G.R. No. 185184

G.R. No. 185184, October 3, 2023,
♦ Decision, Inting, [J]
♦ Concurring Opinion, Gesmundo, [CJ]
♦ Concurring Opinion, Caguioa, [J]
♦ Separate Opinion, Leonen, [J]
♦ Concurring Opinion, Lazaro-Javier, [J]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, REPRESENTED BY ITS ADMINISTRATOR, DIOSDADO JOSE M. ALLADO, PETITIONER, VS. PROVINCIAL GOVERNMENT OF BULACAN, REPRESENTED BY GOV. JOSEFINA M. DELA CRUZ, RESPONDENT.

Before the Court is a Petition for Review on Certiorari1 assailing the Decision2 dated May 30, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 86701 which affirmed with modification the Decision3 dated June 3, 2005 and the Order4 dated January 31, 2006 of Branch 82, Regional Trial Court (RTC), City of Malolos, Bulacan in Civil Case No. 410-M-2003. Also assailed is the CA Resolution5 dated October 24, 2008 denying the motion for reconsideration.

The case emanated from a Complaint6 for Specific Performance/Payment of National Wealth Share filed by the Provincial Government of Bulacan (respondent), represented by its then Provincial Governor, Josefina M. Dela Cruz, against the Metropolitan Waterworks and Sewerage System (petitioner), represented by its then Administrator, Orlando C. Hondrade.7

According to respondent, Angat Dam, which is located within its territorial jurisdiction, is the primary source of water supply of Metro Manila. It averred that petitioner has been deriving proceeds from the water resource of Angat Dam such that it should pay respondent a share arising from the utilization and development of national wealth.8 Respondent stressed that petitioner's duty to pay is sanctioned by Section 7,9 Article X of the 1987 Constitution in relation to Sections 289,10 291,11 and 29212 of the Local Government Code of 199113(LGC).14

Respondent also alleged that since 1992, it has been demanding petitioner to pay its national wealth share but to no avail; it asked petitioner to furnish it with the latter's financial statements from the year 1992 which could be the basis for the determination of respondent's share; and because the request remained unheeded, it filed the complaint against petitioner.15

On the other hand, petitioner raised in its Answer16 that respondent has no cause of action against it, there being no privity of contract between them.17

Petitioner further contended that it is a non-profit service utility which aimed to provide reliable water supply and wastewater disposal system to Metro Manila and its neighboring provinces; and it has been exercising regulatory functions in view of its agreements with various concessionaires, which were granted the right to manage the facilities and collect fees for water and sewerage services supplied to clients.18

Although it admitted that Angat Dam is located within the territory of respondent, petitioner argued that it is not engaged in the utilization and development of national wealth.19 For petitioner, the water stored in Angat Dam did not necessarily come from Bulacan but was simply stored in it. Petitioner further countered that because a dam is a man-made structure, it does not fall within the purview of national wealth that would entitle a local government unit (LGU) to an equitable share in the proceeds derived from its utilization and development.20

In its Decision21 dated June 3, 2005, the RTC granted respondent's complaint, the dispositive portion of which reads:

First, the 1987 Constitution provides that water, per se, is a natural resource. The term "water" encompasses all kinds of water which form part of national wealth, as defined under Article 386(b)23 of the Implementing Rules and Regulations (IRR) of the LGC.24

Second, the substantial portion of the water stored in Angat Dam is sourced from respondent. In fact, the National Mapping and Resource Information Authority (NAMRIA) Topographic Map, as certified by the National Power Corporation (NPC),25 indicated that 88.5% (without the Umiray River Basin), or 71.9% (with the Umiray River Basin) of the water in the Angat Dam is sourced exclusively from respondent.26

Third, in the maintenance of dams and water reservoirs, petitioner is engaged in the utilization and development of water. Thus, the fact that dams and reservoirs are man-made does not remove the water stored in them from being characterized as national wealth.27

Fourth and last, the maintenance and operation of dams are for the purpose of providing proper usage of water and for making it profitable. As it derives profit from the utilization and development of dam water, petitioner is liable to pay respondent its national wealth share as provided for under the LGC.28

In its Order29 dated January 31, 2006, the RTC denied petitioner's motion for reconsideration with clarification as to the share of respondent in the earnings of petitioner:

WHEREFORE, the foregoing considered, the subject motion is hereby DENIED. The assailed Decision stands subject to the qualification that the prayed for relief of the plaintiff commencing from the claimed fiscal year is limited to 1% of its equitable share in the proceeds derived from the utilization and development of the waters in Angat Dam exclusively sourced from Bulacan based on the revenues for Concession.

