Ernesto Francisco, et al. v. Toll Regulatory Board, et al.

Velasco, Jr., J. October 19, 2010 G.R. No. 166910

Doctrine Public Utilities; Constitutional Provisions; Fixed-Term – see issue IV
Regulation of Public Utilities; Authority to Operate – see issues I, II
Regulation of Public Utilities; Vis-à-vis Power to Grant Authority – see issue II
Summary Petitioners assail the constitutionality of the various PDs, which, among others, granted the TRB the power to grant toll
operations certificates and to issue, modify and promulgate toll rate charges, and the issuances it promulgated and
agreements entered into. SC held that there was valid delegation of powers. Some clauses, however, in the
supplemental toll operation agreements, were invalidated for being violative of the PDs and the Constitution.
Facts •   PD 1112 allows toll fee collection: Due to the financial requirements and necessity of tapping the resources
of the private sector to implement the government’s infrastructure programs, the PD was issued to authorize
the collection of toll fees for the use of certain public improvements that would allow a reasonable rate of return.
•   TRB created; powers conferred: PD 1112 also created the Toll Regulatory Board and invested it the power to
enter, for the Republic, into contracts for the construction, maintenance and operation of tollways, grant
authority to operate a toll facility, issue the necessary Toll Operation Certificate (TOC) and fix toll rates.
•   PD 1113 grants PNCC franchise: PNCC was granted – for period of 30 years (up to May 2007) – a franchise
to construct, maintain and operate toll facilities in the North Luzon and South Luzon Expressways, with the right
to collect toll fees at such rates as the TRB may fix and/or authorize.
•   Sell, assign franchise and usufruct: As set out in PD 1113 and PD 1894 (expanding the franchise to highway
extensions), PNCC may sell or assign its franchise or cede the usufruct upon the President’s approval.
•   JVA without bidding: In 1993, the Government Corporate Counsel issued an opinion holding that PNCC may
enter into JVAs with private entities without public bidding in selecting partners. PNCC’s query was prompted
by the need to seek out alternative sources of financing for expanding and improving existing expressways.
•   PNCC projects: PNCC entered into JVAs to implement a number of projects:
o   Skyway Project: PNCC entered into a JVA with P.T. Citra, an Indonesian company, and created
the Citra Metro Manila Tollways Corporation. TRB, PNCC and CMMTC executed a Supplemental
Toll Operation Agreement (STOA) for the project.
o   NLEX Expansion: PNCC and First Philippine Infrastructure and Development Corporation
entered into a JVA for the rehabilitation and modernization of NLEX. The Manila North Tollways
Corporation (MNTC) was formed for the purpose. The Republic, through the TRB, PNCC and
MNTC, executed a STOA in which MNTC was authorized to subcontract the operation and
maintenance of the project.
o   SLEX Project: To implement the expansion from Nichols to Lucena City, PNCC and Hopewell
Holdings Limited, as JV partners, formed the South Luzon Tollway Corporation (SLTC) and the
Manila Toll Expressway Systems, Inc. (MATES) to undertake the financing, construction,
operation and maintenance of the resulting Project Toll Roads forming part of the SLEX.
•   Cases filed: A number of cases were filed to nullify the agreements entered into and the STOAs granted, and
prayed to prohibit TRB and its concessionaires from collecting toll fees along the Skyway and Luzon Tollways:
o   Due process and BOT violations: Petitioners sought to nullify the STOAs and TRB resolutions
fixing initial rates and adjustments, alleging these were unconstitutional as they imposed on the
public the burden of financing tollways through exorbitant fees, depriving the public of property
without due process. The STOAs were also alleged to be infirm as they awarded purported
"build-operate-transfer" projects without public bidding in violation of the BOT Law.
o   TRB authority: Petitioners also assailed parts of PD 1112 for being unconstitutional insofar as
they vested the TRB both toll operation awarding power and the power to issue, modify and
promulgate toll fees. It was alleged that the TRB cannot be an awarding party of a TOA and, at
the same time, regulate the tollway industry and adjudicate rate exactions disputes.
o   President’s assignment power: They also sought to nullify provisions of PD 1113 and PD 1894
granting the President the power to approve the transfer or assignment of usufruct or rights and
privileges by the tollway operator to third parties, particularly the transfer by PNCC to MNTC. As
argued, the authority to approve partakes of legislative power.
•   RTC: Granted the petition, for the main stated reason that the authority to grant or renew franchises belonged
only to Congress. Hence, the petition for review on certiorari under Rule 45 on pure questions of law.
Issues/Ratio
I.   W/N the TRB is vested with the power to grant what amounts to a franchise over tollway facilities (YES)
Petitioners: The PNCC franchise, as toll operator, was granted via PD 1113, on the same day PD 1112,
creating the TRB, was issued. PD 1112 could not have plausibly granted the TRB with the power and
jurisdiction to issue a similar franchise. Only Congress has, under the Constitution, the exclusive prerogative to
grant franchises to operate public utilities and to amend these franchises.

