Corporate Securities Info

Arbitration of water rates

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Finally, after months of indecision, the Metropolitan Waterworks and Sewerage System ruled on the petitions for rate increase filed by Metro Manila water concessionaires Manila Water Co. and Maynilad Water Services Inc.

MWSS denied the petitions after disapproving the inclusion of certain projects, expenses and cash advances in the rate base on which water usage fees are computed. Worse, it ordered the concessionaires to lower their rates.

Earlier, the two companies were the subject of public criticism for inputting entertainment expenses, advertising costs and corporate income tax in their rate base.

They sought to justify this action by saying that, first, these were agreed to by MWSS when it entered into the concession agreement with them in 1997 and, second, it is an internationally accepted practice in the water distribution business.

The decision was a double whammy for the concessionaires. Given the adverse reaction to the controversial inclusions in their rate base, they probably thought that, in a worst case scenario, their present tariffs will be maintained.

Instead, Maynilad and Manila Water were ordered to lower their rates by P1.48 and P7.24 per cubic meter in their rate bases, respectively.

The ruling threw a monkey wrench into their business plans and revenue projections, both short term and long term. A freeze on tariffs would have been bad enough; a reduction of revenues could spell serious trouble.

Dispute

Of critical significance also is the effect of that order on the multimillion-dollar loans they earlier incurred from foreign financial institutions to finance their rehabilitation and expansion projects.

The concessionaires risk being declared in default (i.e., compelled to pay their debts ahead of their maturity plus penalties and additional costs) by their creditors if, on account of the rates reduction, they fail to meet their commitments on profitability and maintenance of the financial ratios that formed the basis for the loans.

In the financial community, a declaration of default may be likened to a death sentence—it could spell the end (or otherwise make it very difficult) of a company’s ability to borrow from the capital market. Creditors have long memories about reneging or neglectful debtors.

As expected, the probability of serious financial problems hitting the two companies spooked their investors.

The stock prices of Maynilad’s major stockholders (Metro Pacific and DMCI), Manila Water and parent firm Ayala Corp. took a dive after news about the MWSS order came out.

Fearful of further deterioration of the prices of those stocks, the investors immediately unloaded their holdings and opted to take whatever profits they could make from the sellout.

Appeals panel

In an effort to allay the investors’ apprehension, the concessionaires quickly announced their intention to question the order before the arbitration board, or Appeals Panel, provided for in their respective concession agreements.

Each panel consists of three members. MWSS appoints one member and the concessionaire appoints another. The third, who will act as chair, shall be appointed by the president of the International Chamber of Commerce.

The panel members (other than the chair) should be residents of the Philippines, but need not be Filipinos, and individuals of good business reputation who have no prior business connection with MWSS or the concessionaire concerned.

The “no prior business links” qualification is aimed at ensuring that the panel members will act independently and will not be influenced by earlier relationships with the concessionaire that appointed them to the panel.

The costs of arbitration will not be cheap. Subject to adjustment depending on the applicable consumer price index, the panel members shall be entitled to a per diem of P2,500 per day (or portion of a day) while in session.

The chair has a different per diem rate—it will be based on the recommendation of the president of the International Chamber of Commerce. In dollars or euros, depending on the nationality of the appointee.

The panel may, at its discretion, retain the services of legal, economic and technical consultants to assist in the arbitration process. The fees of these advisers, including the other expenses that may be incurred during the proceedings, shall be shared by the parties.

Expenditures

There is a kink though in this sharing arrangement—the concessionaire’s share on the arbitration costs shall, pursuant to the concession agreement, be treated as expenditures.

With that treatment, they shall be considered part of the concessionaire’s costs of doing business and therefore included in the rate base for purposes of computing the allowable water rates and fees.

Thus, whichever way the arbitration goes, the concessionaires’ customers will, at the end of the day, pay for the costs of settling the rates dispute between MWSS and the concessionaires.

Why MWSS agreed to this provision which smacks of being fried in one’s own lard (ginigisa sa sariling mantika) is a real puzzler. It either did not know its implications or was outwitted by the concessionaires during the negotiations. Sorry, but there is no getting out of this arrangement anymore.

Under the agreement, the panel has to resolve the appeal within 90 days from receipt of the notice of the dispute unless the parties agree to extend that period.

Considering the complexity of the technical and financial issues involved, it will probably take a year before the panel decides on the appeal. In the meantime, the existing rates shall remain in effect.

For comments, please send your e-mail to “rpalabrica@inquirer.com.ph.”

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