On May 30, 2008, the CA rendered the assailed Decision31 affirming the RTC ruling with modification in that the computation of the share of respondent from the utilization and development of the water in Angat Dam should be in accordance with Section 291 of the LGC.32

Like the RTC, the CA elucidated that based on the definition under the IRR of the LGC, "national wealth" pertained to natural resources and water is unquestionably part of the national wealth of the State. Because water is a natural resource and 71.9% (with the Umiray River Basin) or 88.5% (without the Umiray River Basin) of the water in the Angat Dam is sourced from Bulacan, then respondent is entitled to a share in the proceeds of the utilization and development of the water found in Angat Dam.33 It stressed that under the LGC, it is not necessary that an LGU owned the natural resource; what is simply required is for the natural resource to be found in the territory of the concerned LGU.34

The CA also ruled that petitioner is engaged in the utilization and development of national wealth because it has been supplying water for the use of the consuming public; and pursuant to Section 291 of the LGC, the share of the LGU in the proceeds of the natural resource within its area shall be the gross receipts of the amount received by petitioner before any deductions for expenses or loan payments.35

With the denial of its motion for reconsideration, petitioner filed the present petition raising the following grounds:

Petitioner faults the RTC for delving into factual matters which were purportedly never included as issues for resolution. It also contends that the RTC and the CA erroneously relied on the NAMRIA Topographic Map in ruling that 71.9% to 88.5% of the water in Angat Dam is sourced from Bulacan. It argues that the document in dispute was not admitted in evidence.37

Petitioner further posits that while water is a natural resource, it is not part of the national wealth because the water in Angat Dam is not exclusively within or sourced from Bulacan; and the location of Angat Dam being in Bulacan only proves the place of storage of water, but under no circumstance would this show that water is naturally sourced from Bulacan.38

Relying on its Charter, petitioner asserts that it was created for the sole and exclusive purpose of ensuring the uninterrupted and sufficient supply and distribution of potable water to its clients; petitioner was not created to generate income and its functions do not involve the utilization and development of a natural resource as dams and reservoirs are not natural resources; and petitioner does not derive profit from the concession agreements it enters with private entities because the amount it receives is only used to pay off loans and utilized as the budget of its office.39

Petitioner finally argues that the Sangguniang Panlalawigan of respondent has not passed any ordinance such that respondent is not authorized to impose any tax on petitioner. It also insists that the 1% tax on its gross receipts is unjust and inequitable.40

For its part, respondent maintains that the RTC and the CA properly relied on the NAMRIA Topographic Map because: (1) the parties agreed during the preliminary conference that no witnesses would be presented, and they would instead submit position papers before the RTC; and (2) the subject document is an official document issued by the NPC.41

Respondent likewise asserts that the water used by petitioner emanates from Angat Dam which is located in Bulacan; that as established by the NAMRIA Topographic Map, substantial portion of the water stored in Angat Dam is sourced, located, and found in the Province of Bulacan; and that because petitioner utilizes, develops, and supplies water, it must give respondent an equitable share in the utilization and development of such national wealth.42

At the same time, respondent posits that petitioner is covered by the obligation to remit a share of the proceeds from its utilization and development of national wealth because Section 293 of the LGC used the word "shall" which implies that the remittance is mandatory. It adds that even if petitioner insists that it is a non-profit institution, it is still required to give respondent a national wealth share because Section 291 of the LGC did not distinguish as to which government agency, or government-owned and -controlled corporation (GOCC) must give a share to the LGUs as regards the utilization and development of national wealth.43

In the Resolution44 dated December 7, 2021, the Court stated that central to the resolution of the petition is the determination of the exact nature of water in the Angat Dam. Thus, the Court found it necessary to require the NPC, the National Irrigation Authority (NIA), and the National Water Resources Board (NWRB) to comment on the petition. In the same Resolution, the Court required the parties to inform the Court of supervening event, if any, which may assist it in the immediate disposition of the case.

