regulatory reset of the regulated transmission services...

Regulatory Reset of the Regulated Transmission Services for 2016 to 2020

Transmission Issues Paper

National Grid Corporation of the Philippines

8/22/2014 1

Stronger transmission

for a stronger nation.

• Part 1: Rules for Setting Transmission Wheeling Rates (RTWR)

• Part 2: Review of the 3rd Reset Final Determination (FD)

• Part 3: Transmission Issues Paper – the Proposal

• Part 4: Discussion of Stakeholders’ Comments

Contents

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Part 1: Rules for Setting Transmission Wheeling Rates (RTWR)

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Rate Setting Methodology: What does EPIRA say?

Section 43 (f) Republic Act No. 9136 (EPIRA*) authorizes the ERC to establish and enforce a methodology for

setting transmission wheeling rates, taking into account all considerations, including the efficiency or inefficiency of the regulated entities;

prescribed that the rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base to enable the entity to operate viably;

For purposes of determining the rate base, NGCP may be allowed to revalue its eligible assets not more than once every three (3) years by an independent appraisal company;

provides that the ERC may adopt alternative forms of internationally accepted rate setting methodology as it may deem appropriate.

*/ Electric Power Industry Reform Act of 2001 8/22/2014 4



ERC-promulgated Rules

Transmission Wheeling Rate Guidelines (TWRG) On 29 May 2003, ERC promulgated the TWRG which outlines

the revenue cap methodology – a methodology that follow the model of Performance Based Regulation (PBR);

Sets out the pricing principles for purposes of regulating the maximum transmission wheeling rates that may be charged for the provision of Regulated Transmission Services;

Rules for Setting Transmission Wheeling Rates (RTWR) On 22 September 2009, the ERC promulgated Resolution No.

21, A Resolution Adopting the Amendments to the Transmission Wheeling Rate Guidelines (TWRG) to be renamed as the Rules for Setting Transmission Wheeling Rates (RTWR)

8/22/2014 5



PBR is designed to: Objectives

– Promote economic efficiency

– Share the benefits of efficiency gains between consumers and utilities

– Prevent abuse of monopoly power

– Encourage improved service levels

– Allow utilities sufficient revenue to operate efficiently and attract investment

– Provide transparency and stability

Mechanism

– Place a cap on revenue, linked to inflation

– Introduce an efficiency factor to reduce price increases

– Calculate utility revenue requirements using a building-block approach

– Introduce service level incentives

8/22/2014 6



• Revenue cap and price cap are forms of PBR

• Primary difference is how revenue varies with unanticipated changes in demand within regulatory period – With price cap, regulated entity benefits from increase in new

demand - suitable where costs vary with units of sales (e.g., household connections to distribution network)

– Revenue cap permits consistency in revenue to support large scale CAPEX of transmission upgrades, where costs do not vary proportionately with units of sales

• Revenue cap provides strong incentive for minimizing energy costs and because of this incentive revenue cap is preferred internationally for transmission service regulation. Examples of jurisdictions with revenue cap regulation include:

Australia, Brazil, Bulgaria, California, Denmark, Great Britain, Germany, Italy, Maine, Massachusetts, New Zealand, Norway, Ontario, Spain, Sweden, Turkey

8/22/2014 7

Why Revenue Cap for Transmission Service



Article VII of the RTWR: Regulatory Reset Process

8/22/2014 8

Publication of Issues paper

Issuance of Position paper

Reset Application

Public Hearings

Issuance of Draft Determination

Public Hearings on DD

Issuance of Final Determination

Annual Rate Verification

Implementation of new rates



ARRt = Opext + Taxm,t + RegDepnt + [(RABt + WCt) x WACC] + Taxp,t + Adjustmentst

WC RAB WACC

Return on Capital

Regulatory Depreciation

OPEX Tax ARR

Adjustments

ARR

CWIP Disposal ODRC RAB

Adjustment RegDep

ITA

Kt

NEA Accelerated Depreciation

OPEX

CAPEX

Structure of Annual Revenue Requirement (3rd RP Reset Process)

8/22/2014 9

WACC – Weighted Average Cost of Capital RAB – Regulatory Asset Base WC – Working Capital CWIP – Construction Work in Progress

ITA – Income Tax Adjustment NEA – Net Efficiency Adjustment ODRC – Optimized Depreciated Replacement Cost Kt – under and over recovery



Net Efficiency Adjustment NEA is designed to ensure that the Regulated Entity has an incentive to achieve reductions in controllable costs above those contained in the OPEX and CAPEX forecasts approved by the ERC as part of the Regulatory Reset Process for a Regulatory Period.

