1. Public Service as Public Utility

C.A. No. 146, as amended, Section 13

> SEC. 13.¹ Except as otherwise provided herein, the Commission shall have general supervision and regulation of, jurisdiction and control over, all public services, and also over their property, property rights, equipment, facilities; and franchises so far as may be necessary for the purpose of carrying out the provisions of this Act, and in the exercise of its authority it shall have the necessary powers and aid of the public force: Provided, however, That the Commission shall have no control or jurisdiction over ice plants, cold storage plants, or any public services operated by the Government of the United States in the Philippines exclusively for Its own use and not to serve private persons for pay or compensation, nor over municipal warehouses nor animal-drawn vehicles: Provided, further. That the Commission shall not exercise any control or supervision over air craft in the Philippines, except with regard to the fixing of maximum passenger and freight rates, nor over the Manila Railroad Company until the same shall be controlled by the Government of the Philippines, nor over radio companies or concerns except as regards the fixing of rates: Provided, further, That the control and jurisdiction of the Commission over ships shall be limited to the fixing of freight and passenger rates.

Section 14 of the Public Service Act describes public services as including the following, subject to the narrower definition of “public utility” under R.A. No. 11659:

• Every individual, co-partnership, association, corporation, or joint-stock company, whether domestic or foreign, their lessees, trustees, or receivers appointed by any court whatsoever, or any municipality province or other department of the Government of the Philippines;
• That may own, operate, manage, or control in the Philippines, for hire or compensation, any common carrier, railroad, street railway, traction railway, subway, freight, and/or passenger motor vehicles, with or without fixed route, freight or any other car service, express service, steamboat or steamship line, ferries, small water craft;
• Engaged in the business of transportation of passengers or cargo, shipyard, marine railway, marine repair shop, public warehouse, wharf, dock not under the jurisdiction of the Insular Collector of Customs, ice, refrigeration, canal, irrigation, pipe line, gas, electric, light, heat, power, water, oil, sewer, telephone, wire or wireless telegraph system, plant or equipment, and broadcasting stations;
• Whether the owner or operator be an individual, co-partnership, association, corporation, or joint-stock company, either domestic or foreign, or a trustee or receiver appointed by any court whatsoever, or any municipality, province, or department of the Government of the Philippines, or any other entities. (Public Service Act, Sec. 14)²

Under Section 4 of the Public Service Act, as amended by R.A. No. 11659, a public utility is a person operating, managing, or controlling for public use electricity distribution or transmission, petroleum or petroleum-products pipeline transmission, water pipeline distribution systems, wastewater pipeline systems, seaports, or public utility vehicles.

What constitutes as public utility is not the ownership thereof but their use or service to the public. (Tatad v. Garcia, G.R. No. 114222, 6 April 1995)³

DEFINITION OF PUBLIC UTILITY

Section 14 of the Public Service Act describes public services broadly; this list should not be read as the current definition of “public utility,” which is narrower under RA 11659:

• Every individual, co-partnership, association, corporation, or joint-stock company, whether domestic or foreign, their lessees, trustees, or receivers appointed by any court whatsoever, or any municipality province or other department of the Government of the Philippines;
• That may own, operate, manage, or control in the Philippines, for hire or compensation, any common carrier, railroad, street railway, traction railway, subway, freight, and/or passenger motor vehicles, with or without fixed route, freight or any other car service, express service, steamboat or steamship line, ferries, small water craft;
• Engaged in the business of transportation of passengers or cargo, shipyard, marine railway, marine repair shop, public warehouse, wharf, dock not under the jurisdiction of the Insular Collector of Customs, ice, refrigeration, canal, irrigation, pipe line, gas, electric, light, heat, power, water, oil, sewer, telephone, wire or wireless telegraph system, plant or equipment, and broadcasting stations;
• Whether the owner or operator be an individual, co-partnership, association, corporation, or joint-stock company, either domestic or foreign, or a trustee or receiver appointed by any court whatsoever, or any municipality, province, or department of the Government of the Philippines, or any other entities. (Public Service Act, Sec. 14)⁴

Under Section 4 of the Public Service Act, as amended by RA 11659, “public utility” is limited to a public service that operates, manages, or controls for public use any of the following:

• Electricity distribution or transmission;
• Petroleum or petroleum-products pipeline transmission;
• Water pipeline distribution;
• Wastewater pipeline systems;
• Seaports; or
• Public utility vehicles.