On March 21, 2022, the NPC, through the Office of the Solicitor General (OSG), submitted its Comment/Compliance45 on the petition. It stressed that the NPC previously managed the Angat Hydro Electric Power Plant (AHEPP) but in 2014, the AHEPP was privatized.46 It confirmed nonetheless that while the AHEPP was still under its management, the NPC had paid the national wealth tax to respondent.47 The pertinent portions of the comment of the NPC read:

On May 17, 2022, petitioner, through the Office of the Government Corporate Counsel, filed its Compliance with Motion to Admit.49 Petitioner manifested that there are no on-going negotiations, contracts, or House or Senate Bills affecting the rights and interests of the parties in the case.50

On July 11, 2022, the NWRB, through the OSG, submitted its Comment51 on the petition. It stated that "[a]s to the nature of the utilization of the water of the Angat Dam, the NWRB does not issue water permits with Angat Dam as the source. The Angat Dam is merely a reservoir where water from different sources is collected, allocated, and diverted to different water permit holders."52 It further stressed that based on its records, "it has issued Water Permits for the appropriation of water from the Angat River, not the Angat Dam."53

Meanwhile, in the Resolution54 dated July 19, 2022, the Court noted that the concerned government bodies in this case are now under new administration. Accordingly, pursuant to Section 17,55 Rule III of the Rules of Court,56 it directed the parties as well as the NPC and the NIA to inform the Court, whether these government entities or their concerned officers would continue, maintain, or adopt the action of the predecessors in their respective offices. In the same Resolution, the Court noted the comment dated July 11, 2022 filed by the NWRB under the present administration.

In its Compliance57 dated September 6, 2022, the NPC manifested that it maintains and continues to adopt its earlier Comment/Compliance of March 21, 2022. In similar regard, petitioner manifested in its Compliance58 dated September 7, 2022 that petitioner and its officers continue, maintain, or adopt the actions of their predecessors-in-interest in this case.

On December 20, 2022, the NIA stated in its Manifestation59 that upon a perusal of the petition, there is no mention of any factual or legal issue that requires its comment. It adds that the NIA has no privity over the issue of this case and the relief sought by petitioner will neither be detrimental to the NIA, nor will it affect the NIA in any way.

On May 22, 2023, respondent filed its Reply60 to the respective Comments filed by the NPC and the NWRB. Respondent maintains that it is entitled to a just share of the utilization of national wealth sourced from the Province of Bulacan. It reiterates that the water utilized from Angat Dam was sourced from Bulacan, and while the Angat Dam is a reservoir, the water stored in the dam is from the Province of Bulacan.

Under Section 25, Article II of the 1987 Constitution, the State guarantees the autonomy of LGUs.61 In turn, local autonomy grants LGUs with specific functions and powers for them not to be exceedingly reliant on the National Government. Alongside the local autonomy of LGUs is the necessity of decentralization.62

In Mandanas v. Ochoa,63 the Court specified four categories of decentralization: (1) political decentralization or devolution of powers whereby the central government transfers responsibilities, powers and resources to the LGUs for the performance of specific tasks; (2) administrative decentralization or deconcentration which involves the delegation of authority or functions from national offices to the regional and local offices (reflected in the creation of local schools, health and development boards/councils); (3) policy or decision-making decentralization which relates to the authority given to LGUs to make decisions on certain policy issues; and (4) fiscal decentralization which is reflected in the power of the LGUs to create their own sources of revenue aside from their just share in the national taxes.64

Under the last category, i.e., fiscal decentralization, LGUs are empowered to create their own sources of revenue; and LGUs are guaranteed a share in national taxes and in the utilization and development of national wealth within their corresponding areas, pursuant to Sections 5, 6, and 7 of Article X of the 1987 Constitution as follows:65

Primarily, the present controversy centers on the application of Section 7, Article X of the 1987 Constitution, in relation to Section 28966 of the LGC. Thus, to ascertain whether an LGU is entitled to a share in the proceeds of the utilization and development of national wealth, there must be concurrence of the following requisites: First, there must exist a national wealth forming part of a natural resource. Second, the national wealth must be located within the LGU's territory. And third, the proceeds must have been generated from the utilization and development of national wealth.

Dam water is appropriated water that is already removed from natural resource and therefore, can no longer be subject to national wealth tax.

During its deliberations, the Constitutional Commission discussed national wealth alongside "natural resources," viz.:

Based on the foregoing, the framers of the Constitution referred national wealth interchangeably with or in conjunction with "natural resources." Along this line, natural resources are specified under Section 2, Article XII of the 1987 Constitution to include "lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources."

That national wealth refers to "natural resources" is echoed in Article 386(b) of the Implementing Rules and Regulations of the LGC as follows:

There is therefore no question that water, being a natural resource, is national wealth. However, water is deemed as already appropriated when taken or diverted from a natural resource. This is as explicitly provided under Presidential Decree No. 106768 or The Water Code of the Philippines, as amended (Water Code) that appropriation of water is "the acquisition of rights over the use of waters or the taking or diverting of waters from [natural resources]", which natural resources are enumerated under Articles 5 and 6 of the Water Code:

To be sure, when water is already taken or diverted from a natural source, it is considered appropriated water – as in the case of dam water or water already impounded in an artificial receptacle. The fact of appropriation is crucial in determining the point within which necessary tax is to be imposed on the utilization and development of water. Article 1369 of the Water Code provides that a water permit must be issued for the appropriation of water from a natural source. In this connection, the NWRB confirmed in its Comment to the Petition that it issues water permit for the appropriation of water from the Angat River, not the Angat Dam because Angat Dam is a mere reservoir.70 Verily, the usage of water not directly from a natural source but that which originates from the facilities of a man-made structure, like Angat Dam, does not involve utilization and development of water by reason of the fact that it involves water that is already appropriated.