8/22/2014 10

If the NEA for a given Regulatory Year is a positive amount, then this will be retained by the Regulated Entity for a period of five (5) years. This implies that the NEA for a given year will be added to the Annual Revenue Requirement (ARR) in each of the following 5 years. Conversely, if the NEA for a given Regulatory Year is a negative amount, this will be borne by the Regulated Entity for 5 years, thus, will be subtracted from the ARR of each of the following 5 years.

RTWR Formula NEAt = CEAt + OEAt

CEAt = WACC x (CAPEX Forecastt – CAPEX Actualt) OEAt = (OPEX Forecastt - OPEX Forecastt-1) - (OPEX Actualt - OPEX Actualt-1)

CEA – Capex Efficiency Adjustment OEA – Operating and Maintenance Efficiency Adjustment



• Article VI of the Rules for Setting Transmission Wheeling Rates requires the Regulated Entity to submit its Application for the Annual Verification and Adjustment of Rates every October

• Article V, Section 5.16.1 provides that

As part of the Regulatory Reset Process for a Subsequent Regulatory Period under Article VII, the ERC must implement a performance incentive scheme that rewards the Regulated Entity for achieving specified target levels of performance, and penalizes the Regulated Entity for failing to achieve specified target levels of performance.

Annual Rate Verification

8/22/2014 11



Price Control Formula

MARt MARt-1 1 CWIt X Kt

Maximum Allowed Revenue Cap

Previous Year’s Maximum Allowed

Revenue

Change in CPI and Php/USD Exchange Rate

Productivity/ Efficiency Factor

Over/Under Recovery Adjustment Factor inclusive of RBRt

8/22/2014 12



Part 2: Review of the 3rd Reset Final Determination (FD)

8/22/2014 13



3RD Regulatory Period Regulatory Reset Process

8/22/2014 14

• Publication of Issues Paper 16 Feb 2009

• Issuance of Position paper 9 Sept. 2009

• Reset Application 18 Dec. 2009

• Public Hearings Jan. – Mar. 2010

• Issuance of the Draft Determination 15 July 2010

• Public Hearings on the DD Aug. – Sept. 2010

• Issuance of the Final Determination 22 Nov. 2010

• Implementation of New Rates 1 Jan 2011



3rd RP ERC-Approved Levels

8/22/2014 15

Rev

iew

of

3rd

RP

FD

2011 2012 2013 2014 2015

ARR, PhPMn 44,647.91 44,052.94 45,869.45 46,954.66 46,673.13

2011 2012 2013 2014 2015

2ND RP UNDER RECOVERY 2,435.89 2,403.43 2,502.53 2,561.74 2,546.38

NEA (292.02) (1,526.41) (1,489.17) (1,699.20) (1,628.57)

Rate Arrears 1,455.09

FME 284.08

Land-Related CAPEX 66.99 195.92 301.10 389.61 482.27

RPT and VAT 1,095.29 973.31 897.32 828.10 675.42

Return on Capital 27,427.77 28,637.70 29,560.78 29,996.71 29,932.33

Return of Capital 6,572.12 7,033.17 7,420.69 7,125.06 7,089.94

OPEX 5,602.70 6,335.82 6,676.20 7,752.64 7,575.36

(10,000.00)

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Ph

P, M

n



Asset Valuation: Considerations (9 September 2009 Position Paper on NGCP’s 3rd Reset)

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Indexation from the prior Regulatory Asset

Valuation

Absolute Valuation by Replacement Cost

Absolute Valuation using Modern Equivalent Asset

Easier to undertake Can be performed

as a desk-top study Less resources and

time Prices of the assets

do not move in relation to CPI

Existence of the physical assets are usually identified against the network line diagrams and asset registers

Allows identification of missing and redundant assets in the asset register

Allows an update on the asset register

Allows the latest prices for various components

Allows for changes in exchange rates and metal prices

Does not recognize advancements in modern equipment availability

Additional time, cost, and expertise is required

Existence of the physical assets are usually identified against the network line diagrams and asset registers