[doctrine] A franchise is a legislative grant of a special privilege to a person. It includes authorizations issuing
directly from Congress in the form of statute as well as those granted by administrative agencies to which the
power to grant franchise has been delegated by Congress. As held in Albano v. Reyes, there is nothing in the
Constitution indicating the necessity of a congressional franchise before a public utility may operate.
 While Congress, under the 1987 Constitution, has the explicit authority to grant a public utility franchise, it may
validly delegate its legislative authority, under the power of subordinate legislation, to issue franchises of
certain public utilities to some administrative agencies. In addition, a legislative franchise cannot be modified or
amended by an administrative body with general delegated powers to grant authorities or franchises.

[as applied] PD 1112 and PD 1894 invested the TRB with sufficient and extraordinary powers to grant a
qualified person or entity with authority to construct, maintain, and operate a toll facility and to issue the
corresponding toll operating permit or TOC. By explicit provision of law, the TRB was given the power to grant
administrative franchise for toll facility projects. It follows that it may validly issue an entirely new authorization
to a JV company after the lapse of PNCC’s franchise under PD 1113.

II.   W/N the TRB can enter into TOAs and, at the same time, promulgate toll rates and rule on petitions for
toll rate adjustments (YES)
Petitioners: TRB is incapable of acting as a fair and objective tribunal on matters of toll fee fixing because the
power to award toll contracts is inconsistent with its quasi-judicial function of adjudicating petitions for initial toll
and periodic toll rate adjustments.
SC: Administrative bodies have expertise in specific matters within the purview of their respective jurisdictions.
The law concedes to them the power to promulgate IRRs to carry out declared statutory policies.

The grant to and exercise by an administrative agency of regulating and allowing operation of public utilities
and fixing fees that they may charge is now commonplace. It must be presumed that the legislature, in creating
said agencies and clothing them with both adjudicative powers and contract-making prerogatives, must have
studied such dual authority and found the same not breaching any constitutional principle or concept.

Petitioners did not show that the TRB lacked the expertise, competence and capacity to implement its mandate
of balancing the interests of the toll-paying motoring public and the imperative of allowing the concessionaires
to recoup their investment with reasonable profits. PD 1894 even provides a parametric formula for adjustment
of toll rates, taking into consideration verifiable and quantifiable variables.

The fact that an administrative agency exercises administrative or executive functions (granting of franchises
or awarding of contracts) and at the same time exercising its quasi-legislative (e.g. rule-making) and/or quasi-
judicial functions (e.g. rate-fixing), does not support a finding of a violation of due process or the Constitution.

III.   W/N the President is duly authorized to approve contracts, inclusive of assignment of contracts,
entered into by the TRB relative to tollway operations (YES)
Petitioners: The grant to the President of the power to authorize the assignment by PNCC, as franchise holder,
of its franchise or the usufruct in its franchise is unconstitutional as an encroachment of legislative power.
SC: The President’s authority is of statutory origin. There is nothing illegal or unconstitutional with such
delegation, the assignment and delegation being restricted by the law which delegated such power.

IV.   W/N whether the STOAs and related agreements covering NLEX, SLEX, Skyway and their respective
extensions, linkages, etc., as approved by the President, are valid (some YES, some NO)
[doctrine] While the TRB is vested with the power to extend administrative franchise it grants, it cannot do so
for an accumulated period exceeding 50 years. Otherwise, it would violate Art. XII, Sec. 11:
Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation
in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or associations
must be citizens of the Philippines.

Provision allowing substitution of MNTC in case it defaults on its loans – VALID, CONSTITUTIONAL
Petitioners: Substituting MNTC as the grantee in case of its default with respect to its loans is tantamount to an
amendment of PNCC’s original franchise and is, hence unconstitutional.
SC: TRB has the power to impose conditions on PNCC’s franchise in an appropriate contract and may
therefore amend or alter the same when public interest so requires, save for the conditions under PD 1894
which relate to the coverage area of the tollways and the expiration of PNCC’s original franchise.

Concession extension clause – INVALID, UNCONSTITUTIONAL

Petitioners: Clause 17.5 in the MNTC STOA providing for an option to extend the concession for the stated
period is unconstitutional.
SC: The MNTC STOA already has an original stipulated period of 30 years. At the outset, the clause does not
actually grant the lenders of the defaulting concessionaire the power to unilaterally extend the concession for a
period not exceeding 50 years. However, it does allow the extension of this period (50 year-extension) if
necessary to fully repay the loans made by MNTC to the lenders.
 If the maximum extension as provided for in the clause 17.5 (fifty years) is utilized, the accumulated
concession period granted would effectively be 80 years, in clear violation of the 50-year franchise threshold
set by the Constitution under Art. XII, Sec. 11. (The nullity is limited to extension beyond the 50-year limit.)

