City of Cebu vs. National Waterworks and Sewerage Authority

A municipal waterworks system constructed from municipal funds and operated for profit by charging rates to consumers is patrimonial property of the municipality, not public property for public use, and its transfer to another government entity without effective payment of just compensation is unconstitutional.

The National Waterworks and Sewerage Authority (NAWASA) was created on 17 June 1955 under Republic Act No. 1383 as a public corporation vested with ownership and/or jurisdiction, supervision, and control over all government-owned waterworks and sewerage systems in the Philippines. Section 8 of the Act mandated the transfer of all existing government-owned waterworks and sewerage systems, including their assets and liabilities, to NAWASA, with the net book value of the transferred properties to be received by NAWASA in payment for an equal value of NAWASA's own assets. The City of Cebu had operated the Osmeña Waterworks System since the system's construction in the early twentieth century under authority granted by its charter, Commonwealth Act No. 58, and held a certificate of public convenience from the Public Service Commission for its operation. The City filed an action for declaratory relief to prevent NAWASA from taking over the system, challenging the constitutionality of the statute.

By an Act of 27 December 1910 (Act No. 2009), the Philippine Legislature authorized the Municipality of Cebu to incur an indebtedness of $125,000 in United States money and to issue bonds covering that amount in gold coin, for the purpose of providing funds for the construction of sewer and drainage facilities, securing a sufficient supply of water, and constructing necessary school buildings. The Act provided that the proceeds of the bond sale would be placed by the Treasurer of the Philippines to the credit of the municipality, to be drawn by appropriations of the Municipal Council of Cebu, and exclusively charged the municipality with the obligation of reimbursing the same from its current revenues. The bonds, which were to mature in 1941, were expressly declared exempt from taxes by the government of the United States, the Philippine Islands, and their political or municipal subdivisions.

Pursuant to the statute, the Municipality of Cebu floated the bond issue and invested part of the proceeds in the construction of a waterworks system to supply water to its inhabitants. The system came to be known as the Osmeña Waterworks System, named after former President Sergio Osmeña, Sr., who was then Speaker of the National Assembly that approved Act No. 2009. Since its establishment, the system supplied the inhabitants of the municipality with water taken exclusively from the Buhisan basin, situated within an approximately five-hundred-hectare government reservation. The basin caught rain water run-off from surrounding hills and impounded it in a reinforced concrete dam, from which water was conveyed through a 14-inch main pipe to the Tisa Filters for treatment by coagulants, rapid sand filtration, and chlorination. After purification, the water was stored in a four-million-gallon clear water reservoir and then conveyed through a 16-inch conduit to the city for distribution to paying customers. The $125,000 loan was apparently fully paid by the municipality, as certified by the Insular Treasurer.

The City of Cebu came into existence as a political body corporate on 20 October 1936 under Commonwealth Act No. 58, absorbing the former municipality of Cebu. Among the powers granted to the City's Municipal Board was the duty to provide for the maintenance of waterworks for supplying water to inhabitants, to regulate the consumption and use of water, to fix and collect rents therefor, and to regulate the construction, repair, and use of hydrants, pumps, cisterns, and reservoirs. Pursuant to these charter provisions, the Municipal Board ran and operated the Osmeña Waterworks System, providing for its budgetary expenses and governing the disposition of its revenue. On 16 November 1948, the Public Service Commission granted the City a certificate of public convenience to operate and maintain the system. On 11 December 1950, the City filed an application with the Department of Agriculture and Natural Resources for the use of water from a natural spring on private land in Hagubiao, Consolacion, Cebu, to expand service for its increased population; the application was duly approved.

On 17 June 1955, NAWASA was created as a public corporation under Republic Act No. 1383. Its charter vested NAWASA with ownership and/or jurisdiction, supervision, and control over all areas served by existing government-owned waterworks and sewerage systems in the Philippines. Section 8 of the Act mandated that all existing government-owned waterworks and sewerage systems, including springs and other water sources, as well as bonds, sinking funds, and indebtedness, be transferred to NAWASA, with the net book value of the properties to be received by NAWASA in payment for an equal value of NAWASA's own assets. The system owned properties estimated by the City at ₱10,000,000, though NAWASA claimed a value of only ₱1,000,000, and operated on a budget approved by its Board of Directors rather than by Congress, with disbursements placed under the supervision and custody of the City Treasurer.

To prevent NAWASA from taking over ownership, control, supervision, and jurisdiction of the Osmeña Waterworks System, the City of Cebu filed an action for declaratory relief in the Court of First Instance of Cebu, praying for a declaration that the statute, insofar as it deprived the City of its property rights without due process and just compensation, was unconstitutional. NAWASA countered that the system had always been under the control and operation of the National Government, that it was public property within the absolute control of Congress, and that even if it were patrimonial, just compensation was provided for in Republic Act No. 1383. After trial, the lower court declared the Act unconstitutional insofar as it vested ownership in NAWASA without just compensation, while upholding NAWASA's right of control, jurisdiction, and supervision over the system. NAWASA appealed.