The moment that water from Angat River is already appropriated and impounded into the Angat Dam, it ceases to form part of natural resource. Water already collected through a dam system is separated from its source. "Every diversion of water from a stream is artificial — a disturbance of the natural order of things."71 A dam or a ditch, such as Angat Dam, is an artificial mechanism because it alters the natural conditions of the river by directing the waters into a catchment and preventing its natural flow.72

Significantly, in IDEALS, Inc. v. PSALM73 (IDEALS), the Court, echoing the opinion of the Department of Justice, ruled that water ceases to form part of a natural resource once removed therefrom.74 The Court discussed that power generation, through the use of water already impounded in the Angat Dam, does not involve utilization and development of national wealth because dam water is not part of the State's natural resource.

In addition, the Court outlined in IDEALS the intricacies surrounding the operation and maintenance of the Angat Dam Complex. It explained that the Angat Reservoir and Dam has been in operation since 1968, with multi-purpose design (a) to supply irrigation to certain municipalities; (b) to provide domestic and industrial water for Metro Manila residents; (c) to generate hydroelectric power; and (d) to minimize flooding to downstream areas. In his Dissenting Opinion in IDEALS,75 then Associate Justice Presbitero J. Velasco, Jr. noted that different government agencies jointly operate within the Angat Dam Complex, and petitioner, for instance, makes use of water coming from the outflow of the AHEPP:

The Court further pointed out in IDEALS that the NPC exercises complete jurisdiction and full supervision over dams and power plants, including the Angat Dam and Reservoir, its watershed and the AHEPP.77 It decreed that NPC has the effective control over all elements of the extraction process, including the amount and timing thereof [and] retains full supervision and control over the extraction and diversion of waters from the Angat River.78 This finding is in consonance with Republic Act No. (RA) 6395,79 or the Revised Charter of the NPC, which categorically states the NPC's full control over the extraction and diversion of water from the natural source:

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and from persons owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams or water channels intersecting or connecting therewith or contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any person or persons whose property is, directly or indirectly, adversely affected or damaged thereby[.]

As above-stated, NPC made use of water coming from the Angat River. Notably, the NPC in its Comment to the Petition confirmed that while under its management and prior to the privatization of the AHEPP in 2014, the NPC had been paying the national wealth tax in favor of respondent.80 More, while it did not categorically indicate that respondent is the recipient of payment, the publicly available Audited Financial Statement of the NPC indicates that indeed the NPC has been paying national wealth tax as late as 2021.81

To the Court's mind, it would be highly unreasonable if national wealth tax were to be imposed on dam water given that it is already appropriated water, and, as confirmed by the NPC, the water from the Angat River is subjected to appropriate tax upon its extraction and prior to its impounding.

The foregoing conclusion also finds support in the opinions of the Department of Justice which were likewise duly considered by the Court in IDEALS:

Associate Justice Alfredo Benjamin S. Caguioa shared the same view that dam water is appropriated water, already collected, and no longer part of a natural resource. He expounds:

Following the Court's ruling in the IDEALS case, the water, flowing into Angat Dam, is deemed appropriated once collected, that is, at the point it flows into the man-made structure through artificial means. At this point, the water ceases to be a "natural resource" within the contemplation of the Water Code. Simply stated, once water is diverted and captured through the use of man-made structures or other artificial means, it ceases to become a natural resource. Necessarily, the use of water stored in Angat Dam, whether for the purpose of power generation[,] or distribution (in the case of MWSS through its concessionaires), no longer constitutes the "utilization and development of national wealth", as the source of water is artificial, rather than natural in character.83

In sum, IDEALS definitively characterizes dam water as appropriated water that is already removed from a natural source. Hence, for purposes of claiming national wealth tax, dam water is beyond the reach of respondent's entitlement under Section 7, Article X of the 1987 Constitution.

Aside from the fact that dam water is appropriated water already removed from natural resource, petitioner cannot be held liable for national wealth tax because respondent failed to prove that petitioner is engaged in utilization and development of water.

