Public Consultation on the Proposed Guidelines on the Methodology For Setting Distribution Wheeling Rates

Pursuant to Section 43(f) of Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), the Energy Regulatory Commission (ERC) is authorized to adopt alternative forms of internationally-accepted rate setting methodology that will ensure reasonable price of electricity and non-discriminatory rates.

Relative thereto, notice is hereby given that ERC intends to adopt an alternative form of rate setting methodology for the privately owned electric distribution utilities. Said rate setting methodology is embodied in the proposed Guidelines on the Methodology for Setting Distribution Wheeling Rates drafted by the ERC which is scheduled for public consultation on August 31, 2004 at ten o’clock (10:00 A.M.) in the morning at the ERC Hearing Room, 15th Floor, Pacific Center Building, San Miguel Avenue, Ortigas Center, Pasig City. The proposed guidelines may be photocopied, at cost, during regular office hours at the ERC Main Office at the aforementioned address or may be downloaded from the ERC Website at www.erc.gov.ph.

Considering the complexity of issues to be subject to public consultation and the large number of persons likely to have an interest in this public consultation, the following procedure shall be enforced by the ERC:

I.) All interested parties may submit their comments (six [6] hard copies and two [2] soft copies) on the proposed guidelines on or before August 21, 2004.

II.) Only those parties who have filed their written comments on or before the prescribed period would be allowed to participate in the public consultations
III.) Parties of record are not required to be represented by a lawyer but are strongly advised to have technical experts present with them during the public consultation with knowledge of accounting, finance, economics and pricing issues.

IV.) The timetable for the public consultation shall, to the greatest extent possible adhere to the following schedule:

Finally, within the draft DWRG are highlighted provisions (bold text or with square brackets). Said provisions are identified by the ERC as major concerns in the DWRG. As such, the ERC would appreciate receiving specific written comments from interested parties thereon.

Pasig City, August 9, 2004.

Outline of the Proposed Distribution Wheeling Rate Guidelines (DWRG)

The following paragraphs outline in broad terms the elements of the alternative rate setting methodology for private distribution utilities currently being considered by the ERC for adoption. Said rate setting methodology can be broadly defined as a performance-based price-control regime.

The methodology which is one which is based on a price cap over an initial three (3) then four (4) year regulatory period commencing on July 1, 2005. The price cap shall be based on a regulatory reset (or review) which shall conclude prior to the commencement of the first four (4) year regulatory period. This reset shall put in place the prime regulatory parameters for the remainder of the Second (2nd) Regulatory Period (SRP). Said SRP cannot be re-opened unless particular triggers are met. The price cap shall be based on recovery of the forecast efficient costs of the delivery of electricity distribution services over the regulatory period. Note the price cap does not cover the costs of electricity supply, that is cost of energy or the costs of electricity generation.

Efficient costs require consideration of the following: 1.) efficient operating and maintenance costs; 2.) a return of efficiently deployed capital (i.e.: depreciation over their economic life of regulated distribution network assets grouped into like asset categories); 3.) a return on efficiently deployed capital (ie: a regulatory cost of capital times the written down value of the regulated asset base); and 4.) a recovery of the reasonable cost of tax paid. Here, the regulatory asset base should be established from a rolled-forward asset base without inflation, plus prudent capital expenditure, less depreciation and less retired or written-off assets. The starting point can be a revalued asset base, optimized for capacity over a reasonable planning horizon, and configured on existing easements and rights of way. The revenues thus derived shall be leveled to avoid rate shock over the regulatory period. Note that sub-transmission assets bought by the regulated entity from the National Transmission Corporation (TRANSCO) shall be valued at their revenue potential and considered in parallel with the existing regulated assets.

The revenue requirement will then be converted to a price cap based on forecast energy delivery volumes over the regulatory period. This average price cap will be allowed to adjust automatically as external economy wide factors change. The primary adjustment factor will be the Consumer Price Index (CPI). There will be an additional adjustment applied based on the US$ to Peso exchange rate but only when particular triggers are met. In the normal course of economic development, such triggers are unlikely to be met, and the exchange rate adjustment is not likely to apply. Note that the Incremental Currency Exchange Rate Adjustment (ICERA) mechanism currently in existence will no longer be applicable insofar as the distribution network assets under this new methodology are concerned.

The tariff setting processes will be undertaken annually to ensure that the regulated average price derived from the total of the individual tariff revenues plus assigned revenues from related businesses, all divided by the actual energy delivery are less than the specified price cap. Yearly tariff changes will be leveled to avoid rate shock. Moreover, some tariff segments shall be subjected to side constraints recognizing the need for slow changes in tariff levels to remove any emerging cross subsidies due to capital expenditure programs. An over and under recovery process shall be adopted to ensure that the price cap is not breached. Over collections shall be refunded to consumers in the following year through a reduction in rates. Issues regarding safety net tariffs, structure of tariffs and other tariff related issues shall be considered at the first major reset process for the second regulatory period.

There shall be a transition period during the first regulatory period from July 1, 2005 to June 30, 2008. During said transition period, the ERC shall require private distribution utilities to prepare their financial and operational systems so that the necessary information can be gathered and reviewed allowing a price control reset to occur before June 30, 2008. Likewise, during this transition period, the ERC shall impose a simplified price cap arrangement to ease the transition to the new arrangements.

Proposed Guidelines on the Methodology for Setting Distribution Wheeling Rates

August 11, 2004