G.R. No. L-15525; October 11, 1961
THE MUNICIPALITY OF LUCBAN, plaintiff-appellee, vs. NATIONAL WATERWORKS AND SEWERAGE AUTHORITY, defendant-appellant.

FACTS

The Municipality of Lucban constructed and operated its Apolinario de la Cruz Waterworks System starting in 1919. It financed the system through municipal funds, loans from the Insular Government, pork barrel allotments, and a loan from the Rehabilitation Finance Corporation secured by a mortgage on the system. The municipality managed all operations, appointed personnel, and set water rates. After the enactment of Republic Act No. 1383 creating NAWASA, the municipal council passed a resolution refusing to transfer the system. However, the municipal treasurer transferred the assets to NAWASA. The council subsequently disapproved this transfer, leading the municipality to file suit. It sought a declaration that Sections 1, 8, and 9 of R.A. 1383, which provided for the transfer of municipal waterworks to NAWASA, were unconstitutional, and an injunction against NAWASA’s takeover.
The Court of First Instance ruled in favor of Lucban. It held that operating a waterworks system is a proprietary function, making the system a patrimonial property of the municipality. The court found R.A. 1383 unconstitutional for authorizing the taking of such property without providing just compensation, as the law only credited the municipality with an equivalent book value in NAWASA’s records, not actual payment. NAWASA appealed, arguing the system was public property subject to state control, the transfer was a valid police power measure, and the state could exercise eminent domain.

ISSUE

Whether Republic Act No. 1383 is constitutional insofar as it vests in NAWASA the ownership of municipal waterworks systems without payment of just compensation.

RULING

The Supreme Court affirmed the lower court’s decision, declaring the relevant provisions of R.A. 1383 unconstitutional. The Court rejected NAWASA’s arguments, aligning its ruling with prior decisions in City of Baguio v. NAWASA and City of Cebu v. NAWASA. The Court held that a municipal waterworks system, while providing a public service, operates on a proprietary basis by charging fees for its use. This makes it a patrimonial property of the municipality, not public property subject to unrestricted legislative control. The transfer of ownership constituted a taking for public use, which requires just compensation under the Constitution.
The Court also rejected the police power argument, stating that while the state has broad police powers, these cannot be used as a substitute for eminent domain to acquire property without compensation. Finally, the Court found the eminent domain argument untenable because R.A. 1383 failed to provide for the effective payment of just compensation, mandating only a bookkeeping entry. Consequently, the law violated the constitutional guarantee against taking private property for public use without just compensation. The Municipality of Lucban was declared the owner of its waterworks system, and NAWASA was ordered to account for revenues from its operation.