Contrasting arbitration rulings
LADY luck played favorites between water concessionaires Maynilad Water Services Inc. and Manila Water Co. in their arbitration cases against Metropolitan Waterworks and Sewerage System (MWSS) over water tariffs.
Last December, the arbitration panel in Maynilad’s case granted its application for upward adjustment of its water rates which MWSS earlier denied.
MWSS refused to comply with the decision in spite of the provision in the concession agreement that it is final and binding on the parties.
The agency cited the pendency of the resolution of a similar petition filed by Manila Water with another arbitration panel as justification for its refusal.
Luck did not smile on Manila Water. Last week, its arbitration panel ordered it to reduce is rates by P1.66 per cubic meter this year and another P0.55 per cubic meter in 2016 and 2017.
The reduction is an offshoot of the panel’s removal of the company’s corporate income tax from the items included in the computation of its rates.
To aggravate matters, the arbitrators stated that Manila Water is a public utility corporation. The legal implications of this declaration became a cause for concern for the company.
Except for this issue, which Manila Water said it will clarify with MWSS, the company has served notice of its intention to comply with the order.
Unilateral
MWSS is expected to immediately enforce the Manila Water ruling. It’s a feather in its cap, so to speak, considering the rebuff it got in the Maynilad case.
In a surprise move, however, MWSS said it would apply the exclusion of corporate income tax from the rate base stated in the Manila Water case in the implementation of the Maynilad decision.
This will result in the reduction of the increase in the Maynilad tariff.
In effect, MWSS will unilaterally modify the decision of the Maynilad arbitrators on the computation of the rate base.
Just where did MWSS get the authority to amend or modify the arbitrators’ decision?
Nowhere in the concession agreements does it say that MWSS can act as an appellate body to which decisions of the arbitrators can be appealed, much less does it have the discretion to amend or alter their actions.
Once the arbitrators promulgate their ruling, MWSS is obliged to enforce it to its letter.
Unless MWSS is using a different kind of dictionary, the phrase “final and binding” which describes the nature of the arbitrators’ action simply means that.
Regulatory
The two arbitration cases are distinct and separate from each other even if MWSS is a respondent in both.
Although the cases refer to the same issue—adjustment of water tariffs—their attending circumstances, i.e., service areas, funding sources and operational procedures, are different.
The respective arbitration panels have their own way of evaluating [and later deciding on] the merits of the two companies’ application for tariff adjustment.
Since the panels are composed of different people, they cannot be expected to think alike or come out with findings that are consistent with or complementary to each other.
From the regulatory point of view, it would have been better if both panels came up with the same ruling. That would have made it easier for MWSS to decide on the manner of their implementation.
Too bad, the panels gave contrasting decisions. Under the circumstances, MWSS has no choice but implement them in the manner they were promulgated.
The concession agreements are silent on what action can or should be taken in case the panels decide differently on issues of similar nature raised against MWSS.
The contracting parties probably assumed the arbitration panels will think along parallel lines on issues common to the concessionaires so no provisions were made in the agreement for this situation.
The wrong assumption has put all the parties in a bind.
Rate of return
Regardless of the way MWSS decides to implement the orders of the arbitration panels, neither Manila Water nor Maynilad is expected to be happy about it.
If their media statements are to be believed, they have been operating in the red for the past two years because of their inability to adjust their water tariffs.
The unfavorable ruling in Manila Water’s case and MWSS’s decision to reduce Maynilad’s rates to reflect the exclusion of corporate income tax from the rates computation could wreck havoc on the two companies’ financial position.
Under ordinary circumstances, these losses [assuming they are true] should be the least of the worry of MWSS or the government.
The stockholders of the two companies would have to suffer the consequences of bad business decisions by their managements.
But that principle cannot be applied to the situation at hand. The concession agreements obligate the protection of the financial viability of the two companies through, among others, the rates charged to their costumers.
The agreements state that “… 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 … operating, capital maintenance and investment expenditures …”
In addition to such recovery, they shall be entitled to “… earn a rate of return … 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 agreements in other countries having a credit standing similar to that of the Philippines …”
The underlying message of these provisions is, if the water tariffs are insufficient to pay for those returns, MWSS (or the government) would have to make up the difference.
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