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Performance Based Rate Methodology

Performance base rate

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Kevincarl Fortozo
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© © All Rights Reserved
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26 views

Performance Based Rate Methodology

Performance base rate

Uploaded by

Kevincarl Fortozo
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 24

Performanc

e Based
Rate
Methodolog
y
OBJECTIVES
I. What is Performance Based Methodology
(PBR)
II. What is Rate on Return Base Methodology
(RORB)
III. The Legal Basis of PRB Methodology
IV. Reasons to shift to PBR
V. Benefits of PRB Methodology
VI. CONCLUSION
I. WHAT IS
PERFORMANC
E BASED RATE
(PRB)
METHODOLOG
Y?
It is an internationally-
accepted methodology
which uses projections of
operating and capital
expenditures to enable the
regulator to evaluate
investment in facilities to
meet customer requirements
and prescribed service
levels.
It also has a performance
incentive scheme by which
the regulator provides
incentives and penalties to
the utility to compel it to be
more efficient and reliable,
while maintaining
reasonable rates and
improving the quality of
service to achieve pre
determined target levels.
In simple words, PBR is an
approach to utility regulation
designed to strengthen utility
performance incentives.
II. WHAT IS
RATE OF
RETURN BASE
(RORB)
METHODOLOG
Y?
RORB is cost recovery on
investments already made
or costs incurred. This
methodology meets the
recovery standard set in
EPIRA
In the Philippines:

• A revenue-cap regulation for


the Transmission Utility since
2003
• A price-cap regulation for the
Distribution Utilities passed in
2006 to replace Return on Rate
Base (RORB) Methodology
Applies to 19 investor-owned
DUs
III.
The Legal
Basis of
PRB
Methodolo
gy
The determination of
the appropriate
methodology is covered
by the rate-setting
function of the ERC
under the EPIRA.
Section 43(f) of
EPIRA
"In the public interest, establish and enforce a
methodology for setting transmission and
distribution wheeling rates and retail rates for the
captive market of a distribution utility, taking into
account all relevant considerations, including the
efficiency or inefficiency of the regulated entities.
The rates must be such as to allow the recovery of
just and reasonable costs and a reasonable return
on rate base (RORB) to enable entity to operate
viably. The ERC may adopt alternative forms of
internationally-accepted rate-setting methodology
as it may deem appropriate. The rate setting
methodology so adopted and applied must ensure
a reasonable price of electricity. The rates
prescribed shall be non-discriminatory."
Regulatory Framework in the
Rate-Setting Function of the ERC

Section 25 of
EPIRA
"The retail rates charged by distribution utilities
for the supply of electricity in their captive
market shall be subject to regulation by the
ERC based on the principle of full recovery of
prudent and reasonable economic costs
incurred, or such other principles that will
promote efficiency as may be determined by
the ERC.“
Exercise of Reasonable Discretion in the
Rate Setting Function of the Government

“There is a legal presumption that the


fixed rates by the government are
reasonable, and it must be conceded
that the fixing of rates by he
government, through its authorized
agents, involves the exercise of
reasonable discretion and unless
there is an abuse of that discretion,
the courts will not interfere.”
[NASECORE v. MERALCO, 10
OCTOBER 2016]
RORB Methodology to PBR Methodology

Under the RORB Methodology, rates


are set to recover the cost of service
incurred by the distribution utility plus
a reasonable rate of return whereby
historical costs are used to determine
the revenue requirement.
[NASECORE v. MERALCO, 10
OCTOBER 2016]
ERC issued the following
1. ERC Resolution No. 12-02, Series of 2004,
which promulgated the Distribution Wheeling
Rate Guideline (DWRG) which would govern the
setting of distribution rates of privately-owned
distribution utilities that will enter into the new
PBR System.

2. ERC Resolution No. 39, Series of 2006, which


promulgated the Rules for Setting Distribution
Wheeling Rates (RDWR) for privately-owned
distribution utilities entering the PBR System.

3. ERC Resolution No. 24, Series of 2007,


0ctober 24, 2007 is a resolution adopting a new
grouping for privately-owned distribution
utilities entering performance based regulation.
IV. Reasons
to Shift to
PBR
ERC Case No. 2005-041 RC,
12 July 2010
The ERC adopted the PBR methodology
since it has strong efficiency incentives
for the utility embedded in its framework
to motivate the regulated entity to
reduce its costs, thus, become more
efficient while maintaining its service
delivery performance.

In the light of economic efficiency, R.A.


9136 requires that the rate-setting
methodology to be adopted is one which
will promote efficiency.
The PBR methodology has other
characteristics which support the
implementation of an internationally-
accepted rate-setting methodology.

PBR is Pro-consumer.
PBR encourages CAPEX to improve
efficiency and reliability of service
V. Benefits of
PBR Methodology
Benefi
Consistent with the state policies of
ts
ensuring Quality, Reliability, Security,
and Affordability of the electric power
supply.
Intended to bridge the gap between
service quality and distribution cost. By
allowing DUs to recover rate based on
projected operating and capital
expenditures. Dus are able to make the
necessary to improve efficiency and
service quality.
Provides for an audit of cost and
expenses every reset to check and
reasonableness of the forecast and
ensure just ad reasonable rates, while
encouraging efficiency.
Addresses over and under recoveries
by providing for mechanism to correct
the rates of every reset.
VI.
CONCLUSION
The determination of the use of the PBR Methodology is legal and
reasonable.

More importantly, it is consistent with the promotion of public


interest as it provides substantial economic and reliability benefits
to electricity consumers, ensures continued, sustainable
operations of the transmission and distribution utilities,
encourages stability in the market.

Also, the benefits of PBR will be achieved only if it is implemented


on time and prospectively.
Thanks!

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