Rizal Light & Ice Co., Inc. vs. Municipality of Morong, Rizal

The protection-of-investment rule does not apply to a public utility operator who has persistently failed to render adequate service and violated the conditions of its certificate, and a municipal franchise granted to a corporation before its formal incorporation is valid provided the corporation subsequently obtains its certificate of incorporation and accepts the franchise.

Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation based in Morong, Rizal, which was granted a certificate of public convenience and necessity by the Public Service Commission on August 15, 1949 for the installation, operation, and maintenance of an electric light, heat, and power service in the Municipality of Morong. Respondent Morong Electric Co., Inc. is a Filipino-owned corporation that was granted a municipal franchise by the Municipality of Morong on May 6, 1962 to operate the same type of service. The Public Service Commission, the administrative body empowered under Commonwealth Act No. 146 to regulate public services, approved Morong Electric's application and revoked petitioner's certificate, giving rise to both petitions.

Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with its business address in Morong, Rizal. On August 15, 1949, the Public Service Commission granted it a certificate of public convenience and necessity for the installation, operation, and maintenance of an electric light, heat, and power service in the Municipality of Morong. The relationship between the quality of petitioner's service and the regulatory authority of the Commission forms the core of the dispute.

On December 19, 1956, the Commission issued an order requiring petitioner to appear and show cause why it should not be penalized for violating the conditions of its certificate and the Commission's regulations, specifically for failure to raise service voltage to prescribed levels and to install a kilowattmeter. Petitioner failed to appear at the hearing set for February 18, 1957, prompting the Commission to order the cancellation and revocation of its certificate. Petitioner moved for reconsideration, explaining that its manager, Juan D. Francisco, had been unaware of the hearing due to illness. The Commission set aside the revocation order upon finding that the non-appearance was genuinely due to the manager's illness. The respondent Municipality of Morong opposed the reinstatement, alleging that petitioner had not rendered efficient service and had not complied with the Commission's requirements, but its motion for reconsideration was denied.

On June 25, 1958, the respondent municipality formally petitioned the Commission to revoke petitioner's certificate and forfeit its franchise, alleging failure to comply with the conditions thereof. This petition was set for hearing jointly with the show-cause order. Meanwhile, Commission engineers conducted multiple inspections of petitioner's electric plant — on April 15, 1958 by Engineer Antonio M. Alli, and on September 18, 1959, July 12–13, 1960, and June 21–24, 1961 by Engineer Meliton S. Martinez. The June 1961 inspection was conducted at petitioner's own request, petitioner having manifested that improvements had been made and that it would agree to submit the case for decision based on the inspection report without further hearing. When the case was called on July 5, 1961, petitioner failed to appear, and the respondent municipality was allowed to present its documentary evidence. Petitioner moved to reopen, claiming it had not been furnished a copy of the June inspection report. The Commission granted petitioner ten days to submit a written reply, on condition that failure to do so would result in the case being deemed submitted for decision. Petitioner failed to file the reply. On July 29, 1962, petitioner's electric plant was burned.

On August 20, 1962, the Commission rendered its decision, finding on the basis of the inspection reports that petitioner had failed to comply with directives issued in 1954, had violated the conditions of its certificate, and could not render efficient, adequate, and satisfactory service. It ordered the cancellation and revocation of petitioner's certificate and the forfeiture of its franchise. Petitioner moved for reconsideration on September 18, 1962, alleging improved service before the fire and claiming existing investment that the Commission should protect. Eight days earlier, however, on September 10, 1962, Morong Electric Co., Inc. — which had been granted a municipal franchise by the Municipality of Morong on May 6, 1962, approved by the Provincial Board of Rizal on August 31, 1962 — filed with the Commission an application for a certificate of public convenience and necessity. Petitioner opposed the application, contending that it held a prior certificate for the same service and that approval would cause ruinous competition. Petitioner's opposition was received on November 8, 1962, twenty-four days after an order of general default had been issued on October 15, 1962. Petitioner moved to lift the default and later moved to dismiss on the ground that Morong Electric had no legal personality when it filed its application, its SEC certificate of incorporation having been issued only on October 17, 1962. The Commission denied the motion to dismiss, treating Morong Electric as a de facto corporation, and proceeded to hear the case on the merits.