Allows identification of missing and redundant assets in the asset register

Allows an update on the asset register

Allows the latest prices for various components

Allows for changes in exchange rates and metal prices

Recognizes advancement in modern equipment availability

More economically efficient asset value estimates

Additional time, cost, and expertise is required

Rev

iew

of

3rd

RP

FD




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ERC Decision: To follow two approaches to asset valuation Primary Approach: To undertake the asset valuation using ODRC Technique A concern that all of the transmission assets were not identified to the

ERC during the 2nd RP and that these were best valued using the same techniques as were previously employed

The need to fully understand the impact of using an indexation approach and its advantages and disadvantages for both consumers and the regulated entity

The need to adequately define in writing and consult on an index methodology before it was fully implemented

A concern that compliance with the stated approaches allowed under Article V of the RTWR required the use of ODRC for the 3rd Reset before other approaches could be utilized

Rev

iew

of

3rd

RP

FD




8/22/2014 18

ERC Decision: To follow two approaches to asset valuation Secondary Approach: To undertake a parallel asset valuation using indexation approach, to allow assessment of: The granularity at which an indexation valuation should occur Which indices best allow a reasonable approach to valuation, given the

costs of a transmission business do not usually follow the general Consumer Price Index

The relationship between the asset registers held for accounting purposes and the physical assets identified as transmission assets

The level of resources required to undertake an indexation valuation in relationship with the accuracy which is derived from this technique

Rev

iew

of

3rd

RP

FD



Revenue Smoothing

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Rev

iew

of

3rd

RP

FD

Year Estimated P/kW-mo

2011 364.75

2012 362.43

2013 360.54

2014 359.37

2015 358.39

Revenue smoothing is done to control the likelihood of price shocks to transmission customers and of revenue shock to the regulated entity. Revenue is expected to increase by about 1.6% (4.6% ave inflation rate controlled by X of +3%). The smoothed MAR was expected to result to decreasing tariffs.

X = +3%



(Actual) MAR and Tariff Movement

2009 2010 2011 2012 2013 2014

Effective MAR(Php Mn)

39,176. 44,991. 45,695. 42,903. 44,567. 42,506.

MAR Rate Impact(P/kW-mo)

340.17 371.08 369.79 334.48 336.24 308.67

P/kWh Equivalent 0.7191 0.7639 0.7686 0.6926 0.6841 0.6251

200

250

300

350

400

450

500

30,000.00

32,000.00

34,000.00

36,000.00

38,000.00

40,000.00

42,000.00

44,000.00

46,000.00

48,000.00

Ph

p M

n

8/22/2014 20

Tariff in Real Terms, 2009

P/kW-mo

P/kWh

2009 340.17 0.7191

2010 357.50 0.7359

2011 340.59 0.7079

2012 298.51 0.6181

2013 291.34 0.5927

2014 256.18 0.5188

Rev

iew

of

3rd

RP

FD

CPI – 3% (positive value)



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ARR vs. SMAR vs. Verified MAR (under Article VI)



8/22/2014 22

Components of July 2014 Residential Rate of MERALCO with the consumption of 563kWh

Note: the transmission component of 7% includes ancillary services cost




Performance Incentive Scheme (PIS)

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What is PIS?

• NGCP, being a Regulated Entity and governed by the Commission through a Performance Based Regulation (PBR), is tasked to extend quality service to its customers in adherence to a set of performance standards set forth under Article VIII of the RTWR and the provisions stipulated under Section 4.9 of the 3rdRP FD;

• Thus, in order to measure the quality of these services, the RTWR provides that the ERC must develop a Performance Incentive Scheme (PIS) that rewards/penalizes the Regulated Entity if the actual performance is above/below the target level;

• Based on the PGC, the initial reliability targets shall be set to the mean value of the particular reliability performance for the last five (5) years where the upper and lower cutoff points shall be set at plus or minus one (±1) standard deviation from the mean value.

