Power income tax, too!

DIE HARD III

Herman Tiu Laurel

7/1/2013

Daily Tribune

Last week, the income tax payments of the Metropolitan Waterworks and Sewerage System (MWSS)'s concessionaires being passed on to water consumers became the burning issue of the day. Manila Water and Maynilad were exposed again to be making consumers pay for taxes on what these companies are earning. This provision in the original water concession agreement with each company was signed by Fidel V. Ramos (FVR), which has effectively rendered MWSS regulators helpless, if not totally inutile.

Retrospectively, then, Ramos should be charged in the Ombudsman for this con act. The truth is, water consumers consumed with anger at the unjust P15-billion income tax pass-on should also pour their rage on one person — the supposed Chief Executive BS Aquino, whose office is still the official party to the agreement with the concessionaires.
Mind you. Such income tax pass-on is also continuing in the power sector. Many civic-minded citizens, including consumer activists, who in 2004 helped win the income tax reimbursement from Meralco of around P20 billion (which has yet to be completed), still believe that Meralco's unjust pass-on of its income tax had ceased after the Puno Supreme Court (SC) debunked the position taken by the Energy Regulatory Commission (ERC) and Meralco that income tax is in the same vein as "business taxes" like the value-added tax, which can be shouldered by the end user.

Former Chief Justice Renato Puno correctly declared that income tax must be borne by the party that earns the income. And clearly, in the case of such privatized power utilities, these private corporations earn the profits for themselves — neither for the government nor the consuming public. The ERC and Meralco were thus caught with their pants down.
However, right after that historic Puno decision, the ERC went into stealth mode to restore Meralco's pass-on of its income taxes in another roundabout scheme — the Performance Based Regulation (PBR) system. This is how Romeo Junia, one of our fellow power consumer protection advocates, put it in a letter-to-the-editor in 2010:
"PBR has effectively reversed a SC decision disallowing the charging of Meralco's corporate income tax to us. Justice Renato Puno, in that landmark refund order, denied with finality Meralco's 'stubborn stance' to hit us for their taxes. In an issue paper on PBR, however, ERC said: 'If income tax was not considered a recoverable cost, an equivalent revenue outcome (meaning the overcharge — RLJ) could be achieved by allowing a corresponding pre-tax regulatory weighted average cost of capital (WACC) to be earned on the asset base.' This was after ERC realized that openly including income tax as a revenue building block would go against the Court ruling, thus they tucked the item away in WACC, but with the same devastating impact on captive customers."

Who among our over five million Meralco power consumers are aware of every minutiae of such labyrinth rules concocted by the ERC in cahoots with Meralco, based on the powers given it by the Electric Power Industry Reform Act (Epira) of 2001?
Now Meralco's financial statements do indeed declare income tax payments but what is not seen by the public is the "pre-tax regulatory WACC to be earned on the asset base," recovering whatever income tax is to be passed on to consumers even before such is imposed.
For the water concessionaires, MWSS acting chief lawyer Emmanuel Caparas explained at the Water for People Network that I attended last June 29 at the UP Law Center, this WACC equivalent is the Appropriate Discount Rate (ADR) for their capital cost.
When we read "capital" in the financial reports of these privatized utilities, it must be understood that this comes not from the equity of the companies but from the computation of the "regulatory period" rate base, which means that consumers are charged the capital required by these companies for operating and capital expenditures spread over the regulatory period (of four years for power and five years for water).
In effect, all consumers are subsidizing both the private power utilities and water concessionaires! We can therefore describe this as "socialized capitalization" but with "privatization of profits or income."

Ordinary private companies or corporations, big and small, fund capital and operating expenses from equity and loans; but these goddamn lucky private (and supposedly public) utilities are funded by millions of hapless consumers.
Many are still clueless about why we have this onerous system from the privatization of our public utilities. It is really difficult for ordinary folks as well as legitimate entrepreneurs or businessmen, who go by the traditional route of raising their own capital and expending this very frugally and judiciously in the course of operating the business, to comprehend.
Privatized public utilities know nothing of this because their profits go higher the more they escalate the percentage of their so-called capital and operating costs.
Who imposed this privatization program, if not the international financial institutions, in exchange for stand-by loans during FVR and Gloria Arroyo's terms, the last one totaling $800 million after the Edsa II-induced crisis.

The privatized public utilities companies with the sponsorship of the international financial institutions are now dispersing and obfuscating the trail of the capital and wealth the private companies gained form privatization through promotion of "investments" of these companies in other countries.
A food and beverage giant's power and fuel units have put in hefty investments in our North Borneo land-grabbing neighbor, Malaysia; ditto for Meralco in that country and for Vietnam, too.

Clearly, such grave injustice in the privatized public utilities sector cannot be redressed without nationalization of these companies, with all capital and earnings due the consumers restored to them. And this will only happen after the next popular revolution — an outcome hoped for as this nation gradually knocks some sense into its mind and heart.

(Tune in to 1098 AM, Tuesday to Friday, 5 p.m. to 6 p.m.; watch GNN Destiny Cable Channel 8, Saturday, 8:00 p.m. and replay Sunday, 8 a.m., this week on "Specter: 60 percent foreign ownership of rural banks"; visit http://newkatipunero.blogspot.com; and text reactions to 0923-4095739)