The Commission found that there was an absence of electric service in Morong, that Morong Electric was a Filipino-owned corporation with financial capacity, and that petitioner's certificate had already been revoked. On March 13, 1963, it granted Morong Electric's application and ordered the issuance of a certificate in its favor. Petitioner's motion for reconsideration in the revocation case was denied on February 15, 1963. Petitioner then filed the present petitions for review with the Supreme Court.

• Delegation of Hearing Authority (L-20993): Petitioner contended that the Commission acted without or in excess of jurisdiction in delegating the hearing and reception of evidence to Mr. Pedro S. Talavera, a division chief who is not a lawyer, contrary to Section 32 of Commonwealth Act No. 146, as amended.
• Insufficiency of Evidence (L-20993): Petitioner argued that the inspection reports upon which the Commission based its decision were insufficient and untrustworthy because the authors were not cross-examined, the reports presented only one side, the Commission failed to take judicial notice of contradictory testimony by former mayor Harry B. Bernardino in the companion case, and the Commission acted as both prosecutor and judge.
• Protection of Investment (L-20993 and L-21221): Petitioner invoked the protection-of-investment rule, asserting that as a prior operator its investment should be protected and no new party should be granted a franchise and certificate for the same locality.
• Excessive Penalty (L-20993): Petitioner contended that the imposition of a fine would have been sufficient penalty, as had been done in similar cases, rather than the extreme penalty of revocation.
• Corporate Personality of Morong Electric (L-21221): Petitioner argued that Morong Electric had no legal personality when the municipal franchise was granted on May 6, 1962 or when it applied for a certificate on September 10, 1962, because its SEC certificate of incorporation was issued only on October 17, 1962, rendering the franchise null and void.
• Financial Capability of Morong Electric (L-21221): Petitioner challenged Morong Electric's financial capability by pointing out inconsistencies in the testimony of its president, Mr. Jose P. Ingal, regarding its assets and initial investment.
• Unsupported Findings of Fact (L-21221): Petitioner contended that the Commission made findings of fact — that petitioner's service had "turned from bad to worse," that its equipment was unserviceable, and that it had no plant site — which were not supported by evidence in the record and were contrary to the testimony of Mr. Bernardino.

• De Facto Corporation (L-21221): Morong Electric argued, and the Commission agreed, that it was a de facto corporation at the time the franchise was granted and was therefore not incapacitated to enter into a contract or to apply for and accept a franchise.
• Inadequate Service (L-20993): The respondent municipality alleged that petitioner had not rendered efficient and satisfactory service and had not complied with the Commission's requirements for improvement of its service.
• Public Interest (L-20993): The Commission concluded that petitioner could not render the efficient, adequate, and satisfactory electric service required by its certificate and that it was against public interest to allow it to continue operations.

• Delegation of Hearing Authority: Whether the Commission acted without or in excess of jurisdiction in delegating the hearing of the case to a non-lawyer division chief.
• Sufficiency of Evidence: Whether the inspection reports constituted sufficient evidence to support the revocation of petitioner's certificate, notwithstanding the absence of cross-examination and petitioner's failure to present evidence.
• Protection of Investment: Whether the protection-of-investment rule bars the revocation of a prior operator's certificate and the grant of a new certificate to another entity for the same locality.
• Propriety of Penalty: Whether revocation of the certificate was the proper penalty, or whether a fine would have sufficed.
• Validity of Franchise Before Incorporation: Whether a municipal franchise granted to a corporation before its formal incorporation is valid.
• Financial Capability: Whether Morong Electric was financially capable of operating an electric service.
• Findings of Fact: Whether the Commission's findings of fact regarding petitioner's service were supported by evidence.