8/22/2014 24



Collar Deadband

Cap Low Target High

SISI 22.24 17.96 13.68 9.39 5.10

FOT 5.30 4.96 4.63 4.29 3.95

SA 99.08 99.19 99.31 99.42 99.53

FLC 99.93 99.95 99.97 99.99 100

VLC 89.60 90.93 92.26 93.59 94.92

ConA 99.02 99.15 99.29 99.42 99.56

CSI 20 35 50 65 80

SISI 157.40 121.83 86.26 50.69 15.12

FOT 9.20 7.45 5.70 3.94 2.19

SA 99.44 99.52 99.60 99.68 99.75

FLC 96.24 97.49 98.74 99.98 100

VLC 97.52 98.53 99.27 100 -

CSI 20 35 50 65 80

SISI 34.74 30.74 26.74 22.74 18.74

FOT 7.98 6.75 5.52 4.28 3.04

SA 99.44 99.53 99.62 99.70 99.78

FLC 99.66 99.76 99.86 99.96 100

VLC 99.59 99.66 99.74 99.82 99.89

CSI 20 35 50 65 80

PIS Parameters for the 3rd RP

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Rev

iew

of

3rd

RP

FD

CSI – Costumer Satisfaction Indicator

SISI – System Interruption Severity Index

FOT – Frequency of Tripping

SA – System Availability

FLC – Frequency Limit Compliance

VLC – Voltage Limit Compliance

ConA - Congestion Availability




Additional Capital Expenditures outside the FD

8/22/2014 26



Additional Capital Expenditures

Why the new projects applied for PA? The new projects are urgently needed by the grid to support the

generation capacity additions. These will require new transmission project implementation and capex disbursements within the 3rd Reg

The projects need to be completed in the early part of the 4th Reg. This can only be achieved if the pre-construction activities, including ROW/site acquisitions, will already be started within the 3rd Reg considering the 3-year average project implementation period

8/22/2014 27



Key Drivers for Additional Capital Expenditures

Drivers New Projects for PA

a. New information on power plant developments requiring grid reinforcements

1. Calaca-Dasmariñas 230 kV T/L (Approved) 2. CNP 230 kV Backbone – Stage 1 (Approved) 3. Toril 138 kV S/S (Approved) 4. Malita-Matanao 230 kV T/L (Filed) 5. Eastern Panay 138 kV Backbone (Filed) 6. Western 500 kV Backbone – Stage 1 (Filed) 7. Bataan-Cavite/MM T/L – Stage 1 (FS) (Filed) 8. Limay-Hermosa and Hermosa-San Jose 500 kV T/L (to be Filed) 9. CNP 230 kV Backbone – Stage 2 (to be Filed)

b. Need for immediate implementation of identified critical projects

1. Agus 6 S/Y Upgrading (Approved) 2. Tuguegarao-Lal-lo 230 kV T/L (Approved) 3. Antipolo EHV Substation (Approved) 4. Taguig EHV Substation (to be Filed) 5. Agus 2 S/Y Upgrading (to be Filed) 6. Restoration of Typhoon Yolanda-Affected T/L (to be Filed)

8/22/2014 28



Drivers New Projects for PA

c. Updates in the actual and forecast loading of transmission facilities and results of coordination with customers

1. Sta. Barbara 230 kV S/S (Approved) 2. Calamba 230 kV S/S (Filed) 3. Hermosa-Floridablanca 69 kV T/L (Filed) 4. Las Piñas 230 kV S/S Expansion (Approved) 5. Opol 138 kV S/S (Approved) 6. La Trinidad-Calot 69 kV T/L (Filed) 7. SRP 230 kV S/S (to be Filed)

d. Island Interconnection – special projects

1. Leyte-Mindanao Interconnection: Stage 1 (FS) (Approved)

2. Visayas-Mindanao Interconnection: Stage 2 (to be Filed) 3. Batangas-Mindoro Interconnection (Filed)

8/22/2014 29

Key Drivers for Additional Capital Expenditures



Additional Capital Expenditures

Some of the projects filed for PA (e.g. Tuguegarao-Lal-lo 230 kV T/L, La Trinidad-

Calot 69 kV Line) are already part of the 2009 TDP but have not been included in

the 3rd

RP Revenue application due to project prioritization.

