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Regulation of the Transmission Business

Regulation of the Transmission Business. A presentation to HAPUA Working Group 5. Dinna O. Dizon Head, Regulatory Compliance Monitoring Department National Transmission Corporation February 25, 2009.

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Regulation of the Transmission Business

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  1. Regulation of the Transmission Business A presentation to HAPUA Working Group 5 Dinna O. Dizon Head, Regulatory Compliance Monitoring Department National Transmission Corporation February 25, 2009

  2. 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)

  3. 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

  4. What is Performance Based Ratemaking (PBR)? 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.

  5. 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.

  6. 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 casewhere benefits eventually flow to consumers.

  7. Building Block Approach • Return on Capital - WACC-based return on Regulatory Asset Base (including working capital) Return on Capital + • Depreciation-Regulatory depreciation on re-valued Regulatory Asset Base Depreciation Annual Revenue Requirement (ARR) + Taxes • Taxes -Corporate income taxes and other taxes + Operating Expenditure • Operating Expenditure -Operating and maintenance expenditure forecasts approved by the ERC

  8. Price Control Formula (Section 3.2) Formula that regulates TransCo’s revenue on an annual basis Portion of net income derived from related business Previous year’s revenue Correction for revenue over or under-recovery in previous year.(Sec. 3.4) This year’s revenue Index of change in Consumer Prices (Sec. 3.3) Efficiency factor or Smoothing factor

  9. Current Activities • Ongoing process for the amendment of the TWRG • Preparation for the Upcoming Regulatory Reset for the Third Regulatory Period (2011-2015)

  10. END OF PRESENTATION

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