THE CITY OF CEBU, PLAINTIFF AND APPELLEE, VS. THE NATIONAL WATERWORKS AND SEWERAGE AUTHORITY, DEFENDANT AND APPELLANT.

To prevent the National Waterworks and Sewerage Authority (NAWASA),
created under Republic Act No. 1383, from taking over the ownership,
control, supervision, and jurisdiction over the Osmeña Waterworks
System, pursuant to the provisions of Section 8 of the said Act, the
City of Cebu filed an action for declaratory relief in the Court of
First Instance of Cebu, naming the NAWASA as defendant, praying for a
clear interpretation of the provisions of said R. A. No. 1383; a
declaration of the rights and obligations of the parties thereunder;
and a declaration that the statute or any part thereof, in so far as it
deprives the plaintiff of its property rights in the Osmeña Waterworks
System without due process of law and just compensation, is
unconstitutional.

In its answer, NAWASA contended that as the System had always been
under the control and operation of the National Government, its
transfer to the defendant NAWASA was within the competence of Congress
to do; that even assuming that the said System belonged to plaintiff,
it was public property and therefore, within the absolute control of
Congress; and that granting that it was patrimonial property, there was
proper and just compensation provided for in Republic Act No. 1383 for
its transfer to NAWASA.

After due trial, the lower court rendered judgment which was later
amended, declaring Republic Act No. 1383 unconstitutional “in so far as
it vests in defendant authority (NAWASA) ownership over the Osmeña
Waterworks System without just compensation as required by the
Constitution, without prejudice to granting positive coercive relief
upon proper showing that defendant insists upon taking ownership of the
Osmeña Waterworks System,” at the same time upholding the defendant’s
right of control, jurisdiction and supervision over the said System.
The question as to what acts of the NAWASA would constitute acts of
ownership or dominion and what would be considered as an exercise of
jurisdiction, supervision and control was left open for future
determination.

From this decision the present appeal has been interposed by the defendant NAWASA.

The facts as found by the lower court and upon which its decision was based, are as follows:

“By an Act of 27 December 1918, the now defunct
Philippine Legislature authorized the Municipality of Cebu, Province of
Cebu, Philippines, to incur an indebtedness of $125,000.00 in money of
the United States, and to issue bonds covering the amount of the said
indebtedness in gold coin of the United States, for the purpose of
providing funds for the construction of sewer and drainage facilities,
to secure a sufficient supply of water and necessary buildings for
primary schools, and for other purposes (Act No. 2009). The Act
provided that the proceeds of the sale of the bond issue should be
placed by the Treasurer of the Philippines to the credit of the
municipality, to be drawn therefrom by appropriations by the Municipal
Council of Cebu. It exclusively charged the municipality with the
obligation of reimbursing the same from its current revenues. (Sections
4 and 7, Act No. 2009). The bonds which were to mature in 1941 were
expressly declared exempt from taxes by the government of the United
States or by the government of the Philippine Islands, and its
political or municipal subdivisions, or by any state or territory of
the United States. (Sec. 1, Act No. 2009).

“Pursuant to the
statute, the Municipality of Cebu floated the bond issue and invested
part of the proceeds of the sale thereof in the construction of a
waterworks system to supply water to its inhabitants. The system came
to be known as the Osmeña Waterworks System in honor of the illustrious
son of Cebu, former President Sergio Osmeña, Sr., who was then the
Speaker of the National Assembly that approved Act No. 2009. Since its
establishment, the System has been supplying the inhabitants of the
municipality of Cebu with water originally taken exclusively from the
Buhisan basin, within an area of approximately five hundred hectares,
and which, is admittedly within a government reservation. The basin
catches the rain water run-off from, the surrounding hills and impounds
it in a reinforced concrete dam. From the dam the water is conveyed in
a 14 inch main pipe to the Tisa Filters where it is treated or purified
by means of coagulants, rapid sand filtration and chlorination. After
the purification process, the water is stored in a four million-gallon
clear water reservoir. From the Tisa Filters the water is finally
conveyed through a 16-inch conduit to the city far distribution to the
paying customers of the system.

“By statute, the City of Cebu
came into existence as a political body corporate on 20 October 1936.
(Sec. 2. Commonwealth Act No. 58). The newly created city absorbed the
former municipality of Cebu. (Sec. 3, Commonwealth Act No. 68).

