In the Name of GodThe Beneficent, The MercifulOOCUR 2013 Development of a Rate Setting Methodology(Electricity Sector Public Utilities Commission Belize)
The Public Utilities Commission (the Commission) has a Rate Setting Methodology (RSM).This effort reflects the writer’s views on a RSM, it is not the RSM employed by the Commission.
this effort:a) makes abundant use of the initial work that was done by KEMA in 2005 in contract to the Commission and under the leadership of then Chairman, Dr. Gilbert Canton.b) relies heavily on work done in our office by Chairman John Avery and other employees like myself. It is still a work in progress.
Objectives:1) something mentioned may be of value to one or more of my audience; 2) establish the need for a Rate Setting Methodology (RSM)3) walk us through some of the rules of the RSM 4) model for calculating the Mean Electricity Rate (MER)5) I will have fun;
In the absence of open competition, Regulation is the best we can do for setting rates. Presently in the electricity market, mainly because of the relatively large financial and the intellectual capital requirements, open competition may not be an appropriate model for setting Utility rates in Belize.
The Regulator is responsibility to ensure the rate is fair and reasonable, and that determination of the rate be done in an open and transparent manner.
Why do we want to do a RSM?because it makes us feel good? because, even though there is no requirement, no express need, no shall, we feel it is the right thing to do? or because there is an clear requirement ?
PUC Act: Section 11. –(1)Every rate made, demanded or received by any public utility provider shall be fair and reasonable and in any case shall be in conformity with and shall use the rate setting methodologies specified in any Regulations, By-laws, Orders, directions or other subsidiary legislation or administrative orders made under the Electricity Act, or any licence authorising the provision of such services.
Electricity Act: Section 7. – (1)The Minister may, after consultation with the Commission, make bylaws relating to:-the methodology and process to determine tariffs, charges and fees to be charged by Licensees;
Electricity Act: Section 20. – (1)A Licensee may charge its customers such fees for electricity transmission, distribution and supply, installations, rentals, removals and all other matters chargeable in connection with the provision of those services as may from time to time be approved or fixed by the Commission:
Electricity Act: Section 20. – (4)In approving or fixing the fees the Commission shall observe the process and apply the basis and the methodology for approving and fixing fees prescribed in applicable by-laws.
So:if the Licensee is going to be sustainable, if the Licensee is going to be viable, then the Licensee is going to have to charge fees;these fees must be approved or fixed by the Commission.when the Commission is approving or fixing fees, there shall be a methodology.
The RSM is:practices, procedures, and rules used in the process of setting rates.We do a Full Tariff Review Proceeding (FTRP) to forecast over the four year Full Tariff Period (FTP).The FTP has four Annual Tariff Periods (ATP), we do four Annual Review Proceedings (ARP). The first ARP is done coincident with the FTRP.
The Base Year is the Licensee’s Financial Year, January 1st through December 31st, immediately prior to the calendar year in which any FTRP or ARP is being conducted.The ATP is twelve months, July 1st through June 30th , with the first six months in one calendar year and the second six months in the following calendar year.The cost information used in the methodology, unless otherwise specified, is the cost information from the Base Year.
Rates will be set going forward to address all costs identified in this methodology. There will be no going backward and setting or adjusting historical rates for a calendar year or an ATP in the past.
In a FTRP the Commission sets:Calendar year and ATP regulated parameters and related values, that will remain in effect for the next Full Tariff Period (FTP).Calendar year and ATP regulated parameters and related values, that apply across the FTP but can be adjusted in an ARP or on the occurrence of a material COP Variance.
The Commission shall determine the Tariff Basket Revenue (TBR) for:each of the five calendar years that span the FTP, and for each ATP of the FTP. The TBR is the sum of the costs for:a) Cost of Power (COP); b) Value Added of Delivery (VAD);c) Corrections;d) Other Defined Components.
The Cost of Power (COP) is a pass-through.COP is made up of:1) Cost of power from electricity sales (COPPS);2) Cost of power from technical losses in the transmission and distribution network (COPTL);3) Cost of power from commercial losses (COPCL);COP originates from: a) cost for power by Independent Power Producers; b) cost for power from self generation;
There is a recovery of COP Variance, in any Calendar Year or ATP , is the difference between:a) cost for power paid by the Licensee to IPPs plus the cost for self-generated power;andb) the cost for power paid to the Licensee by Customers;
The Value Added of Delivery (VAD) is made up of:a) Operational Expenditures (OPEX);b) Depreciation Cost (D);c) A Return on Regulated Assets; d) Taxes Payments and License Fees (TL);e) Less Other Revenue (OR);
The Corrections component in the TBRconsists ofannual adjustments to cost elements which should be adjusted resulting from the actual amount of kilowatt hours sold; for example: a) Opex;b) Depreciation Expense;c) Return on Regulated Assets; d) Tax Payments e) License Fees; f) Resolving errors made in the past by the Licensee and or the Commission;
Other Defined Cost Components in the TBR are: a) Costs resulting from Force Majeure events that the Commission may consider appropriate to include in the TBR (FM);b) Commercial Quality and Reliability Incentive;
The Licensee shall be allowed to charge its customers a set of tariffs, the Tariff Basket (TB).
The Other Revenue (OR) is the revenue generated by the Licensee from the regulated portion of its business other than the revenue generated from the TB.
The Regulated Asset Value (RAV):a) is the net book value of the tangible and intangible assets, used by the Licensee in the provision of electricity service, that are derived from efficiently incurred investments. b) does not include assets or any element thereof financed by Capital Contributions. c) is made up of assets approved by the Commission, that has been commissioned and put into service.
The Commission shall determine investmentsfor each calendar year in the FTP after reviewing submissions made by the Licensee, and based on the Commission’s own assessments of appropriate investment levels for the Licensee.
Capitalization … Routine maintenance should not be capitalized. The gross value of a fixed asset may only be modified to reflect subsequent expenditure intended to enhance the asset, and where that expenditure results in one or both of the following:significant extension of the life of the asset, beyond life assumed in the depreciation rate at the time acquired; significant improvement in the capacity of the asset, beyond the recorded rated capacity of the asset at the time acquired;
Capital assets under construction shall:be adjusted annually to take account of interest costs, at the average cost of debt incurred by the Licensee. when commissioned and put into service, the value in the RAV shall be their construction cost plus the accumulated interest costs.
The Commission shall determine:the Rate of Return (ROR), that will be applied to the RAVtfor each calendar year in the FTP to calculate the Total Return (TOR); that the Licensee will be allowed to earn on the RAV for each calendar year; TORt in any calendar year t shall be calculated:TORt= ROR · RAVt
In determining the ROR for the FTP the Commission shall;take into consideration the Licensee’s Weighted Average Cost of Capital (WACC). WACC= Equity /(Equity + Debt) · ROE + Debt /(Equity + Debt) · COD where:Equity = The Licensee's amount of equity;Debt = The Licensee’s amount of debt; ROE = The Licensee’s Return on Equity (%);COD = The Licensee’s Cost of Debt (%).
Development of VAD, c/y 2008 $000 ARP 2008RAV 248,379 for 2008Sales Kwh 403067,961 $000Opex 19,341Depreciation 11,707Returns 24,838Tax Estimation 4,044License fees in opexVAD 2008 (before deducting other revenue) 59,930Other revenue 4,940VAD 2008 (after deducting other revenue) 54,990VAD per unit kWh sales 0.1364