contrast, in the case of an indirect tax, the
person statutorily liable to pay the indirect tax is not necessarily the person
who ultimately bears the burden of such tax since an indirect tax may be

31
32
33

Id.
223 SCRA 217 (1993)
Id. at 235. Underscoring supplied.
53 | P a g e

passed on by the person directly and legally liable to pay the same to the
final purchaser or end-user of the goods and services involved.34
195. The unjust absurdity of the panel decision may be exemplified
in the very Concession Agreement Maynilad seeks to uphold. The
Agreement only allows for the imposition of expenditures efficiently and
prudently incurred. If it is an expenditure, when can income tax be
inefficiently incurred? When can it be imprudently incurred?
196. Respondents interpretative contortion of the word expenditure
would have been funny if it were not tragic because it will cost the poor and
empoverished public billions of pesos. If this Honorable Court struck down
this unjust imposition in the case of Meralco, then this Court can strike down
greed once more in this petition.
APPLICATION FOR A TEMPORARY RESTRAINING ORDER
AND/OR WRIT OF PRELIMINARY INJUNCTION
The Petitioners re-plead the foregoing allegations in support of their
application for a TRO and/or writ of preliminary injunction.
In addition, the Petitioners have clear and unmistakable rights that are
threatened by the impending, direct or indirect, enforcement of a clearly
illegal imposition on water consumers. They are entitled to the relief
demanded and such relief consists in restraining the Respondents from
placing unnecessary and illegal burden on the water consumers and/or the
taxpayers.
Such grave and irreparable illegal impositions consist of the
implementation and enforcement of Arbitral Awards which we argue is
contrary to the dictates of public policy and the consequent implementation
of two contradictory regulatory regimes in MWSSs lone franchise area, as
well as the impending illegal multi-billion claims of Maynilad and Manila
Water against the sovereign guarantee under the Republics Letters of
Undertaking.
The imposition of the arbitral awards creates a burden to the people
and this Honorable Court is asked to immediately avert the same.
Additionally, a rate hike in public utilities services such as water rates, is
inflationary in nature increasing the production cost of goods and services
using water. Once imposed, it will impact on the entire country and cannot
be taken back. There is no reimbursement for inflation.
The same goes for the Respondents claim to the Republics sovereign
guarantee which Respondent Purisima found valid and essentially approved,
34

Commissioner of Internal Revenue vs. Philippine Long Distance Telephone

Company, G.R 140230, 15 December 2005.
54 | P a g e

and is up for approval by the President, to the detriment of the public and the
loss of scarce public funds that may have been used for education, health
and other public welfare projects. We are currently taxed to death. We
should not allow our taxes to be used to pay for the income tax of the
rich and the powerful. Immediate reprieve from this Court is implored.
It is void, it is unfair, it is incorrect, it is unreasonable. The details
have been set forth above. If this is not stopped, the petitioners and millions
more will suffer grave and irreparable injury. For the rich and notorious, an
additional peso per cubic meter may mean nothing. But for the working and
toiling class, it is not just an economic and material sacrifice and loss but an
insult and affront to their dignities as persons.

PRAYER
In view of the foregoing, Petitioners respectfully pray of this
Honorable Court that:
a) By way of a writ of certiorari: The Arbitration Clause, Article 12 of
the Concession Agreements, be set aside and declared void for
being unconstitutional, illegal and/or ultra vires of the parties
thereto;
b) By way of writ of certiorari: The Letters of Undertaking executed
by the Republic in relation to the Concession Agreements be set
aside and declared void for being unconstitutional, illegal and/or
ultra vires of the parties thereto;
c) By way of a writ of certiorari: Corporate income taxes of both
Maynilad and Manila Water be expressly declared to be excluded
from allowed expenditures under the Concession Agreements, with
the effect that corporate income taxes of Maynilad and Manila
Water cannot be passed on directly or indirectly to the water
consumers;
d) By way of a writ of prohibition: Respondents Secretary Purisima
and President Aquino be prohibited from processing Respondents
Maynilad and Manila Waters claims for alleged damages against
the Sovereign Guarantee embodied in the Republics Letters of
Undertaking;
e) In the meantime, pending this litigation, by way of a TRO and a
writ of preliminary injunction:
55 | P a g e

a. Secretary Purisima and President Aquino be immediately

restrained by way of a TRO or writ of preliminary injunction
from paying out of the national coffers any amount to
Maynilad and Manila Water for alleged damage claims
against the Sovereign Guarantee embodied in the Republics
Letters of Undertaking;
b. MWSS, MWSS Administrator Esquivel, MWSS-RO and
MWSS-RO Chief Regulator Yu be immediately restrained
by way of a TRO or writ of preliminary injunction from
implementing the Arbitral Awards which may result to two
contradictory regulatory regimes in the lone MWSS
franchise area;
c. Maynilad and Manila Water be immediately restrained by
way of a TRO or writ of preliminary injunction from
recovering from the national coffers their income tax
liabilities (by way of claiming alleged damages against the
Sovereign Guarantee embodied in the Republics Letters of
Undertaking) which the Meralco ruling expressly and
categorically prohibits.
Other remedies or relief just and equitable under the circumstances are
prayed for.
Respectfully submitted.
Quezon City for the City of Manila. 6 August 2015.
COUNSEL FOR PETITIONERS
MARIA CRISTINA YAMBOT
No. 45 K-7th St. West Kamias Quezon City
Tel. No.: (02) 921-3473
Roll No. 59700
IBP No. 961187/02-04-14/Rizal
PTR No. 3114732/01-05-15/Rizal
MCLE Compliance No. IV 0016616/04-11-13

JEFFREY G. AGUILAR
Roll No. 64454
IBP No. 1006823/04-08-15/Occ. Mindoro
PTR No. 1353494C/05-19-15/Q.C.
56 | P a g e

Deadline of MCLE Compliance April 2016

Copy furnished:
SEC. CESAR V. PURISIMA
Department of Finance
Roxas Blvd. corner Pablo Ocampo, Sr. St.
Manila 1004
GERARDO A.I. ESQUIVEL
Manila Waterworks and Sewerage Services
4/F MWSS Administration Building
MWSS Complex, 489 Katipunan Road
Balara, Quezon City 1105
JOEL YU
MWSS Regulatory Office
3/F MWSS Engineering Building
MWSS Complex, 489 Katipunan Road
Balara, Quezon City 1105
MAYNILAD WATER SERVICES, INC.
MWSS Engineering Building
MWSS Complex, 489 Katipunan Road
Balara, Quezon City 1105
MANILA WATER COMPANY, INC.
2/F MWSS Administration Building
MWSS Compound, Katipunan Road
Balara, Quezon City 1105
BENIGNO SIMEON C. AQUINO III
President
New Executive Building, Malacaang Palace
J.P. Laurel St., San Miguel, Manila
OFFICE OF THE SOLICITOR GENERAL
134 Amorsolo St. Legaspi Village
Makati City
OFFICE OF THE GOVERNMENT CORPORATE COUNSEL
3/F MWSS Administration Building
MWSS Compound, Katipunan Road
57 | P a g e

Balara, Quezon City 1105

EXPLANATION
Due to the shortage of messengerial services and lack of time, copies
of the foregoing are being served to the other parties by registered mail in
accordance with Section 11, Rule 13 of the Revised Rules of Court.
MARIA CRISTINA YAMBOT

58 | P a g e