Consumers to pay big business, foreign firms’ income tax under Duterte bill

From Pointwest

By Arnold Padilla

(Released at the launch of consumer network Samahan at Ugnayan ng Konsyumer para sa Ikauunlad ng Bayan (SUKI))

When President Rodrigo Duterte told striking jeepney drivers and operators “Magtiis kayo sa hirap at gutom”, he could be as well speaking to all poor Filipinos who struggle with ever-rising cost of electricity, water and other basic necessities.

If one of the Duterte administration’s priority and urgent bills pushes through, consumers of water, power, telecommunications, transport and other public services, an overwhelming majority of them are poor, will have to pay more for these basic needs.

House Bill (HB) 5828 deepens what is wrong with privatization where public services are run for the private gains of local oligarchs and foreign firms. Not only does it allow public utility operators to compute profit rates using methodologies of any investor seeking maximum profits. It will also allow them to include their corporate income tax in doing so. All these will be shouldered by consumers who are left with no choice but to pay for the exorbitant fees and charges.

Priority and urgent legislation

This is contained in House Bill (HB) 5828 – a consolidation of five bills introduced in the House of Representatives (HoR) by the President’s party-mates and allies including former President Gloria Macapagal-Arroyo – that amends the Public Service Act or the Commonwealth Act No. 146. It is one of the 28 priority measures that the Legislative-Executive Development Advisory Council (LEDAC) under the Duterte administration has identified as part of its Common Legislative Agenda (CLA) for the 17th Congress. HB 5828, which the LEDAC Executive Committee (Execom) also listed as among the 14 urgent bills out of the 28 priority measures, has already been approved on third reading by the HoR last September. As defined by the LEDAC Execom, an urgent bill means that it needs to be passed within the year.

Counterpart bills have also been filed at the Senate including Senator Grace Poe’s Senate Bill (SB) 1441, Sen. Win Gatchalian’s SB 1594, and Sen. Bam Aquino’s SB 695. All are pending at the Senate’s committee level. SB 1441 contains mostly similar provisions with HB 5828 but for discussion purposes, this article focuses on HB 5828 that has the backing of Malacañang.

A major agenda of HB 5828 is to liberalize public services like telecommunications and transportation by narrowing the list of what are defined as “public utilities”. Under the bill, public utilities shall refer to a person that operates, manages and controls a) power distribution, b) power transmission, and c) water distribution and sewerage pipeline systems.

The implication is that other public services not defined as public utilities (e.g., telecommunications and transportation) would be exempt from the Constitutional restriction on foreign ownership of public utilities. Consequently, the effective control of Filipinos of the economy and of economic activities that have significant public consequence would be further undermined.

War against consumers

Pres. Duterte it seems is ready to declare war against the consumers with his administration’s planned amendments to the Public Service Act. In its report endorsing the HoR approval of HB 5828, the committee on economic affairs chaired by recent PDP-Laban recruit Rep. Arthur Yap said that one of the objectives of the amendment is “to provide a mechanism for rate fixing that allows a reasonable rate of return to attract investments into public utilities”. Unfortunately for consumers, this means that the profitability and commercial viability of public services take precedence over the provision or delivery of services that are basic necessities in nature.

One of the alarming issues in HB 5828 is its insertion in Section 16 (c) of Commonwealth Act 146 of the following new provision:

“The maximum rate of return shall be equal to the post-tax weighted average cost of capital for the same or comparable businesses computed using established methodologies such as the capital asset pricing model. Income tax shall be allowed as a cash outflow for rate-determination purposes. This provision shall not bar the application of performance-based rate regulation should the administrative agency regulating such public service deem it efficient and in the public interest. 

The Philippine Competition Commission (PCC) is hereby mandated to conduct regular studies on whether deregulation is warranted in a sector and submit its recommendation to Congress.”