“Among
the general powers granted to, and duties imposed upon, the legislative
body of the City, known as the Municipal Board, is that of providing
for the maintenance of waterworks for the purpose of supplying water to
the inhabitants of the city, and the purification of the source of
supply and the places through which the same passes, and to regulate
the consumption and use of the water; to fix and provide for the
collection of rents therefor; and to regulate the construction, repair,
and use of hydrants, pumps, cisterns, and reservoirs. Sec. 17-x.
Commonwealth Act 58). Pursuant to the aforesaid charter provision, the
Municipal Board of the City of Cebu has been running and operating the
Osmeña Waterworks System, Its municipal Board provides for the
budgetary expenses of the System and governs the disposition of the
System’s revenue.

“On 16 November 1948, the Public Service
Commission granted plaintiff City a certificate of public convenience
to operate and maintain the Osmeña Waterworks System, subject to the
terms and conditions imposed therein Exh. E).

“For the
purpose of expanding the service to meet the water needs of its
increased population, the City of Cebu, on 11 December 1950 filed with
the Department of Agriculture and Natural Resources an application for
the use of water emanating from a natural spring in a private land
belonging to the late Dr. Pio Valencia, situated in Hagubiao,
Consolacion, Cebu. The said application was in duo time approved by the
department head. Page 5, Exh- C).

“On 17 June 1955, defendant
Authority was created as a public corporation. (Sec. 1, Republic Act
No. 1383). Pursuant to its charter, defendant shall own and/or have
jurisdiction, supervision and control over all territory now embraced
by the Metropolitan Water District as well as all areas now served by
existing government-owned waterworks and sewerage and drainage systems
within the boundaries of cities, municipalities, and municipal
districts in the Philippine including those served by the Waterworks
and Wells and Drills Sections of the Bureau of Public Works’ (See. 1).
Defendant was also given the power to acquire, purchase, hold,
transfer, sell, lease, rent, mortgage, encumber, and otherwise dispose
of real and personal property including rights and franchises within
the Philippines, as authorized by the purposes for which the Authority
was created and reasonably and necessarily required for the
‘transaction of the lawful business of the same unless otherwise
provided in this Act’, and to exercise the right of eminent domain for
the purpose for which the Authority was created, in the manner provided
for by law for condemnation proceedings by the national, provincial,
and municipal governments;’ (Sec. 2, paragraphs [h] and [i]).

“Lastly,
the Act provides that ‘all existing government-owned waterworks and
sewerage systems in cities, municipalities and municipal districts,
including springs and other water sources, as well as the water-works
and sewerage bonds, sinking funds, and all indebtedness in general of
the said Metropolitan Water District, and government-owned waterworks
and sewerage systems are transferred to the National Waterworks and
Sewerage Authority, and the Board is hereby authorized and directed to
receive and assume all such assets and liabilities or on behalf of the
said Authority and in turn to pledge such assets as security for the
payment of waterworks and sewerage bonded debt’ and that the net book
value of the properties and assets of the Metropolitan Water District
and of government owned waterworks and sewerage systems in cities,
municipalities, or municipal districts, and other government-owned
waterworks ‘and sewerage systems shall be received by the Authority in
payment for an equal value of the assets of the National Waterworks and
Sewerage Authority’. (Sec. 8).”

Appellant, in its appeal, claims that the lower court erred:

1. In declaring Republic Act Number 1383 unconstitutional in
   that it vests in defendant ownership and control of the Osmeña
   Waterworks System without just compensation as required by the
   Constitution.

2. In not holding that under
   the legitimate exercise of the police power of the State, Congress has
   the authority to enact a law transferring the Osmeña Waterworks System
   to another agency of the Government such as the defendant National
   Waterworks and Sewerage Authority in this case.

3. In
   declaring that Republic Act Number 1383 does not provide; for just
   compensation and also in refusing to recognize the right of the
   National Government to acquire the Osmeña Waterworks System by eminent
   domain.

