THE RATE REBASING FRAMEWORK

MWSS REGULATORY OFFICE

Presentation Outline

What the Concession Agreement Provides

Rate Rebasing Guidelines Rate Setting vs Service Levels

Concession Agreement Framework

Economic Regulation
TARIFF ASPECTS Tariffs Revenue Requirements Financial Monitoring TECHNICAL ASPECTS Service Quality Operational Performance Customer Services

Source: Stone & Webber Consultants, Inc., Severn Trent Water International Ltd., IDP Consult, Inc. 2003. Introduction to Economic Regulation of Water Supply and Wastewater Utilities

Concession Agreement Framework

Asset Management Obligations operate, maintain and renew Meet Service Obligations provision of water supply & sewerage services

Cash Flows prudently and efficiency incurred

Historical and Future ; Receipts and Expenditures

WHAT THE CA PROVIDES ON RATE REBASING

Article 9.4 General Rate Setting Policy (Rate Rebasing) . . . the rates for water and sewerage services shall be set at a level that will permit the Concessionaire to recover over the 25-year term of the Concession operating, capital maintenance and investment expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on the MWSS Loans and Concessionaire Loans incurred to finance such expenditures, and to earn a rate of return on these expenditures for the remaining term of the Concession.

THE RATE REBASING FORMULA

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TARIFF = F. RECEIPTS FROM RATES F. BILLED VOLUME

RATE REBASING FORMULA

Opening Cash Position (OCP) Net Future Expenditures

Net of Historical Receipts and Expenditures

Stated in Current Prices

Negative amount

Expenditures net of other Receipts, and Expiration Payment

Stated in Current Prices

Efficiently and prudently incurred

Cost of Money

Project Return (not Equity)

REAL Rate of Return (insulated from inflation)

Represents Weighted Average Cost of Capital after Taxes

RATE REBASING PROCESS

Review Actual vs. Committed Performance on Service Obligations and Operational Efficiency

Technical Aspects

Reinforce, Modify or Enhance Service Obligations and Establish Performance Targets

Historical Cash Flows or Opening Cash Position

TARIFF

Future Cash Flows

THE RATE REBASING PROCESS

Population growth Consumption patterns Demand vs. supply for reasonableness of projections

Check accuracy and completeness

RECEIPTS

Demand Projections

OPEX

Audit for accuracy Prudency and efficiency test; benchmark determine intercompany costs for disallowances Ring-fencing
Audit for accuracy Prudency and efficiency test, benchmark determine related party transactions for disallowances Ring-fencing

OPEX

Check for reasonableness of projections Check prudency and efficiency Benchmark

CAPEX

CAPEX

Check for reasonableness of projection Check prudency and efficiency Benchmark MWSS-CO review

Service Obligations Rewards and KPIs, BEMs NRW, OPEX penalties

ADR

Cost of Equity Cost of Debt Gearing Ratio

Check accuracy of estimates of Concession Fees Check inclusion of other operating reciepts Determine appropriate macro-economic assumptions (i.e. inflation, forex rates)

Others

Review non-recurring costs such as retirement pay Review accuracy of recorded concession fee payments

Others

RATES vs LEVELS OF SERVICE

T A R I F F

S L E E R V O V E F I L C S E

HOW??

LEVELS OF SERVICE
COVERAGE AVAILABILITY PRESSURE QUALITY RESPONSE TO CUSTOMER COMPLAINT/REQUEST INFORMATION TO CUSTOMERS

RATES vs SERVICE LEVELS

Opening Cash Position (OCP)

REFLECTS THE PAST ACTIVITIES OF THE CONCESSIONAIRES THAT RESULTED IN THE PRESENT LEVELS OF SERVICE

INCLUDES PENALTIES FOR FAILURE TO MEET SERVICE LEVEL TARGETS

Net Future Expenditures

Cost of Money Future Billed Volume

BASED ON TARGET LEVELS OF SERVICE

REFLECTS FUTURE ACTIVITIES OF THE CONCESSIONAIRES TO MEET THE SERVICE LEVEL TARGETS

AFFECTS WILLINGNESS OF CONCESSIONAIRES TO INVEST IN F. EXPENDITURES

IN TURN, LEVELS OF F. EXPENDITURES AFFECTS BILLED VOLUME AND LEVELS OF SERVICE

AFFECTED BY LEVELS OF F. EXPENDITURES

AFFECTS LEVELS OF SERVICE (I.E. COVERAGE, AVAILABILITY AND PRESSURE)

THANK YOU