What constitutes as public utility is not the ownership thereof but their use or service to the public. (Tatad v. Garcia)⁵

Critical Infrastructure refers to any public service that is so vital that its incapacity or destruction would have a debilitating impact on national security, economic security, public health, or safety.

Republic of the Philippines vs. Manila Electric Company (MERALCO)⁶

G.R. No. 166706, November 15, 2011

Facts of the Case

• MERALCO was accused of overcharging its customers by including certain expenses in its rate base that were not allowable under the regulatory guidelines. These expenses included income tax payments, which were passed on to consumers as part of the electricity rates.
• The ERC, acting on complaints from consumer groups and following its regulatory mandate, conducted an investigation into the rate-setting practices of MERALCO. The ERC found that MERALCO had indeed included expenses in its rate base that should not have been passed on to consumers.
• The ERC ordered MERALCO to refund its customers for the overcharged amounts. This decision was based on the finding that the inclusion of income tax payments in the rate base was improper and resulted in unjust and unreasonable electricity rates.

Issues

• Whether the inclusion of income tax payments in the rate base for calculating electricity rates was permissible.
• Whether the ERC acted within its powers and authority in ordering MERALCO to refund the overcharged amounts to consumers.

Ruling

The Supreme Court upheld the decision of the ERC, ruling that the inclusion of income tax payments in the rate base was not permissible and that the ERC acted within its regulatory authority in ordering the refund. The key points of the ruling include:

• The Court emphasized that rate-setting must adhere to principles of fairness and reasonableness. Utilities are entitled to a fair return on their investments, but this must be balanced against the need to protect consumers from excessive charges.
• The Court clarified that income tax payments are not operating expenses of the utility and should not be passed on to consumers through the rate base. Including such expenses in the rate base would unjustly inflate the cost of electricity for consumers.
• The Court affirmed the ERC's authority to regulate public utilities and ensure that rates charged to consumers are just and reasonable. The ERC's decision to order a refund was within its mandate to protect consumer interests and enforce compliance with regulatory standards.

National Telecommunications Commission vs. Philippine Long Distance Telephone Company (PLDT)⁷

Certificate of Public Convenience

It is an authorization to operate a public service, constituting a license or privilege, not a franchise or a vested property right. (Repormang v. City of Mandaluyong, G.R. No. 218593, 15 June 2020)⁸

No public utility or public service shall operate in the Philippines without securing a Certificate of Public Convenience/Certificate of Public Convenience and Necessity. (Public Service Act, Sec. 15)⁹

A certificate of public convenience does not vest property rights to its holder to conduct business along the route covered in it. It is a mere license or privilege. (Repormang v. City of Mandaluyong)

This privilege is subject to compliance with local traffic regulations because the Land Transportation Franchising and Regulatory Board's (LTFRB) authority to issue such certificates is only supplemental to the right of local governments to control and regulate traffic in their localities. (Repormang v. City of Mandaluyong)

Requisites

Before a certificate to operate a public service or utility may be granted, the applicant must comply with three requisites:

• For a public utility, the applicant must be a citizen of the Philippines or a corporation or association organized under the laws of the Philippines at least 60% of whose capital is owned by citizens of the Philippines (1987 Constitution, Art. XII, Sec. 11). The 60% Filipino-ownership requirement does not apply to every other public service; those services are governed by the Public Service Act, as amended by RA 11659, and any applicable restrictions;
• The applicant must be financially capable of undertaking the proposed service and meeting the responsibilities incident to its operation; and
• The applicant must prove that the operation of the public service will promote the public interest in a proper and suitable manner. (Vda. de Lat v. Public Service Commission)¹⁰

