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NERA's Role in the Matter Maynilad Water Services, Inc. (Philippines) v. Republic of the Philippines
The Situation
Drinking water supply in metropolitan Manila is managed by two privately owned concessionaires, Manila Water Company, Inc., and Maynilad Water Services, Inc. (Maynilad). The water tariffs the concessionaires are allowed to collect from end users are regulated by the Metropolitan Waterworks and Sewerage System (MWSS), which sets water tariffs at five-year intervals.
In a September 2013 resolution, MWSS denied Maynilad’s petition to raise water tariffs and instead required the company to reduce rates over the upcoming five-year period. The main areas of disagreement were the appropriate cost of capital allowance and the recoverability of corporate income tax, which MWSS sought to disallow based on diverging interpretations of the meaning of certain contract clauses.
Following the ruling, Maynilad filed a notice of dispute with the Secretariat of the International Chamber of Commerce (ICC) International Court of Arbitration to conduct arbitration under UNCITRAL rules as provided by the concession agreement signed by Maynilad and the MWSS, and guaranteed by the Philippine government.
NERA's Role
Counsel for the claimant retained NERA Managing Director Dr. Richard Hern to provide the tribunal with an expert report on the economic rationale and international precedent for recoverability of corporate income tax when setting regulated tariffs. Working with NERA’s team, which included NERA Principal Dominik Huebler and Consultant Marija Spasovska, Dr. Hern presented the case for recoverability of corporate income tax from both an economic viewpoint and based on international practice.
Dr. Hern presented the economic theory behind regulated rate setting, including determination of the appropriate cost of capital to mimic a competitive market outcome. He outlined the different ways in which regulators can allow companies to earn a reasonable rate of return on capital by allowing for the company’s corporate income tax liability—either through setting a pre-tax weighted average cost of capital (WACC) allowance or a post-tax WACC allowance—in combination with a separate tax allowance.
Dr. Hern’s conclusion drew on the results of a survey of international practice, covering regulatory precedent with regard to tax allowances in four different industries (water, power, gas, and aviation) and a wide range of countries spanning advanced economies in Europe and Asia-Pacific, alongside emerging economies of similar credit standing to the Philippines. He found that not a single regulator outside the Philippines failed to recognize corporate income tax in one way or other.
Dr. Hern then highlighted a number of ways the respondent’s erroneous approach could be rectified in a way that is consistent with economic theory and international practice.
The Result
On 29 December 2014, the ICC Appeals Panel upheld the alternative rate-rebasing adjustment of Maynilad, allowing an increase in its base water rate. The award cited NERA evidence several times, which supported the Appeals Panel’s decision to uphold Maynilad’s position that corporate income tax should be deemed a recoverable expense.
MWSS initially refused to adhere to the ruling while waiting for a parallel arbitration initiated by Manila Water Company to conclude. In February 2015, Maynilad took the matter to an arbitration panel in Singapore, seeking to require the Philippine government to indemnify the concessionaire from losses as a result of any delay caused by any government-owned agency in implementing any increase. In a decision dated 24 July 2017, the ICC three-member arbitral tribunal unanimously upheld the validity of Maynilad’s claim for compensation for the delayed implementation of its relevant tariffs for the rebasing period 2013 to 2017.
This case highlights the importance that economic arguments and international precedent has in leading a tribunal toward its conclusion of the intended meaning of certain disputed contract clauses.
More information on this case can be found here.