PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, PETITIONER, VS. THE PUBLIC SERVICE COMMISSION, RESPONDENT, MANILA ELECTRIC COMPANY, PETITIONER, VS. THE PUBLIC SERVICE COMMISSION, RE…

Philippine Long Distance Telephone Company versus Public Service Commission

The Case

This is a consolidated special civil action in which the Philippine Long Distance Telephone Company and the Manila Electric Company challenged the interpretation given by the Public Service Commission, later replaced by the Specialized Regulatory Boards, to the supervision and regulation fees imposed by Section 40, paragraph (e), of the Public Service Act, as amended by Republic Act 3792. The petitioners are public utilities organized as stock corporations. The respondent is the regulatory body that assessed and collected the fees. The case matters because it settles two questions every utility lawyer and every student of taxation must know: whether these exactions are taxes or regulatory fees, and what base Congress intended for their computation. The answer fixes the boundary between the taxing power and the police power, and it protects the public utility from assessments that bear no reasonable relation to the cost of supervising it.

Procedural History

The controversy began before the Public Service Commission, which construed the amended provision to mean that the fees of a stock corporation are computed on the capital stock or the property and equipment, whichever is higher. The matter reached the Supreme Court, which on August 31, 1970 affirmed the Commission with a modification: the property and equipment must be taken net of depreciation. The petitioners moved for reconsideration, and in a second motion for reconsideration and a supplemental second motion for reconsideration they insisted that the amendatory law did not change the base for stock corporations at all. Because the case had been tried below on the theory that the fees were purely regulatory, leaving the parties no adequate opportunity to prove that the fees were confiscatory and unreasonable, the Court by resolution of August 30, 1971 remanded the case to the Commission for the reception of evidence on that point. In October 1972 the Commission was abolished and its powers and functions were transferred to the Specialized Regulatory Boards. The petitioners and the Board then entered into a stipulation of facts, which they submitted to the Court in January 1975, followed by their respective memoranda. The Board repudiated the former position of the Commission and made common cause with the petitioners. The Court then resolved the pending motions and reconsidered its earlier decision.

Facts

The petitioners are two of the largest public utilities in the country, both organized as stock corporations. For years the Commission collected the annual supervision fees from them on the basis of their outstanding capital stock. From 1964 to 1974 the Philippine Long Distance Telephone Company paid a total of 1,124,529 pesos and 20 centavos, while the Manila Electric Company paid 2,836,302 pesos and 58 centavos.

After the amendment, the Board computed what the fees would have been had they been based on the gross value of the petitioners' property and equipment in service. The figures were staggering: over the same eleven years the telephone company would have owed 15,284,379 pesos and 20 centavos, and the electric company 31,036,000 pesos and 80 centavos. Even on the net-of-depreciation basis adopted in the earlier decision, the telephone company would have paid 9,832,145 pesos and 65 centavos and the electric company 21,223,640 pesos and 60 centavos.

The stipulation also showed that there were 14,637 public utility operators in the country, and that total collections from all of them over the same period amounted to 26,964,845 pesos and 37 centavos. Nearly four million pesos, or about fifteen percent of the total, came from these two petitioners alone, a share far exceeding the proportionate supervision they received. The Commission had also accumulated savings of 28,007,408 pesos and 9 centavos as of June 30, 1974. Finally, both franchises contain an in lieu of all taxes clause, and the Department of Justice and the Secretary of Finance had ruled that such a clause forecloses the imposition of any other tax.

Issues

• Whether or not the supervision and regulation fees under Section 40, paragraph (e), of the Public Service Act, as amended by Republic Act 3792, are taxes rather than regulatory fees.
• Whether or not the amendment made the value of property and equipment an alternative basis for computing the fees due from public utilities organized as stock corporations.
• Whether or not the fees, if computed on the value of property and equipment, bear a reasonable relation to the cost of supervision and regulation.

Applicable Provisions

Section 40, paragraph (e), of the Public Service Act, as amended by Section 5 of Republic Act 3792, provides:

For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services and or in the regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of the capital invested, or of the property and equipment, whichever is higher.

The opening words fix the character of the exaction as reimbursement of expenses, and the enumerated bases supply the alternative measures of computation that the Court had to construe.

The last paragraph of the same section provides:

Aside from the appropriations for the Commission under the Annual General Appropriations Act, any unexpended balance of the fees collected by the Commission under this section shall be constituted receipts automatically appropriated each year, and together with any surplus in the standardizing meter laboratory revolving fund under Commonwealth Act numbered Three Hundred Forty Nine, shall be disbursed by the Public Service Commissioner in accordance with special budget to be approved by the Department of Justice, the Budget Commission and the Office of the President of the Philippines for additional needed personal services, maintenance and operating expenses, acquisition of urgently needed vehicles, furniture and equipment, maintenance of an adequate reference library, acquisition of a lot and building for the Commission, and other expenses necessary for efficient administration and effective supervision and regulation of public services.

This provision shows that only the unexpended balance, and not the collections themselves, is devoted to the enumerated projects, so the primary purpose remains regulation and supervision.

Ruling

On the first issue, the Court held that the fees are not taxes but regulation and supervision fees imposed in the exercise of the police power. Neither the amendment nor the automatic appropriation clause altered their nature as previously settled. The Court recalled its earlier rulings that the amounts collected under Section 40 were fees for the regulatory functions of the Commission, not taxes. It stressed that the intention of Congress is stated in the provision itself, which speaks of reimbursement of expenses. To treat the fees as taxes would be self-defeating, because the in lieu of all taxes clauses in both franchises would then preclude their collection altogether.

On the second issue, the Court reconsidered its decision of August 31, 1970 and ruled that the basis for computing the fees, insofar as these petitioners are concerned, is and remains the capital stock subscribed or paid, and not alternatively the property and equipment. The Court noted that the term property and equipment carries no qualification, leaving unclear whether it means original cost, cost less depreciation, market value, or cost less outstanding loans. The parties themselves rejected the last alternative as unwarranted by the text and administratively unstable.

On the third issue, the Court held that the nature and amount of such fees must be reasonably related to the cost of supervision and regulation, and that to base the computation on the value of property and equipment, with or without depreciation, would ignore that requirement altogether. The stipulation showed that such a basis would not merely double the pre-amendment collections but make them almost ten times more for these petitioners, a result the lawmaking body could not have intended.

Doctrine

Supervision and regulation fees under Section 40, paragraph (e), of the Public Service Act, as amended, are regulatory fees exacted under the police power, not taxes levied under the taxing power, because the provision itself declares them to be reimbursement of the expenses of supervision and regulation. Being regulatory, their nature and amount must bear a reasonable relation to the cost of the supervision and regulation rendered. For a public utility organized as a stock corporation, the base is the capital stock subscribed or paid, and the value of property and equipment is not an alternative base. The phrase property and equipment applies only where no shares have been issued, in which case the base is the capital invested or the property and equipment, whichever is higher.

Disposition

The Court granted the motions, reconsidered and set aside its earlier decision, declared the assessments to be regulation and supervision fees rather than taxes, and ruled that the fees due from the petitioners are computed on the capital stock subscribed or paid.

Remember This

Memorize the line that the fees are exactly what the provision says, regulatory fees that must be reasonably related to the cost of supervision, so the base for stock corporations is the capital stock subscribed or paid. Examiners use this case to test the tax versus police power distinction, the reasonable relation requirement for regulatory fees, and the effect of an in lieu of all taxes clause in a franchise.