4. In not dismissing the plaintiff’s complaint.

“It is clear that the State may, in the interest of
national welfare, transfer to public ownership any private enterprise
upon payment of just compensation. At the same time, one has to bear in
mind that no person can be deprived of his property except for public
use and upon payment of just compensation. There is an attempt to
observe this requirement in Republic Act No. 1883 when in providing for
the transfer of appellee’s waterworks system to a national agency it
was directed that the transfer be made upon payment of an equivalent
value of the property. Has this been implemented? Has appellant
actually transferred to appellee any asset of the NAWASA that may be
considered just compensation for the property expropriated? There is
nothing in the record to show that such was done. Neither is there
anything to this effect in Office Memorandum No. 7 issued by the NAWASA
in implementation of the provision of Republic Act No. 1383. The law
speaks of assets of the NAWASA but they are not specified. While the
Act empowers the NAWASA to contract indebtedness and issue bonds
subject to the approval of the Secretary of Finance when necessary for
the transaction of its business (sec, 2, par. (1), see. 5, Act No.
1383), no such action has been taken to comply with appellant’s
commitment in so far as payment of compensation of appellee is
concerned. As to when such action should be taken no one knows. And
unless this aspect of the law is clarified and appellee is given its
due compensation, appellee cannot be deprived of its property even if
appellant desires to take over its administration in line with the
spirit of the law. We are therefore persuaded to conclude that the law,
insofar as it expropriates the waterworks in question without providing
for an effective payment of just compensation, violates our
Constitution.”

Exactly the same situation obtains in the present case, Section 8 of Republic Act No. 1383 (supra.)
provides that “the net book value of the properties and assets of the
Metropolitan Water District and of government-owned waterworks and
sewerage systems in cities, municipalities of municipal districts, and
other government-owned waterworks and sewerage systems shall be
received by the. Authority In payment for an equal value of the assets
of the National Waterworks and Sewerage Authority”. In other words, all
the properties and assets of the Osmeña Waterworks System are
transferred to the defendant NAWASA in exchange for an equal value of
the latter’s assets. But what these assets consist of, nothing concrete
presently appears. All that is provided in Section 8 is that NAWASA
acquires all the assets and liabilities of all government-owned
waterworks and sewerage systems in the country. It is an equal value of
these unliquidated assets and liabilities that is supposed to be given
to plaintiff-appellee as payment of its System. Such, certainly, is not
a compensation that satisfies the Constitutional provisions.

Appellant, however, maintains that the waterworks involved herein is
not a patrimonial property of the City of Cebu but one for public use
and, therefore, falls within the control of the legislature. We find no
merit in this contention.

It must be remembered that the Osmeña Waterworks System was
established out of the $125,000.00 loan extended to the municipality of
Cebu by the U.S. Government payable within 80 years from the release
thereof (Sec. 1, Act 2009), and which apparently was fully paid for by
said municipality as certified to by the Insular Treasurer (Exh. D).
For its operation and maintenance, the City of Cebu (Osmeña Waterworks
System) applied for and obtained a certificate of public convenience
from the Public Service Commission (Exh. B) and was made subject to the
rates fixed and regulations imposed by said body. The System owned
properties which appellee estimated at P10,000,000.00, although
appellant claims it to be worth only P1,000,000.00, and operates on a
budget approved by its. Board of Directors (not by Congress), the
disbursement of which was placed under the supervision and custody of
the City Treasurer (t.s.n., pp. 28-29). The mere fact that the Buhisan
basin where the water is collected stands on a government reservation,
and that the System was created to serve the needs of the residents of
said City (upon payment of certain rates from which the System
derives material gain), to our mind do not transform the proprietary
nature of appellee’s ownership over the same to governmental or public.
The flaw in appellant’s contention that the System is a public works
for public service is due to an apparent misapprehension that because
the System serves the public in a manner of speaking, it is, but that
token alone, necessarily for public service. The contention overlooks
the fact that only those of the general public who pay the required
rental or charge authorized and collected by the System, do make use of
the water. In other words, the System serves all who pay the charges.
It is open to the public (in this sense, it is public service), but
upon the payment only of a certain rental (which makes it proprietary.)
Article 424 of the New Civil Code cited by appellant makes clear this
distinction. It reads:

“Art. 424. Property for public use, in the province,
cities, and municipalities, consist of the provincial roads, city
streets, municipal streets, the squares, fountains, public waters,
promenades, and public works for public service paid for by said
provinces, cities, or municipalities.

“All other property
possessed by any of them is patrimonial and shall be governed by this
Code, without prejudice to the provisions of special laws.”