From Page (15) of the Final Determination (ERC Case No. 2009 – 180RC) dated November 22, 2010

“Criteria for developing the network to ensure an acceptable quality of supply are set out in the Philippine Grid Code. The ERC is aware that significant capital investment is required to bring the network up to the standard required in the Grid Code but notes that, if this investment is implemented too quickly, customers could experience a severe rate shock. While it may be necessary to spread this investment over more than one regulatory period in order to manage this impact, there is a risk of further deterioration in supply reliability if the MAR is so low that the required investment does not occur.” 8/22/2014 30



Part 3: Transmission Issues Paper – the Proposal

8/22/2014 31



Purpose of RTWR Regulatory Reset Issues Paper

Section 7.1.2 of the RTWR states, “The ERC must publish a Regulatory Reset Issues Paper not less than 21 months prior to the end of each Regulatory Period. The Regulatory Reset Issues Paper must: (a) provide the ERC's initial views on the issues raised by the pending Regulatory Reset Process; and (b) specify the information to be provided by the Regulated Entity for the purposes of the Regulatory Reset Process and the time by which that information must be provided.

8/22/2014 32



Timelines

Regulatory Task As per RTWR 3rd RP Indicative

4thresetTimeline

Start of the Regulatory Period - 01 Jan 2011 01 Jan 2016

Final Determination 3 mos. Nov. 22, 2010 Jul 31, 2015

Public Hearings 5 – 7 mos. Aug. – Sept. 2010 May 12 - 12 June

2015

Submission on Draft Determination 7 mos. May 1,2015

Draft Determination 9 mos. July 15, 2010 Mar 9, 2015

NGCP revenue application filing 18 Dec. 2009 Jan 8, 2015

Asset Revaluation Completed 10 mos. 29 Oct. 2009 Dec 1, 2014

Initial Asset Revaluation Report 11 mos. Nov 3, 2014

Asset Valuation to Commence 17 mos. Aug 1, 2014

Release of Position Paper Sept. 9, 2009 Jul, 31, 2014

Submissions on Issues Paper 19 mos. Jun 30, 2014

Publish RTWR Regulatory Issues

Paper

21 mos. Feb. 16, 2009 June 2, 2014 8/22/2014 33



Amendment to the Rules

Context Issue NGCP View

Section 1.9 of the RTWR These Rules may only be amended by the ERC for the purposes of giving effect to a decision made by it in accordance with these Rules or with the agreement of the Regulated Entity or as ordered by a court with appropriate jurisdiction.

• Public consultation of the DU Issues Paper

- Far reaching change to PBR such as inclusion of alternative building blocks and a sinking fund concept

• Similar suggestions may be raised in the Transmission Issues Paper

• Not sufficient time • Require careful analysis

and development of new rules

• If there is merit in considering far reaching change to the present rate setting methodology, the work need to be undertaken in the 4th RP while the changes be applied in the 5th Reset

8/22/2014 34



Duration of the Regulatory Period


The ERC may, during a regulatory reset process for the 4th and subsequent Regulatory Periods, under Article VII, determine that the duration of that subsequent regulatory period is greater than five calendar years but not more

than 10 calendar years.

• The longer the duration of the regulatory period the greater the risk that the maximum allowed revenue would diverge from the efficient costs of providing the regulated service

• Difficulty in predicting accurate CAPEX 5 years in advance; much more in 10 years in advance

• there would not be a net benefit from extending the duration of the 4th RP.

8/22/2014 35



Classification of Services


The RTWR provide for three service classifications: • Regulated transmission

services; • Excluded services; and • Contestable services

(“unregulated”).

• Recovery of Transmission Connection Assets (TCAs) amounting to PhP2Bn

• some sub-trans were reverted into “RAB” notwithstanding the existence of technical and functional criteria

• Recovery of Franchise Tax (FT) on excluded services

• TCAs be included as part of the RAB

• Costs of TCAs be recognized as windfall loss and recovered

• Guidelines on sub-trans to be reverted to RAB

• Unrecovered FT on excluded services be recognized and be recovered

• Excluded Services of the regulated entity should also be subject to a surcharge to cover Franchise Tax.

8/22/2014 36



Price Control Formula


The MAR for a given year within a regulatory control period is calculated with reference to the MAR for the preceding year adjusted for: • Change in a weighted

index of prices (CWI); • An efficiency factor (X),

and • A correction (K) factor to

adjust for any over or under recovery of revenue in the preceding regulatory year.