Guaranteed viability clause – INVALID, UNCONSTITUTIONAL

Petitioners: MNTC STOA is grossly disadvantageous to the Government since under Clause 11.7, the latter,
through the TRB, guarantees the viability of the financing program of a toll operator by paying monthly, the
difference in the toll fees actually collected by MNTC and that which it could have realized under the STOA.
SC: PD 1112 explicitly states that no guarantee shall be issued by any government agency or GOCC on any
financing program of the toll operator in connection with his undertaking under the Toll Operation Certificate. It
seeks to prevent the eventuality that the Government could be obligated to pay or secure, whether directly or
indirectly, the financing by the private investor of the project.

In this case, under Clause 11.7 of the MNTC STOA, as well under Clause 8.08 in the SLTC STOA, the
Republic (through the TRB) guaranteed the security of the project against revenue losses that could result, in
case the TRB, based on its determination of toll fees, decides not to effect a toll fee adjustment under the
periodic/interim adjustment formula in the respective STOAs.

As PD 1112 itself expressly prohibits the guarantee of a security in the financing of the toll operator pursuant to
its tollway project, Clause 11.7 cannot be a valid stipulation in the STOA. It is also in violation of the
Constitution, specifically Art. VI, Sec. 29(1) which mandates that "[n]o money shall be paid out of the Treasury
except in pursuance of an appropriation made by law."

Stipulated periodic and interim toll rate adjustments – VALID, CONSTITUTIONAL

Petitioners: The STOA provisions on initial toll rates and periodic adjustments, by using a built-in automatic
adjustment formula, guaranteed fixed returns for the investors and negated the public hearing requirement.
SC: The requisite public hearings under PD 1112 and PD 1894 are not negated by the fixing of the initial toll
rates and the periodic adjustments under the STOA. Additionally, it is the fixing of initial and provisional toll
rates where a public hearing is not a vitiating requirement. Subsequent toll rate adjustments are those
mandated by law to undergo both the requirements of public hearing and publication.

While the periodic, interim and other adjustment formulas are indicated in the STOAs, it does not necessarily
mean that the TRB should accept a rate adjustment predicated on the data, references or assumptions
adopted by the toll operator. It should exercise its rate-fixing powers vested to it by law within the context of the
agreed formula, but always having in mind that the rates should be just and reasonable.

V.   W/N a public bidding is required or mandatory for these tollway projects (NO)
Petitioners: Public bidding is required as these projects partake the nature of a BOT infrastructure undertaking
under the BOT Law. The STOAs in question and related preliminary and post-STOA agreements are null and
void for want of the necessary public bidding required for government infrastructure projects.
SC: Given that the projects have been undertaken by PNCC in the exercise of its franchise, in joint partnership
with its chosen partners, the public bidding provisions under the BOT Law do not strictly apply. The STOAs are
not ordinary contracts for the construction of government infrastructure projects. Neither are they contracts
where financing or financial guarantees for the project are obtained from the government. Rather, the STOAs
actually constitute a statutorily-authorized transfer or assignment of usufruct of PNCC’s existing franchise to
construct, maintain and operate expressways.

When a franchisee undertakes the tollway projects of construction, rehabilitation and expansion under its
franchise, there is no need for public bidding. In pursuing the projects, the franchisee can partner with other
investors, which it may choose in the exercise of its management prerogatives and in pursuit of its right
of delectus personae. In this case, no public bidding is required upon the franchisee in choosing its partners.

Holding Declared as VALID and CONSTITUTIONAL are the following, among others:
1.   All the STOAs and the TRB Board Resolutions issued pursuant thereto;
2.   Toll operation awarding power and the power to issue, modify and promulgate toll rate charges of the TRB under
Sec. 3(a), PD 1112, in relation to Sec. 3(d) thereof and Sec. 8(b) of PD 1894; and
3.   The adjudicatory jurisdiction granted to the TRB over matters involving toll rate movements under Sec. 3(e), PD
1112 and Sec. 13 PD 1894.

Declared as VOID and UNCONSTITUTIONAL are the following:

1.   Clause 11.7 of the MNTC STOA and the clause "including if necessary an extension of the CONCESSION
PERIOD which in no case shall exceed a maximum period of fifty (50) years" in Clause 17.5 of the same STOA for
being contrary to Section 2, Article XII of the 1987 Constitution.
2.   Clauses 8.08 (2) (3) of the SLTC STOA.