As specified in its Charter, petitioner is tasked with the operation and maintenance of waterworks system to ensure an uninterrupted and sufficient supply and distribution of potable water for the consuming public.84 Its attributes, powers, and functions include:

The enumeration above readily shows that petitioner was created for regulatory functions. It does not make use of the water in Angat Dam to gain profit, and from which profit an LGU may share. While petitioner converts to good use the water in Angat Dam, it is solely for the purpose of operating and maintaining waterworks system for the supply and distribution of potable water to the consuming public. To give respondent a share in the proceeds from the utilization and development of dam water is illogical because petitioner does not derive proceeds by the mere operation of the dam.

Further, in Metropolitan Waterworks and Sewerage System v. Central Board of Assessment Appeals,86 the Court ruled that petitioner is created to render public service and that petitioner is a government instrumentality vested with corporate powers pursuant to Executive Order No. 59687 and RA 10149:88

Further, in Republic v. City of Parañaque,89 the Court differentiated a government instrumentality vested with corporate powers from a GOCC in that a government instrumentality vested with corporate powers is created in order to perform essential governmental or public functions and does not need to be economically viable:

The powers and functions of petitioner are for public use and welfare rather than profit, and are governmental and not commercial in nature.91 Associate Justice Alfredo Benjamin S. Caguioa explained that the maintenance, and operation of the Angat Dam and reservoir are being undertaken by [petitioner] (through its concessionaires) in furtherance of its mandate to provide an essential public service within its jurisdiction. The provision of essential public services does not constitute exploration and development of national wealth so as to entitle [respondent] to a portion of proceeds resulting therefrom.92 At the same time, Chief Justice Alexander G. Gesmundo underscored that the petitioner's powers and functions relate to public needs and that its operation and maintenance of waterworks and sewerage systems are essential public services vital to public health and safety. Meanwhile, "utilization and development of national wealth" contemplates a commercial undertaking which generates income which is not the undertaking of petitioner given that it is not a profit-oriented entity.93

Petitioner's Charter also specifies the manner on how it shall dispose of its "income." While termed as income, Section 13 of RA 6234 reveals that the money being referred therein is that which petitioner receives and which it shall use for its operation, expansion and maintenance:

Further, a careful examination of the concession agreements94 presently in effect between petitioner and its private concessionaires (Manila Water Services, Inc.95 and Manila Water, Inc.96) also lends veracity to petitioner's averment that it does not derive profit from the concession agreements.

Primarily, the concession fees payable to petitioner represent, among others: (a) portions of the outstanding balances of petitioner's loan obligations and (b) annual budget requirement for petitioner's operating expenses.

That monies flowed into (cash inflows) an entity does not automatically characterize such proceeds as revenues or income. To be sure, petitioner did not earn these amounts in exchange for a sale of goods or services. The concession fees have been intended to approximate the amounts needed by petitioner to meet its financial obligations and defray the costs of operations. In other words, petitioner's cash receipts are capital and not revenue in nature or, much less, income. In this light, the concession fees are not gross receipts or proceeds in the hands of petitioner within the meaning of Section 291 of the LGC, to which the LGU is entitled to a share.

Water in a natural resource is national wealth. When water is utilized and developed directly from a natural source, the concerned government entity must abide by the constitutional requirement to give the concerned LGU its equitable share in the proceeds of the utilization and development of national wealth. However, such circumstance is wanting here because respondent asserts entitlement to a share arising from the use of dam water which is appropriated water already impounded in the Angat Dam, and no longer part of a natural resource. Being already appropriated, dam water is no longer subject of national wealth tax because appropriate tax is to be determined and imposed upon the extraction of water from a natural resource and accordingly, prior to the impounding and appropriation of water. More, petitioner is not liable to pay respondent a share in its use of dam water because petitioner is created for its regulatory governmental functions. It does not generate income and derives no profit from which respondent may share arising from the utilization and development of dam water.

All told, the Court finds that the CA erred in affirming the RTC Decision which found petitioner liable to pay respondent a share in the utilization and development of national wealth.

WHEREFORE, the petition is GRANTED. The Decision dated May 30, 2008 and the Resolution dated October 24, 2008 of the Court of Appeals in CA-G.R. CV No. 86701 are REVERSED and SET ASIDE. Accordingly, the Complaint for Specific Performance/Payment of National Wealth Share is DISMISSED for lack of merit.

Hernando, Zalameda, M. Lopez, Gaerlan, Rosario, J. Lopez, Marquez, Kho, Jr., and Singh, JJ., concur.

Lazaro-Javier,* J., on official business but left her vote. Please see concurrence and dissent.