The RTWR provides for the ERC to review the form of price control that is to apply for the third and subsequent regulatory periods and apply a revenue cap, a price cap, or a hybrid cap as the form of price control.

• NGCP is not aware of any issue that would warrant the ERC to alter the form of price control that is applied to regulated transmission services.

• NGCP does not propose any change to the price control formula set out in Rule 5.2.

8/22/2014 37



Values of W1 and W2 in the CWI Computation


The CWIt combines two adjustments: an adjustment for exchange rate changes and an adjustment for CPI (domestic price changes). The proportion of the adjustment driven by the CPI is set by the W1 factor. The proportion of the adjustment driven by exchange rates is set by the W2.

• W1 and W2 are to be set by the ERC after it has approved the capital, operating, and maintenance expenditure forecasts.

• These forecasts are approved by the ERC in its Final Determination and hence will not be known to NGCP in advance of the release of the Final Determination.

• review of the setting of the weighted index of prices

• propose values for W1 and W2 consistent with its forecast of capital expenditure and operating and maintenance expenditure which would be incurred in a foreign currency.

8/22/2014 38



PhP/$US Exchange Rates Adjustment


“The Php/$US exchange rate for a Quarter within the Second Regulatory Period is less than 90%, or more than 110%, of the Php/$US exchange rate for the Quarter which is approved by the ERC for the purpose of the capital expenditure program that is approved by the ERC under Section 4.10.5 (see also Section 12.5.3), then this Section 12.9.1 applies in respect of the Regulatory Year that immediately follows the Regulatory Year in which that quarter occurs (Section 3.3.1 specifies the consequences of Section 12.9.1).

• ERC_USER for year’s t3, t4, and t5 of the previous regulatory period are exchange rates that have been determined almost six (6) years ago in reference to the first regulatory year of a regulatory period

• these exchange rates are no longer valid and applicable in the determination of the revenues of NGCP for any regulatory period.

• Adjustment of the ERC US$ Exchange Rate (ERC_USER) in the calculation of the MAR through the use of more correct, relevant and realistic actual US$ exchange rates (Actual ERC_USER).

8/22/2014 39



Over/Under Recovery Formula


The over/under recovery formula is set out in Section 5.3 of the RTWR. The formula enables correction (via a K factor in the price control formula) in the event that actual revenues fall short of or exceed the relevant revenue cap.

• Determination whether there should be any change to the existing cap of 5 per cent with regard to the carryover of under and over from the 3rd RP to the 4th RP.

• existing correction formula for under or over recoveries should be retained;

• use of Manila Reference Rate (MRR) should be retained; and

• 5% limit on carrying over the under and over recoveries should be removed

8/22/2014 40



Primary Building Blocks


building blocks: Operating and

maintenance expenditure (OPEX);

Taxes other than corporate income tax;

Regulatory depreciation; Return “on” capital; and Corporate income tax.

• Public consultation of the DU Issues Paper

- Absence of risk and

uncertainty may result in a lower level of transparency over the setting of appropriate allowances for risk and uncertainty

• Alternative approach in

calculating working capital

• Extensive work in defining the new building block and adjustment on others

• No experience internationally

8/22/2014 41



Asset Valuation (1)


For the 4th Reset, the ERC may require that either the regulatory asset base (RAB) is re-valued, or the previous value of the regulatory asset base is rolled forward.

• The RTWR do not detail ‘some other method of internationally-accepted valuation methodology’

• the RTWR do not detail how a roll-forward of the previous value of the regulatory asset base would be undertaken.

• a move from ODRC to a roll forward method would represent a significant development in the regulatory framework

• the current RAB is not yet sufficiently stable to transition to a roll-forward approach at the 4th reset.

• A further revaluation using an ODV approach for the 4th RP would assist in stabilizing the RAB

• This further revaluation could be completed using the ODRC methodology and handbook already determined by the ERC

8/22/2014 42



Asset Valuation (2)


The RTWR state that the definition of the previous regulatory period’s CAPEX to be used to determine the opening valuation is the actual or budgeted CAPEX, to the extent such expenditure is deemed reasonable, and to the extent they would be included in the RAB (section 4.6.10).