• Delegation of Hearing Authority: No. The objection is procedural, not jurisdictional, and is waived by failure to raise it timely before the Commission.
• Sufficiency of Evidence: Yes. The inspection reports were sufficient bases for the decision, petitioner having waived its right to cross-examine and to present evidence.
• Protection of Investment: No. The protection-of-investment rule applies only to operators of good standing who comply with laws, rules, and regulations — not to those who persistently fail to render adequate service.
• Propriety of Penalty: Yes. Revocation was warranted by petitioner's contumacious refusal since 1954 to comply with Commission directives and its incapability to render adequate service.
• Validity of Franchise Before Incorporation: Yes. The franchise granted before incorporation becomes valid upon the corporation's subsequent incorporation and acceptance of the franchise.
• Financial Capability: Yes. The Commission's finding of financial capability was a factual determination supported by evidence and is conclusive on the Supreme Court.
• Findings of Fact: Yes. The Commission's findings of fact, including those taken by judicial notice from the related case, were supported by evidence and will not be disturbed.

• Delegation of Hearing Authority: Section 32 of Commonwealth Act No. 146, as amended, authorizes the Commission to delegate hearing authority only to division chiefs who are lawyers. Mr. Talavera was not a lawyer. However, the objection to his authority is procedural, not jurisdictional. Petitioner never objected to Talavera's authority before the Commission, appeared and submitted evidence at his hearings, and through counsel entered into procedural agreements with him. Raising the objection only after an adverse decision constitutes waiver. Consistent with precedent, a party cannot raise on appeal questions not raised before the Commission.

• Sufficiency of Evidence: The scope of Supreme Court review of PSC decisions is limited to determining whether there is evidence before the Commission upon which its decision might reasonably be based; the Court does not examine the proof de novo. The inspection reports by Commission engineers specified in detail the deficiencies and violations committed by petitioner, resulting in the inadequacy of its service. These reports were not mere documentary proofs but the results of the Commission's own observations and investigations, which it may rightfully consider. Petitioner waived its right to cross-examine and to present evidence, as its counsel expressly agreed that the inspection report would be the "best evidence to decide this matter" and undertook to submit the case for decision based on that report. The Commission could not take judicial notice of Bernardino's testimony because it was not a proper subject of judicial notice (not being a well-established, authoritatively settled fact), it was given in a subsequent and distinct case, and it was not brought to the Commission's attention through an appropriate pleading. The Commission did not act as both prosecutor and judge; the respondent municipality had been allowed to present its evidence, and even if there were a commingling of functions, Section 17(a) of Commonwealth Act No. 146 authorizes the Commission to investigate on its own initiative and enforce compliance, so long as the respondent is given a day in court.

• Protection of Investment: The protection-of-investment rule from Batangas Transportation Co. vs. Orlanes is not absolute, as nobody has an exclusive right to a franchise or certificate. Where the operator has persistently failed to render adequate service and violated the conditions of its certificate despite ample time and opportunity, the rule cannot apply. To apply it unqualifiedly would encourage disregard of the terms and conditions of the certificate and close the door to other applicants who could provide adequate service. The duty to protect investment refers only to operators of good standing — those who comply with laws, rules, and regulations — not to operators unconcerned with public interest whose investments have deteriorated through their own fault. The paramount consideration is always public interest and convenience.

• Propriety of Penalty: Section 16(n) of Commonwealth Act No. 146 confers upon the Commission ample power and discretion to cancel and revoke any certificate issued to an operator who has violated or willfully and contumaciously refused to comply with any order, rule, or regulation. Petitioner's contumacious refusal since 1954 to comply with directives, its violation of certificate conditions, and its incapability to render adequate service warranted revocation rather than a mere fine. Section 21's provision for fines is cumulative and additional, not exclusive. A certificate of public convenience confers no property rights but is a mere license or privilege, forfeited when the grantee fails to comply with commitments behind which lies the paramount interest of the public.

