Whether a Municipality May Establish a Local Water District After Granting Exclusive Functions Similar to a Water District to a Private Corporation

September 29, 2010 DILG LEGAL OPINION NO. 137-10 Atty. Francesca C. Manzano Consultant Office of the Mayor General Trias, Cavite Dear Atty. Manzano : This has reference to your earlier letter seeking clarification from this Department regarding the legal ramifications of establishing a local water district considering that the Municipality of General Trias has already contracted a private corporation to perform the functions similar to a water district and further granted exclusivity of said functions. Per your letter, by virtue of Sanggunian Resolution No. 95-01 dated 12 October 1995, the Municipality of General Trias, Cavite, contracted a private entity, the General Trias Water Corporation (GTWC), to perform the functions of a local water district. Thereafter, the Municipality of General Trias signed a Memorandum of Agreement (MOA) dated 12 October 2007 with GTWC, allowing it to establish and develop a water supply and distribution system within the municipality. A perusal of the copy of the MOA forwarded to this Department however revealed that the MOA was entered into by the aforesaid parties on 23 October 1995, not 12 October 2007 as indicated in your letter. You further represented in your letter that after more than 10 years of operation, the Municipality of General Trias conducted an overall assessment of the operations of GTWC to determine if said entity has sufficiently served its purpose. According to you, a growing demand and clamor for an efficient and extensive water distribution system has led the municipality to put up its local water district to augment the existing services that GTWC has already established. This prompted you to review the terms and conditions of the aforesaid MOA and you found out that under Section 11 of the MOA, the Municipality has agreed to grant exclusivity to GTWC of the development and operation of water supply and distribution system within the municipality for a period of 25 years. However, it is your position that the aforesaid Section 11 of the MOA cannot be considered valid since the municipality does not even have the power to grant a franchise as said authority pertains to the National Water Resources Board (NWRB). The NWRB, on the other hand, granted GTWC a Certificate of Public Convenience (CPC) to operate and maintain a waterworks system in the municipality for a period of five (5) years starting the year 2007 conditioned upon its revocation or cancellation upon assumption of the operation of the water system by the LWUA-local water districts. Hence, your queries, which we quoted in toto : "1. Since GTWC (General Trias Water Corporation), which is a private corporation performing functions similar to a local water district, does it enjoy the privilege of tax exemption (income taxes, local government and municipal taxes and fees) given to local water districts in accordance with Section 46 Chapter XI Title II of PD 198? 2. Is the establishment of a local water district, pursuant to PD 198, be considered a violation of the terms and conditions agreed upon by the municipality and GTWC as set forth in the MOA? 3. Is it possible for a local water district to co-exist with a private entity in the development and operation of the water supply and distribution in the municipality without violating the MOA? 4. In the event that may be considered a violation, does the municipality incur any liability considering that public interest and public policy justifies the establishment of a local water district?" In reply to your first query, we reply in the negative. Please be informed that Section 45, not Section 46, of Chapter XI, Title II of PD 198 pertains to tax exemption of local water districts (LWDs). Section 45 of PD 198 provides and we quote: "SECTION 45. Exemption from Taxes. A district shall (1) be exempt from paying income taxes, and (2) shall be exempt from the payment of (a) all National Government, local government and municipal taxes and fees, including any franchise, filing, recordation, license or permit fees or taxes and fees, charges or costs involved in any court of administrative proceeding in which it may be a party and (b) all duties or imposts on imported machinery, equipment and materials required for its operations." Based on the foregoing, a "district" shall be exempted from taxes. A district is defined under Section 3 (g) of PD 198 as "(A) local water district formed pursuant to Title II of this Act". Section 6, Title II of PD 198 provides and we quote: "Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district. Once formed, a district is subject to the provisions of this Act and not under the jurisdiction of any political subdivision. To form a district, the legislative body of any city, municipality or province shall enact a resolution containing the following : (a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words "Water District". (b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof. (c) A statement of intent to transfer any and all waterworks and/or sewerage facilities owned by such city, municipality or province to such district pursuant to a contract authorized by Section 31 (b) of this Title. (d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above. (e) The names of the initial directors of the district with the date of expiration of term of office for each. (f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title. (g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title. Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act. If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province." (Emphasis Supplied) In the aforequoted provision, one of the requirements for the formation of a local water district is the enactment of a resolution by the concerned legislative body. On this requirement alone, it is readily discernible that the tax exemption accorded for local water district under Section 45 of PD 198 cannot be similarly enjoyed by a private corporation such as the GTWC even if the latter performs functions similar to LWD since GTWC is not a LWD formed pursuant to PD 198. According to you, GTWC is a private corporation and as such, it derives its legal existence and power from the Corporation Code. With regard to your second up to third queries, we shall answer the same in one discussion since they are interrelated. According to you, the Municipality of General Trias, by virtue of Sanggunian Resolution No. 95-01 dated 12 October 1995, entered into a MOA with GTWC allowing the latter to establish and develop a water supply and distribution system within the aforesaid municipality. Section 11 of the said MOA provides and we quote: "Section 11. Exclusive Franchise . The GTWC shall have exclusive franchise for the development and operation of the water supply and distribution system within the lands of the Municipality of General Trias for an initial period of twenty five (25) years renewable to another twenty five (25) years. No franchise shall be granted to any other person or agency domestic, industrial or commercial water service within the service area or any portion thereof. At the end of the initial 25-year period, the franchise shall either be renewed to another 25 years or MGT shall take over the ownership and operation of the water system provided that in the case of take over the GTWC shall be paid for the value of its assets at the time of the take over in the amount and manner agreeable to both parties. Valuation of the assets shall be computed using the present value method which is the replacement cost depreciated for the expired life of the asset." Well-settled is the rule that existing contracts between the parties are presumed valid and shall be respected. The Sangguniang Bayan of General Trias, in enacting Sanggunian Resolution No. 95-01 dated 12 October 1995 that paved the way for the execution of the MOA is presumed to have performed their official acts. If the said Sanggunian Resolution and the MOA are assailed to be invalid due to, like in the case at hand, absence of authority of the Sangguniang Bayan to grant a franchise to GTWC, we are of the view that the proper action must be initiated first by the aggrieved party/ies before the proper forum. Unless the Sanggunian Resolution and the MOA were invalidated by the proper forum, the same must in the meantime be given force and effect by the parties. As to the issue of co-existence of the GTWC and LWD, we are of the view that co-existence of GTWC and LWD or establishment of a LWD while GTWC is still in operation will violate the aforequoted Section 11 of the MOA and Section 46 of PD 198, which also provides "exclusivity clause", thus: "Section 46. Exclusive Franchise. No franchise shall be granted to any other person or agency for domestic water service within the district or any portion thereof unless and except to the extent that the board of directors of said district consents thereto by resolution duly adopted." On a final note, the Certificate of Public Convenience granted by NWRB to GTWC to operate and maintain a waterworks system in the municipality is for a period of 5 years starting from the year 2007 up to the year 2012. Hence, at this point in time, the GTWC has still a valid CPC to operate and maintain a water service system. We hope that we have addressed your concern accordingly. Very truly yours, (SGD.) ATTY. JESUS B. DOQUE IV Director III, Legal Service Department of Interior and Local Government