Regulation of the Transmission Business

Regulation of the Transmission Regulation of the Transmission BusinessBusiness

A presentation to HAPUA Working Group 5

Dinna O. DizonHead, Regulatory Compliance Monitoring Department

National Transmission CorporationFebruary 25, 2009

TransCo

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The Philippine transmission business is regulated under Performance Based

Regulation (PBR) using a revenue cap approach

Adopted in May 2003 by the ERC thru its promulgation of the Transmission Wheeling Rate Guidelines (TWRG)

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Rationale for PBR

EPIRA Sec. 43(f) In the public interest, [ERC shall] establish and enforce a methodology for setting transmission and distribution wheeling rates xxx, taking into account all relevant considerations, including the efficiency and inefficiency of the regulated entities

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PBR is a form of utility regulation

that strengthens the financial

incentives to lower rates, lower cost,

or improve non-price performance

relative to traditional regulation.

What is Performance Based Ratemaking (PBR)?

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Why Adopt PBR Now?

Costs are more predictable. Ability to stabilize revenues and earnings

over multi-year period. Rate case avoidance for multi-year PBR

plans. Opportunities to be rewarded for cost

cutting and efficiencies. Incentives for market/technology risk

taking.

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PBR vs Cost Based (RORB) PBR

Ex-ante cost (forecast data and ‘time-value-of-money’). Uses pricing formula independent of cost. Provides incentive for utility to lower costs and rates. Creates opportunity for a utility to earn additional profits by reducing

costs or improving service. Reduces regulatory delays and cost. Sets measurable targets for reliability & safety and provides

incentives for meeting the targets/standards. RORB

Ex- post cost (historical data). Uses fixed rate of return in computing revenue requirement. Cost based rates. No guaranteed rate of return (potential to overspend) . Short-term incentives to reduce costs since benefits on cost

reductions are kept by stakeholders until the next rate case where benefits eventually flow to consumers.

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Building Block Approach

Operating Expenditure - Operating and maintenance

expenditure forecasts approved by the ERC

Operating

Expenditure

Taxes

DepreciationAnnual

Revenue Requirement

(ARR)

Return on

Capital

Taxes - Corporate income taxes and other taxes

Depreciation - Regulatory depreciation on re-valued

Regulatory Asset Base

Return on Capital - WACC-based return on Regulatory

Asset Base (including working capital)+

+

+

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tRBR

tKX

tCWI

tMAR

tMAR }]1{

1[

This year’s revenue

Previous year’s revenue

Index of change in Consumer

Prices (Sec. 3.3)

Efficiency factor or Smoothing factor

Correction for revenue over or

under-recovery in previous year.

(Sec. 3.4)

Portion of net income derived

from related business

Formula that regulates TransCo’s revenue on an annual basis

Price Control Formula (Section 3.2)

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Current Activities

Ongoing process for the amendment of the TWRG

Preparation for the Upcoming Regulatory Reset for the Third Regulatory Period (2011-2015)

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END OF PRESENTATION

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