N/A — The City of Cebu is the plaintiff-appellee; its arguments are not separately enumerated in the decision beyond the prayer for declaratory relief described in the Facts.

• Government Ownership and Legislative Control: NAWASA contended that the Osmeña Waterworks System had always been under the control and operation of the National Government, making its transfer to NAWASA within the competence of Congress.
• Public Property Character: NAWASA maintained that even assuming the system belonged to the City of Cebu, it was public property and therefore within the absolute control of Congress.
• Just Compensation Provided: NAWASA argued that even if the system were patrimonial property, Republic Act No. 1383 provided proper and just compensation for its transfer through the exchange of NAWASA assets of equal value.
• Police Power: NAWASA claimed that the transfer of the system to another government agency was a valid exercise of the police power of the State.
• Eminent Domain: NAWASA urged recognition of the National Government's right to acquire the system by eminent domain through NAWASA.

• Constitutionality of RA 1383 (Just Compensation): Whether Republic Act No. 1383 is unconstitutional insofar as it vests ownership of the Osmeña Waterworks System in NAWASA without just compensation as required by the Constitution.
• Nature of the Property: Whether the Osmeña Waterworks System is patrimonial property of the City of Cebu or public property for public use subject to absolute legislative control.
• Police Power: Whether the transfer of ownership of the system to NAWASA constitutes a valid exercise of police power.
• Eminent Domain: Whether the National Government, through NAWASA, may acquire the system by eminent domain under Republic Act No. 1383.

• Constitutionality of RA 1383 (Just Compensation): Yes, the law is unconstitutional insofar as it vests ownership without just compensation. Section 8's provision for exchange of NAWASA assets of equal value does not constitute effective payment of just compensation because the assets are unspecified and unliquidated.
• Nature of the Property: The system is patrimonial property. A waterworks system that charges rates and operates for profit is a proprietary, not governmental, function of the municipality, and falls under the second paragraph of Article 424 of the Civil Code.
• Police Power: No. Police power cannot override the constitutional prohibition against taking private property for public use without just compensation.
• Eminent Domain: No. The lawful exercise of eminent domain requires payment of just compensation ascertained according to law, which Republic Act No. 1383 fails to effectively provide.

• Constitutionality of RA 1383 (Just Compensation): Section 8 of Republic Act No. 1383 provides that the net book value of the properties of government-owned waterworks systems shall be received by NAWASA in payment for an equal value of NAWASA's own assets. However, what these assets consist of is entirely unspecified. All that Section 8 provides is that NAWASA acquires all the assets and liabilities of all government-owned waterworks systems in the country, and it is an equal value of these unliquidated assets and liabilities that is supposed to be given to the City as payment. No concrete assets were ever transferred, and nothing in the record or in Office Memorandum No. 7 issued by NAWASA showed that any compensation was actually paid. This situation is identical to that in City of Baguio vs. NAWASA, where the Court held that the law, insofar as it expropriates the waterworks without providing for effective payment of just compensation, violates the Constitution.

• Nature of the Property: The Osmeña Waterworks System was established out of a $125,000 loan from the U.S. Government, which was fully paid by the municipality. The City obtained a certificate of public convenience from the Public Service Commission for its operation and was subject to rates fixed and regulations imposed by that body. The system owned properties estimated at ₱10,000,000 and operated on a budget approved by its Board of Directors, not by Congress, with disbursements under the supervision of the City Treasurer. The mere fact that the Buhisan basin stands on a government reservation and that the system was created to serve residents does not transform the proprietary nature of the City's ownership into governmental or public. The system serves only those who pay the required rental or charge, making it proprietary rather than a free public service. Under Article 424 of the Civil Code, "public works for public service" must be interpreted, following the principle of ejusdem generis, in the context of the preceding enumerated items—provincial roads, city streets, squares, fountains, public waters, and promenades—which are used freely by all without distinction. A waterworks system that charges fees does not fall within the first paragraph of Article 424 but within the second, making it patrimonial in character. A municipal water system designed to supply water to inhabitants for profit is a corporate or proprietary function of the municipality, and in the ownership and operation of such a system, the city acts in its proprietary capacity, free from legislative interference.

• Police Power: While the power to enact laws promoting public order, safety, health, morals, and general welfare is inherent in every sovereign state, such power is not without limitations. Notable among these is the constitutional prohibition against the taking of private property for public use without just compensation. No exercise of police power can disregard constitutional guarantees regarding the taking of private property, due process, and equal protection. A statute purporting to protect public health, morals, or safety that is a palpable invasion of rights secured by fundamental law must be adjudged unconstitutional by the courts.

• Eminent Domain: One of the essential requisites to the lawful exercise of eminent domain is the payment to the owner of condemned property of just compensation ascertained according to law. It is precisely the absence of any provision for effective payment of just compensation that rendered Republic Act No. 1383 unconstitutional, as already held in City of Baguio vs. NAWASA. The same deficiency obtains in the present case.