• Whether unplanned CAPEX be included in the opening RAB of the transmission assets

• NGCP considers that unplanned CAPEX incurred in the 3rd RP be included in the opening RAB for the 4thRP. There are some capital expenditures that are urgent, important and unavoidable for the Regulated Entity. This expenditure includes transmission projects driven by the generators consistent with Section 4.9.1 of the Draft Determination

8/22/2014 43



Rolled-Forward Regulatory Asset Base


For the 4th Reset, the ERC may change its approach to rolling forward the regulatory asset base (within the 4th Regulatory Period) provided that it is consistent with the approach it adopts in relation to the Primary Building Blocks (section 5.5) and the RAB (5.6).

• Whether to use “as commissioned” or “as spent” in the roll-forward calculation

• Requiring NGCP to present the data so that the same adjustments that were made for the 3rd RP can be applied to the 4th RP is a lower risk approach than adopting a new method that might also turnout to be ambiguous when first applied.

8/22/2014 44



Regulatory Depreciation


Depreciation is sometimes referred to as ‘the return of capital’ as the depreciation charge returns to the investor the value of the investment as the asset is used up (depreciated) in providing the service.

• Establishment of sinking fund

• Sinking Fund concept would be contrary to EPIRA as it conflicts with the EPIRA Declaration of Policy

• an investor is unlikely to make additional capital available if the regulator has established a rule that prevents the return of that capital to the investor.

8/22/2014 45



Weighted Average Cost of Capital


The RTWR require that the ERC must continue to apply the approach to the calculation of the WACC used in the 3rd Reset, provided there is no change to the definition of the primary building blocks.

• If a different building block analysis is adopted for the 4th Reset, then the ERC must also alter the methodology for calculating the WACC

• The ERC may vary its approach to calculating the WACC for any subsequent regulatory period following the 3rd RP, provided that it uses an internationally accepted methodology.

• ERC should retain its approach adopted in the 3rd RP Final Determination on observable market data.

8/22/2014 46



Capital Expenditure Forecast


the ERC is required by the RTWR to assess the capital expenditure forecast, including whether the program is based on the best available prices, is reasonably efficient, and is consistent with connection and demand forecasts

• CAPEX forecasts are inherently subject to uncertainty

demand growth number, location and

type of future connections

timing of individual projects

• Challenge on the implementation of several submarine interconnection facilities

• Difficulty in applying uniform CWIP factors

• Adoption of same approach of forecasting capital expenditure

• Pre-construction activities be allowed

• specify the use of different CWIP Factors

Transmission Lines; Transmission

Substations; and Interconnection

Submarine Cables and Facilities.

8/22/2014 47



Operating and Maintenance Expenditure Forecast


The operating and maintenance expenditure (OPEX) forecast relates to the forecast for a primary building block. This building block relates to identifiable operating expenditure such as labor, software licenses, lease costs and other operating costs that are expensed in a given reporting period rather than capitalized and amortized over a number of years.

• Level of OPEX • Reasonable level of

bad debts • Compliance to Republic

Act 7641 of 1993

• Consider flexibility in managing the operating expenditure

• adequate % of bad debts • Debts as OPEX:

Systems loss is more than the limit set by ERC of 13%;

Unpaid power bill to PSALM/NPC and NGCP of more than Php2B; and

With political interventions,

• Consider retirement fund

8/22/2014 48



Revenue Smoothing


Objective: to allow NGCP to achieve the sum of annual revenue requirements over the course of the regulatory period without undue volatility in transmission rates from year to year (efficiency factor X and P naught (Po) Rule 4.13.3: windfall gains and losses; smooth the annual revenue

• not possible to calculate a P naught term that both addresses windfalls and calculates the smoothing element.

• the parameter would introduce two unknowns into the revenue calculation preventing a unique solution.

• P naught has a dual function

P1: a known input, is a parameter for the external influences that have resulted in windfall gains or losses; P2: an unknown input, is a parameter that allows, along with X factor, for smoothing of the step in revenue between regulatory periods 8/22/2014 49



Side Constraints


The primary purpose of side constraints is to balance the risks of rate shock, on the one hand, with the desirability of maintaining prices at cost reflective levels, on the other.

Setting side constraints as low as 2 per cent may raise equity issues whereby other rates have to increase at a higher rate than otherwise to offset the effect of the side constraint.