 

HB 5828 institutionalizes market-oriented rate-setting methodologies by public utility firms that allow for the full-cost recovery of actual and projected expenses as well as the cost of all risks resulting to guaranteed returns for the investors but unreasonably high charges for consumers. In the bill, as already mentioned, the maximum rate of return shall be equal to the post-tax weighted average cost of capital (WACC) for the same or comparable businesses computed using established methodologies such as the capital asset pricing model (CAPM).

 

CAPM captures the expected or required return in an investment (cost of equity) factoring in the prevailing market rates and risks (e.g., commercial bank rates, stock market rates). Using CAPM means assuring public utility operators that the tariffs or charges they could collect from their consumers would give them their expected or required return that is guaranteed higher than prevailing commercial bank rates and stock market rates. This means further exposing users of basic needs such as water, electricity, telecommunications, transportation and others to the vagaries and abuses of the market. WACC, on the other hand, captures the cost of equity (expected return) and cost of debt (interest rates) and measures whether or not an investment is worth pursuing – i.e. a rate of return should be at least equal to or greater than the WACC for an investment to be profitable. But public services should be measured beyond profitability as these deliver necessities of public consequence and help ensure decent living for the people.

 

In addition, HB 5828 legitimizes the use of so-called performance-based regulation (PBR), which consumer groups have already questioned in the past because they could easily be taken advantage of by public utility operators such as the rate-setting methodology for Meralco rates or the similar rate rebasing exercise for Maynilad and Manila Water where the cost of future expenses (which would also include future corporate income taxes under HB 5828) are already collected from the users of the public utility. In several instances, these future expenses included expansion projects that were not even implemented or projections (like future demand) are bloated to justify high rates.

 

Income tax as an expense

 

The use of these methodologies in the computation of profit rates acceptable to big business is the bill’s provision allowing the inclusion of income tax in their expenses thereby bloating capital cost that would in turn be used to determine rates that would be charged to consumers.

 

HB 5828 thus in effect legitimizes and institutionalizes the passing on the cost to consumers of public service/utility operators of their corporate income tax. This would make household expenses on monthly water and power bills among other basic public services even more onerous than they already are. The Supreme Court (SC) in a 2002 decision on the case of the power distribution giant Manila Electric Co. (Meralco) has barred all public utilities from including income tax in their computation of operating expenses (opex). Including the income tax in their opex artificially bloats Meralco’s expenses that could be deducted from their gross revenues (net income) where their allowed rate of return is based as a regulated public utility. HB 5828 seeks to overturn this landmark ruling with the above-mentioned stipulation.

 

In arguing against the inclusion of income tax as operating expense for rate-determination purposes, the High Court argued that: “Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue.” Income tax, on the other hand, is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income, said the court.

The SC decision has forced Meralco to refund consumers for overcharging. The same SC ruling has also been used as basis in the rejection of huge water rate hikes sought by Manila Water Co. and Maynilad Water Services Inc. in 2013. Regulators even actually ordered the water concessionaires to bring down their rates but which the latter challenged through international arbitration and the local courts. The public faces an enormous Php82 billion in additional burden, mostly representing the cost of the private water concessionaires’ corporate income tax whose inclusion in rate-setting the regulators have prohibited. Corporate income tax represents a huge portion of the amounts that water firms want to fully recover from end-users through rate hikes and their monthly bills. Maynilad, for instance, has publicly admitted that 65% of its tariff hike would be for the recovery of its income tax.

Worse, HB 5828 mandates that deregulation – e.g., rate adjustments are automatic and no longer regulated – should be an option for any public service sector if the Philippine Competition Commission (PCC) deems that it is warranted and approved by Congress.

Public services or utilities are natural monopolies that meet certain basic needs of a society and demand for them is inelastic. By allowing their private operators to set rates based on the maximum profits they could rake in as dictated by the market, HB 5828 sets up hapless consumers who do not have a choice but to use the services that a public utility provides to grave abuses.###

 

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