• Validity of Franchise Before Incorporation: Petitioner correctly argued that Morong Electric's juridical personality began only on October 17, 1962 when its SEC certificate of incorporation was issued, and that before that date its incorporators could not be considered a de facto corporation. However, the fact that Morong Electric had no corporate existence when the franchise was granted does not render the franchise invalid, because Morong Electric subsequently obtained its certificate of incorporation and accepted the franchise. Citing McQuillin, Fletcher, and Thompson, the Court held that a franchise may be applied for before a company is fully organized; the grant is valid although the corporation is not created until afterwards, but cannot take effect until the corporation is organized. The incorporation and acceptance perfected the contract and cured the deficiency. The efficacy of the franchise arose only upon PSC approval on March 13, 1963, pursuant to Section 16(b) of Commonwealth Act No. 146. This conclusion is not incompatible with Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko, which did not state the rule as absolute and did not preclude ratification of promoters' acts by the corporation when subsequently organized.

• Financial Capability: The Commission's finding that Morong Electric was financially qualified is a factual determination that the Supreme Court will not disturb unless patently unsupported by evidence. The testimony of Morong Electric's president and the documents presented provided reasonable grounds for the finding. A subsequent inspection report dated January 20, 1964 confirmed that Morong Electric was already serving the entire area covered by its approved plan, further dispelling any doubt as to its financial capability.

• Findings of Fact: The Commission took judicial notice of the records of the previous case (PSC Case No. 39715) where the quality of petitioner's service had been squarely put in issue. The Commission gave credence to the inspection reports over Bernardino's testimony. The close connection between the two cases warranted the Commission's taking of judicial notice. The Commission's conclusions of fact, arrived at after weighing conflicting evidence, are conclusive on the Supreme Court when supported by evidence. Petitioner's claim of prior right and plea for protection of investment were untenable for the same reasons as in the companion case.

• Protection-of-Investment Rule — The government, having taken over control and supervision of public utilities, has a duty to protect rather than destroy the investment of an operator under a prior license who complies with the terms and conditions of the license and meets the reasonable demands of the public. However, this rule is not absolute: it applies only to operators of good standing who comply with laws, rules, and regulations. It does not extend to operators who persistently fail to render adequate service or who violate the conditions of their certificates. The paramount consideration is always public interest and public convenience.

• Nature of a Certificate of Public Convenience — A grant of a certificate of public convenience confers no property rights but is a mere license or privilege. Such privilege is forfeited when the grantee fails to comply with commitments, for public necessity cannot be made to wait or be sacrificed for private convenience.

• Waiver of Procedural Objections Before Administrative Bodies — Objection to the delegation of authority to hear a case before the Public Service Commission is a procedural, not jurisdictional, point. It is waived by failure to interpose a timely objection, particularly where the party appeared, participated in proceedings, and entered into procedural agreements before the hearing officer.

• Scope of Supreme Court Review of PSC Decisions — The Supreme Court is not required to examine the proof de novo in reviewing PSC decisions. Its only function is to determine whether there is evidence before the Commission upon which its decision might reasonably be based. Findings and conclusions of fact made by the Commission after weighing evidence will not be disturbed unless they appear not to be reasonably supported by evidence.

• Validity of Franchise Granted Before Incorporation — A municipal franchise granted to a corporation before its formal incorporation is not void, provided the corporation subsequently obtains its certificate of incorporation and accepts the franchise. The franchise cannot take effect until the corporation is organized, but it may be applied for before full organization. The efficacy of a municipal electric franchise arises only upon approval by the Public Service Commission.

• Dual Prosecutorial and Adjudicatory Functions of the PSC — The Public Service Commission may exercise both prosecuting and investigating functions. Under Section 17(a) of Commonwealth Act No. 146, the Commission may investigate upon its own initiative, require adequate service, and enforce compliance. So long as the respondent is given a day in court, there is no denial of due process.

• "The duty of the Commission to protect investment of a public utility operator refers only to operators of good standing — those who comply with the laws, rules and regulations — and not to operators who are unconcerned with the public interest and whose investments have failed or deteriorated because of their own fault." — This passage defines the limiting principle of the protection-of-investment doctrine, distinguishing compliant operators from those whose own neglect caused service deterioration.

