ERC opens performance-based regulation scheme

The Energy Regulatory Commission (ERC) is inviting regulatory experts for the review of the expenditure forecasts of privately-owned electricity distribution utilities (DUs) that would use the so-called performance-based regulation (PBR) methodology.

PBR, an internationally-accepted rate setting methodology, is an alternative to the return-on-rate-base (RORB) methodology currently being used by DUs in gauging their returns.

As suggested in the distribution wheeling rate guidelines (DWRG), PBR employs incentives to induce cost-cutting that will result in better electricity rates, encourage improvement and efficiency in service delivery and optimal use of assets, and provide more rational allocation of risks and rewards.

ERC, the country’s power sector watchdog, recently promulgated a PBR for DUs, of which participating utilities will be subject to a price cap for the delivery of distribution wheeling services.

The reset process for the setting of the price cap that will apply from July 1, 2007 to June 30, 2011 is currently underway.

The ERC said an important requirement of the reset process is the review of the expenditure forecasts submitted by DUs as part of the rate-setting process under PBR.

These expenditure components, the ERC said, are critical to the determination of the revenue to which DUs are entitled on which price caps will be based.

The ERC said it will require assistance from regulatory experts in its review of the expenditure forecasts for the said period.

The forecasts will be for the following expenditure categories: capital expenditure; disposal of fixed assets; operating and maintenance expenditure; and taxes (other than corporate income tax), levies and duties and expenditure.

So far, three DUs have opted to take part in the PBR, and the expenditure forecasts for each of these will be reviewed. These DUs are Cagayan de Oro Electric Power & Light Co. Inc. (Cepalco); Dagupan Electric Corp. (Decorp); and Manila Electric Co. (Meralco).

The experts that would be selected by the ERC would be tasked to come up with the analyses of the expenditure forecasts for each DU; assessment of these expenditure forecasts and recommendation about how they should be modified, if required; and preparation and presentation to the ERC of a detailed report in which the expert’s finding are presented.

The experts are also expected to assist in explaining and defending the approved expenditure forecasts during the public hearing process that will follow rate applications by DUs under the regulatory reset process and the publication of the ERC’s draft determination; and come up with documentation of all the functions performed in evaluating the date provided and of the reasons for coming up with the recommendations, including full details of the changes recommended to the utility expenditure programs.

Interested parties are required to submit their respective expression of interest on June 2, 2006. In terms of reset process, the ERC has to make its draft determination on the price caps for distribution wheeling rates by Feb. 16, 2007 and the final determination by May 31, 2007.