• Side constraints need not be the same percent to all customer segments

• side constraints be

reviewed and adjusted relative to the proposed changes of the Load Billing Determinants from rolling a 12-month average of the non-coincident peak to rolling 12-months of the customer’s system coincident peak. 8/22/2014 50



Financial Ratios


Section 5.19.1 of the RTWRs gives the ERC the discretion to require the Regulated Entity to provide forecast financial ratios for each Regulatory Year.

• efficient approach that the regulated entity would have to apply in forecasting financial ratios.

• a more practical and robust approach would be to forecast financial statements independently from the MAR model, once the operation of the side constraints has been determined.

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Service Quality Measures and Targets


NGCP, being a Regulated Entity and governed by the ERC through a Performance Based Regulation (PBR), is tasked to extend quality service to its customers in adherence to a set of performance standards set forth under Article VIII of the RTWR and the provisions stipulated under Section 4.9 of the 3rdRP Final Determination (FD).

• Sub-transmission assets reverted to RAB

• the samples provide insufficient data to establish realistic and statistically sound ASAI parameters

• Unrecovered amount due to the setting of zero (0) incentive/penalty while maintaining a 5% weighting on ASAI

• Recognition of Customer satisfaction survey undertaken by NGCP

• Be measured based on the performance of both the transmission assets and the reverted sub-transmission assets;

• Removal of ASAI • Unrecovered amount be

recognized as a windfall loss and be recovered by NGCP in the 4th RP

• allow and recognize the Customer Satisfaction Survey undertaken by an independent research company engaged/to be engaged by NGCP

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OPEX and CAPEX Efficiency Adjustments


The purpose of the NEA is to ensure that the regulated entity has an incentive to achieve reductions in controllable costs relative to the allowed costs in forecasts approved by the regulator.

• NGCP views issues on the 5-year leverage and in the formula of OEA.

• Reduce the leverage; NGCP should be invited to submit with its regulatory filing sufficient evidence to support any proposed change to leverage

• reform the OEA mechanism

• Retain adjustment to budget comparator to account for factors not controllable by NGCP on Capex projects approved during 3rd RP. 8/22/2014 53



Force Majeure and Tax Event Pass Through


Following an FM event, the regulated entity is required to submit an ad hoc request to increase the revenue cap sufficient to recover efficient costs associated with the event for a subsequent period

• This process creates an additional overhead cost and delay for both the regulated entity and the ERC

• It also creates a high level of uncertainty for both customers and the regulated entity as to the extent of additional FM related costs to transmission tariffs in any given year during an RP.

• NGCP proposes that the ERC consider the possible advantage of the creation of an FM fund/self-insurance but that Article X of the RTWR should not be removed.

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Reopening and Adjustments Events


Re-opening and adjustment events are addressed under Article XII of the RTWR. The existing thresholds are described under section 12.1.

• revision of the existing thresholds for the reopening of the MAR

• NGCP considers the reopening triggers should be set at significantly lower levels. In setting the triggers, consideration should be given to the allowance for non-controllable risk provided for in the overall regulatory package.

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Independent Experts


The RTWR requires the ERC (and the regulated entity) to be assisted by independent experts.

• During the public consultation for the DU Issues Paper, comments have been expressed about the cost of engaging experts.

• Employing (a mix of local and international) consultants for specific tasks for the regulatory reviews ensure that decisions benefit from expert input.

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Land-Related Costs


certain amount as provision for funding land-related CAPEX was allowed by the ERC in the FD; Conduct of prudency review where the net difference between the allowed cost vs. the actual land-related expenditures shall be recovered by NGCP during the 4th RP

The RTWR do not provide the mechanisms on:

How the prudency review be done; and How to recover reasonable and efficient land-related cost incurred by the Regulated Entity.

• Jointly develop an agreed methodology for the ex post prudency review of land-related CAPEX.

• recovery of any prudent land related CAPEX incurred that exceeds the ERC’s allowed level of land related CAPEX

• process be undertaken in parallel with the process for determining the opening RAB in the 4th RP

• sufficient amount of 2016-2020 land-related costs.

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Part 4: Discussion of Stakeholders’ Comments

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2014.08.03_Consolidated Comments on Issues Paper_suggested responsible group.docx




Thank you.

National Grid Corporation of the Philippines

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regulatory reset of the regulated transmission services...

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