Thus, the term “public works for public service” must be interpreted, following the principle of ejusdem generis,
in the concept of the preceding words “provincial roads, city streets,
municipal streets, the squares, fountains, public waters and
promenades” which are used freely by all, without distinction. Hence, if the public works is not for such free
public service, it is not within the purview of the first paragraph,
but of the second paragraph of Article 424, and, consequently,
patrimonial in character. And, as already held by this Court, a
municipal water system designed to supply water to the inhabitants for profit is a corporate function of the municipality (Mendoza vs. De Leon, 33 Phil., 508, citing Omaha Water Co. vs. Omaha, 12 L.R.A., [N.S.] 736; CCA. 267; 147 Fed. 1; Jodson vs. Borough of Winsted, 80 Conn. 384; 15 L.R.A. [N.S.], 91).

“Cases differ as to the public and private character
of waterworks in some respects, but the weight of authority, in so far
as legislative control is concerned, classes them as private affairs.
(Shirk vs. City of Lancaster, 313 Pa. 158, 169 Alt. 557, 90 A.L.E. 688, cited in City of Baguio vs. National Waterworks and Sewerage Authority, supra.)

The consequential effect of such declaration is foreseeable, thus:

Although the state may regulate the service and
rates of water plants owned and operated by municipalities, such
property is not employed for governmental purposes and in the ownership
operation thereof the municipality acts in its proprietary capacity,
free from legislative interference (1 McQuiliin, p. 683).

The
water system of a city not being a property held for governmental
purposes is not subject to legislative control (Kenton Water Co. vs. City of Covington, 156 Ky. 569, 161 SW 988).

In
the ownership and control of a water system purchased by the city out
of the proceeds of the loan contracted for that purpose, the city acts
in its proprietary, character as distinguished from its governmental
capacity (Helena Consolidated Water Co. vs. Steele, 20 Mont. 1, 49 Pac, 382, 37 L.R.A. 412; Public Service Commission vs. City of Helena, 52 Mont. 527; 159 Pac. 24).

Similarly, we cannot uphold appellant’s theory that the transfer of
ownership of the Osmeña Waterworks System to another. government agency
is a valid exercise of the police power of the State, because while the
power to enact laws intended to promote public order, safety, health,
morals and general welfare of society is inherent in every sovereign
state (Churchill vs. Rafferty, 32 Phil., 580), such power is
not without limitations, notable among which is the constitutional
prohibition against the taking of private property for public use
without just compensation. (Art. III, Sec. 1, Philippine Constitution.)

No exercise of the police power can disregard the
constitutional guarantees in respect to the taking of private property,
due process and equal protection of the laws and it should not override
the demands of natural justice (People vs. Chicago, M & St. P.R. Co., 306 111. 486, 138 N.E. 155, 28 A.L.R. 610.)

If
a statute purporting to have been enacted to protect the public health,
morals or safety, has no real or substantial reason to these objects,
or is a palpable invasion of rights secured by fundamental law, it is
the duty of courts to so adjudge, and thereby give effect to the
Constitution, (Gaines & Co. vs. Holmes, 15, Ga. 344, 114 S.E. 327, 37 A.L.R. 98.)

Action
in the nature of police regulation is void if against the express
provisions of the Constitution although otherwise within its general
power to make police regulations. (State vs. Froechlich, 115 Wis. 82, 91 N.W. 115).

Appellant also urges recognition of the right of the National
Government (through the National Waterworks & Sewerage Authority)
to acquire the Osmeña Waterworks System by eminent domain. This, we
find to be equally untenable, for one of the essential requisites to
the lawful exercise of this right is the payment to the owner of the
condemned property of just compensation to be ascertained according to
law (Western Union Tel. Co. vs. Louisville, etc. R. Co., 270
Ill. 399; 110 NE 583, Ann. Cas 1917B, 760; II Cooley’s Constitutional
Limitations, p. 1110). Needless to state in this respect, that it is
precisely for this reason, that is, lack of provision regarding
effective payment of just compensation, that Republic Act No. 1383 was
declared violative of the Constitution, in the case of City of Baguio vs. National Waterworks & Sewerage Authority.

Wherefore, and finding no reason to depart from the established
jurisprudence on the matter, the decision appealed from is hereby
affirmed, without costs. So ordered.

Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, and Gutierrez David, JJ., concur.