• Patrimonial vs. Public Property of Municipalities — Under Article 424 of the Civil Code, property for public use of provinces, cities, and municipalities consists of provincial roads, city streets, municipal streets, squares, fountains, public waters, promenades, and public works for public service paid for by said entities. All other property possessed by them is patrimonial. The term "public works for public service" must be interpreted, following the principle of ejusdem generis, in the context of the preceding enumerated items, which are used freely by all without distinction. A municipal waterworks system that charges rates and operates for profit does not qualify as a public work for public service and is therefore patrimonial property of the municipality. The Court applied this doctrine to classify the Osmeña Waterworks System as patrimonial, removing it from the absolute control of Congress.

• Proprietary vs. Governmental Capacity of Municipalities — A municipal water system designed to supply water to inhabitants for profit is a corporate or proprietary function of the municipality, not a governmental one. In the ownership and operation of such a system, the municipality acts in its proprietary capacity, free from legislative interference. The Court relied on this principle to hold that the City of Cebu's ownership of the Osmeña Waterworks System could not be divested by mere legislative fiat.

• Limitations on Police Power — Police power, while inherent in every sovereign state, is subject to constitutional limitations, notably the prohibition against taking private property for public use without just compensation, and the guarantees of due process and equal protection. No exercise of police power can override these constitutional guarantees. The Court applied this doctrine to reject NAWASA's argument that the transfer of the waterworks system was a valid exercise of police power.

• Just Compensation in Eminent Domain — The lawful exercise of eminent domain requires payment to the owner of condemned property of just compensation ascertained according to law. A statutory scheme that purports to transfer property in exchange for unspecified, unliquidated assets does not constitute effective payment of just compensation and is unconstitutional. The Court applied this doctrine to hold Section 8 of Republic Act No. 1383 unconstitutional.

• "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." — This passage articulates the ratio decidendi on the nature of the property, distinguishing proprietary from governmental ownership by the criterion of whether the service is rendered for profit through charges.

• "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 such free public service, it is not within the purview the first paragraph, but of the second paragraph of Article 424, and, consequently, patrimonial in character." — This passage provides the canonical interpretation of Article 424 of the Civil Code as applied to municipal waterworks systems, using ejusdem generis to classify fee-charging utilities as patrimonial property.

• "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." — This passage states the doctrinal limitation on police power, establishing that constitutional guarantees of just compensation and due process operate as firm boundaries on legislative authority.

• City of Baguio vs. National Waterworks and Sewerage Authority, 106 Phil. 144; 57 Off. Gaz. [9] 1579 — Controlling precedent. The Court held that Republic Act No. 1383, insofar as it expropriated waterworks systems without providing for effective payment of just compensation, violated the Constitution. The present case was decided on the basis of identical facts and reasoning, with the Court finding "no reason to depart from the established jurisprudence on the matter."

• Mendoza vs. Leon, 33 Phil. 508 — Followed for the proposition that a municipal water system designed to supply water to inhabitants for profit is a corporate function of the municipality, citing American authorities to the same effect.

• Churchill vs. Rafferty, 32 Phil. 580 — Cited for the principle that police power is inherent in every sovereign state, establishing the baseline from which the Court then identified constitutional limitations on that power.

• Section 6, Article XIII and Section 1(2), Article III, 1935 Philippine Constitution — These provisions guarantee that no person shall be deprived of property except for public use and upon payment of just compensation. The Court relied on them to hold that Republic Act No. 1383's transfer of the Osmeña Waterworks System without effective compensation was unconstitutional.

• Article 424, New Civil Code — Distinguishes property for public use (provincial roads, city streets, squares, fountains, public waters, promenades, and public works for public service paid for by the entity) from all other property of provinces, cities, and municipalities, which is patrimonial. The Court applied this provision to classify the Osmeña Waterworks System as patrimonial property because it charges fees and is not freely available to all without distinction.

• Section 8, Republic Act No. 1383 — Mandates the transfer of all existing government-owned waterworks and sewerage systems to NAWASA, with the net book value of transferred properties to be received by NAWASA in payment for an equal value of NAWASA's assets. The Court held this provision unconstitutional for failing to provide effective payment of just compensation, as the NAWASA assets to be exchanged were unspecified and unliquidated.

• Act No. 2009 — The 1910 statute authorizing the Municipality of Cebu to incur a $125,000 indebtedness and issue bonds for constructing waterworks and other public improvements. The Court cited this Act to establish that the Osmeña Waterworks System was built from municipal funds and the loan was fully repaid by the municipality, supporting the finding that the system was patrimonial property of the City.

• Commonwealth Act No. 58 — The charter of the City of Cebu, which granted the Municipal Board the power and duty to maintain waterworks for supplying water to inhabitants, regulate water consumption, and collect rents. The Court cited this provision to establish the City's statutory authority to operate the Osmeña Waterworks System.

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