• "A grant of a certificate of public convenience confers no property rights but is a mere license or privilege, and such privilege is forfeited when the grantee fails to comply with his commitments behind which lies the paramount interest of the public, for public necessity cannot be made to wait, nor sacrificed for private convenience." — This formulation articulates the nature of a certificate of public convenience and the supremacy of public interest over private investment, frequently cited in subsequent public service jurisprudence.

• "The fact that a company is not completely incorporated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized." — Quoted from McQuillin, this passage states the rule on the validity of franchises granted before incorporation, adopted by the Court as the controlling principle.

• "So long as the respondent is given a day in court, there can be no denial of due process, and objections to said procedure cannot be sustained." — This passage establishes that the commingling of prosecuting and adjudicatory functions in an administrative body does not violate due process provided the respondent is afforded the opportunity to be heard.

• Batangas Transportation Co. vs. Orlanes, 52 Phil. 455 — Source of the protection-of-investment rule; followed but distinguished, the Court holding that the rule does not apply where the operator has persistently failed to render adequate service.
• Collector of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958 — Cited for the proposition that the PSC may cancel and revoke a certificate even without a formal charge filed by any interested party, provided the holder is given a day in court.
• Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko, 65 Phil. 223 — Cited by petitioner for the rule that a corporation must have full and complete organization before entering into contracts; distinguished, the Court noting the rule was not stated as absolute and did not preclude ratification by a subsequently organized corporation.
• Almendras vs. Ramos, 90 Phil. 231 — Cited for the proposition that the efficacy of a municipal electric franchise arises only after PSC approval.
• La Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November 29, 1965 — Followed for the rule that PSC findings of fact are conclusive on the Supreme Court when reasonably supported by evidence.
• Raymundo Trans. vs. Cervo, L-3899, May 21, 1952 — Followed for the rule that an appellant can only raise in a petition for review questions that had been raised before the Public Service Commission, establishing the waiver doctrine for procedural objections.
• Cebu Transit Co. vs. PSC, 79 Phil. 386 — Followed for the proposition that the PSC may take into consideration the results of its own observations and investigations in exercising its quasi-judicial and administrative functions.

• Section 32, Commonwealth Act No. 146 (Public Service Act), as amended by R.A. No. 723 — Authorizes the Commission to delegate hearing authority to attorneys of the legal division or division chiefs, provided they are lawyers. Applied to determine that delegation to a non-lawyer division chief was procedurally defective but waived by petitioner's failure to object.
• Section 17(a), Commonwealth Act No. 146, as amended — Empowers the Commission to investigate upon its own initiative or upon complaint, require adequate service, and enforce compliance. Applied to uphold the Commission's dual prosecutorial and adjudicatory functions.
• Section 16(n), Commonwealth Act No. 146, as amended — Confers upon the Commission power to cancel and revoke any certificate of public convenience issued to an operator who has violated or willfully and contumaciously refused to comply with any order, rule, or regulation. Applied to sustain the revocation of petitioner's certificate.
• Section 16(b), Commonwealth Act No. 146, as amended — Empowers the Commission to approve municipal franchises granted under Act No. 667, as amended by Act No. 1022. Applied to establish that the efficacy of a municipal electric franchise arises only upon PSC approval.
• Section 21, Commonwealth Act No. 146, as amended — Provides that a public utility operator violating the terms of its certificate is subject to a fine; the remedy is cumulative and additional, not exclusive. Applied to reject petitioner's argument that a fine should have been imposed instead of revocation.
• Section 15, Commonwealth Act No. 146 — Sets forth the requisites for granting a certificate of public convenience: citizenship, financial capability, and promotion of public interest. Applied to validate the grant of a certificate to Morong Electric.
• Act No. 667, as amended by Act No. 1022 — Grants municipal councils the power to grant electric franchises, subject to approval by the provincial board and the President. Applied as the statutory basis for the municipal franchise granted to Morong Electric.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, and Fernando, JJ., concurred.