Citizenship

Certificates of Public Convenience/Certificates of Public Convenience and Necessity for the operation of public utilities will be granted only to:

• Citizens of the Philippines; or
• Corporations, co-partnerships, associations, or joint stock companies constituted and organized under the laws of the Philippines, 60% of which is owned by Filipinos. (Public Service Act, Sec. 16 [a])¹¹

While the Public Service Act initially allowed American citizens and juridical entities to be granted with certificates of public convenience, this is essentially removed by Art. XII, Sec. 11 of the 1987 Constitution¹². The constitutional provision states that no franchise, certificate, or any other form for the authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by Philippine citizens. (1987 Constitution, Art. XII, Sec. 11)¹³

Other public services under the Public Service Act, as amended by RA 11659, are distinct from public utilities and are not subject to Art. XII, Sec. 11’s ownership restriction solely because they are public services.

Promotion of public interests

Public necessity is the primary consideration for the authorization of the operation of public services and the issuance of certificates of public convenience. (In re: Gregorio)¹⁴

Financial capability

The commission shall have the power, without previous hearing, to require any public service to furnish annual reports of finances and operations. (Public Service Act, Sec. 17 [h]¹⁵)

Meaning

The Prior Operator Rule provides that a public utility operator should be afforded with an opportunity to improve its equipment and service before allowing a new operator to serve in the same territory it covers. (Mandbusco, Inc. v. Francisco)¹⁶

Exceptions

The invocation of the Prior Operator Rule is not applicable in the following instances:

• The Certificate of Public Convenience granted to the new operator is a maiden certificate (Mandbusco, Inc. v. Francisco)¹⁷
• The old operator does not offer to meet the increase in traffic (Isidro v. Ocampo, G.R. No. L-12331, 29 May 1959)¹⁸
• The old operator violated the law, in this case by operating despite the expiration of its franchise (Buenaflor v. Camarines Sur Industry Corporation)¹⁹
• If the application of the rule results in a monopoly (Raymundo Transportation Co., Inc. v. Cervo, G.R. No. L-3899, 21 May 1952)²⁰

Ruinous competition

An opposition for an application for Certificate of Public Convenience based on ruinous competition must show that the opposing party would be deprived of fair profits on the capital invested in its business. It must be shown that the business would not have sufficient gains to pay a fair rate of interest on its capital investment. (Halili v. Daplas, G.R. No. L-20282, 19 May 1965)²¹

Ruinous Competition, When Not Applicable

The argument of ruinous competition is not applicable in the following instances:

• When public necessity requires that a new operator be allowed to put an additional service. (Raymundo Transportation Co., Inc. v. Cervo)²²
• The opponent only showed a mere possibility of reduction in the earnings of a business (Raymundo Transportation Co., Inc. v. Tanchingco, G.R. No. L-7224, 27 May 1955)²³

Rate of return

The rate of return is a judgment percentage which provides a fair return on the public utility for the use of its property and service to the public. This is fixed by administrative and judicial pronouncements. (Republic of the Philippines v. Manila Electric Company)²⁴

The jurisprudentially-provided rate of return for public utilities is 12% (Republic of the Philippines v. Manila Electric Company)

Exclusion of income tax as expense

Income tax is not included in the computation of the operating expenses of a public utility. It is inconsistent with the nature of operating expenses (Republic of the Philippines v. Manila Electric Company)²⁵

Income tax is imposed on an individual or entity as a tax on the privilege of earning income. By its nature, income tax payments of a public utility are not expenses which are incurred in connection with the production of profit. (Republic of the Philippines v. Manila Electric Company)

APPROVAL OF SALE, ENCUMBRANCE OR LEASE OF PROPERTY

The Land Transportation and Traffic Code provides for the compulsory registration of motor vehicles to the Land Transportation Office. Furthermore, the same law requires all mortgages, attachments, and all other encumbrances to be recorded to the LTO in order to be valid against third parties. (Land Transportation and Traffic Code, Sec.s 5 [a] & 5 [e])²⁶