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MWSS: Contracts with 2 firms void

Cites SC rule on Meralco case disallowing pass-on taxes The Metropolitan Waterworks Sewerage System said Friday it would adopt the legal opinion of the Office of the Government Corporate Counsel, which declared as void the government’s contracts with two private concessionaires, citing as basis a Supreme Court ruling that disallowed public utilities from passing their income taxes to consumers. In 2003, the Supreme Court ordered the Manila Electric Co. to refund its customers some P30 billon in overcharges because it passed on its income taxes to consumers from 1994 to 2003. But the chief regulator of the MWSS Regulatory Office, Emmanuel Caparas, did not order a refund of the P15 billion collected by the Manila Water Co. and Maynilad Water Systems over the last five years, and vowed only to stop the pass-on charges in the next round of rate adjustments. Removing the pass-on tax charge would reduce the rates of Manila Water and Maynilad, which want to charge their customers P5.83 and P8.58 per cubic meter respectively. In a June 4 legal opinion, OGCC chief government counsel Raoul Creencia said the Supreme Court ruling on Meralco must apply to the water concessionaires. Creencia it was clear that the Meralco ruling “applies with the same force to the concessionaires who merely derive their authority from the MWSS and who do not have the power and authority to conduct waterworks and sewerage operations independently of the MWSS in such areas.” “MWSS could not have validly agreed in the concession agreements that income taxes paid by concessionaires could be recovered from its consumers, since doing so would be contrary to law (the Meralco ruling forming part of the law) and, therefore, void,” Creencia said. Caparas acknowledged the “absurdity” in the situation when its agents were allowed to pass on to consumers their income taxes when the MWSS, as their principal and as a public utility was barred from doing so. Two civil society groups, the Water for the People Network, led by Sonny Africa, and the Water for All Refund Movement headed by Rodolfo Javellana put pressure on President Benigno Aquino III to rescind what they called an “onerous concession agreement.” But the Palace has refused to comment on the issue pending the decision of the MWSS on the new round of increase being sought by the concessionaires. The two water companies immediately demanded that the MWSS-RO withdraw its June 7 ruling, insisting that the OGCC’s argument was flawed because the Meralco case cannot be applied to them as they were not “public utilities” but “mere agents and contractors.” The MWSS ruling, they said, was tantamount to a breach of contract and vowed to seek remedies through arbitration, the costs of which they would also pass on to consumers. Virgilio Rivera Jr., Manila Water corporate strategy and development director, invoked the legal maxim “stare decidis et non quieta movere” (follow past precedents and do not disturb what has been settled). But Caparas said allowing the two water firms to continue passing on their 30 percent corporate income taxes to consumers would put the concessionaires in “an elevated and privileged status” over their principal, the MWSS. “A spring cannot rise above its source,” Caparas said in a June 7 resolution, also signed by the four other officials of the executive committee of the MWSS-RO. “Even assuming for the sake of argument that they are mere agents, their being so would not take away their character as public utilities because their principal, MWSS, is a public utility,” Caparas said. He said the concessionaires derive their powers and obligations from a principal whose nature and operation is for public use. “With respect to the treatment of their income taxes where the concessionaires insist that they are mere agents and not public utilities, it is submitted that such would put them in an elevated and privileged status than that of their principal, i.e., their income taxes are considered part of their opex (operating expenses), which they can pass on to the consumers while their principal does not do so. Such an absurd situation would run contrary to the principle of agency where it is said that a spring cannot rise above the source,” Caparas said. Caparas convened a technical working group on April 7, 2011 to settle the dispute on whether or not the two firms were public utilities and found that they were indeed public utilities, reversing the rulings of working groups during previous administrations. Caparas’ June 7 resolution was based on the OGCC’s June 4 legal opinion. Rivera and Maynilad president Victorico Vargas insisted that the concession agreement was explicit in its intent that the concessionaires can pass on their income taxes and operating expenses to fully recover the cost over a period of 25 years or up to 2022. The concessionaires were able to secure an extension of the contract for another 15 years or up to 2037. “The MWSS is, by its charter, exempt from the payment of income taxes. The exempt status of MWSS makes the principles espoused by the Regulatory Office i.e., that the agent cannot rise above the principal, inapplicable. In fact, following the OGCC’s contention that concessionaires would be ‘bound by the same rules and laws applicable to their principal,’ MWCI could make the argument that it should not be paying income taxes as well,” Rivera said. Caparas cited the argument raised before the Supreme Court by the Energy Regulatory Board that “income tax should not be included in the computation of operating expenses of a public utility.” “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 an 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,” Caparas quoted the ERB argument, which was upheld by the Supreme Court, and which ordered the Meralco to refund its consumers. “The MWSS-RO fully concurs with the opinion of the OGCC. The MWSS-RO notes that allowing the concessionaires to recover the amount of income taxes they paid and, on top of that, giving them additional profit with the application of the appropriate discount rate would be grossly unjust to consumers, who actually paid for those income taxes,” Caparas said. “Allowing the concessionaires to pass on their income taxes to consumers is in effect giving the concessionaires a profit on an investment that they did not make,” Caparas said. Caparas also ordered the exclusion of the income taxes in the cash flows of the concessionaires. Vargas said the Caparas ruling was contrary to the terms of the concession agreement and would “undermine both the integrity and financial viability of the concession agreement as well as the viability of Maynilad’s operations.” “It is also important to point out that Maynilad was able to secure project financing on the basis of the terms of the concession agreement,” Vargas said. Reacting to the pass-on charges, Senator Francis Escudero said all monopolies must be placed under strict monitoring to curb their tendencies to abuse consumers. Escudero said one of the first items of the legislative agenda would be to look into the monopoly of the private water concessionaires. “We will investigate that once the Senate resumes. I intend to keep a watchful eye on all monopolies that, given their market dominance, have a natural tendency to abuse and take advantage of their consumers,” assured Escudero. With Macon Ramos-Araneta
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