Regulators approve new electricity price formula
Business World, january 12, 2005
The Energy Regulatory Commission (ERC) has approved a new formula for electric utilities like Manila Electric Company to compute electricity prices.
The new rate-setting methodology will base electricity prices on a utility's efficiency, as determined by its performance, and no longer on the value of its assets or its total investment in delivering electricity.
With the Distribution Wheeling Rates Guidelines (DWRG), utilities like Meralco can choose not to use the Return on Rate Base (RORB) methodology, ERC said in a statement.
"The RORB methodology allows a distribution utility to set rates or charges for regulated activities to recover costs plus a reasonable rate of return on rate base. DWRG is a performance-based rate-setting approach that employs incentives to induce cost-cutting that is expected to result in lower electricity rates in the long term," said ERC Chairman Rodolfo B. Albano, Jr.
The shift to performance-based pricing is expected to compel utilities to be efficient, since their profits will depend on their efficiency gains.
Ivanna G. dela Peña, Meralco vice-president for utility economics, said the change in methodology was timely.
"It gives distribution utilities the flexibility. We still have to meet and asses the implication. Right now, we're looking at the guidelines, schedules. In due time, we will come to a decision whether we want to opt in," she said.
ERC said it adopted DWRG as an alternative rate-setting formula under Republic Act No. 9136 or the Electric Power Industry Reform Act.
With RORB, regulatory reviews use straight-forward accounting everytime a utility applies for a rate increase.
BWRG will require fewer but more detailed reviews of forecasts and performance, ERC said.
"It provides incentives to distribution utilities to make efficient investments and to lower costs by improving efficiency of utility operations and ultimately bring about long-term benefits to consumers in terms of providing more affordable electricity rates and greater quality and reliable electric service," Mr. Albano said.
ERC said power rates under DWRG would be controlled through an average price cap mechanism -- a limit on the average revenue per unit a utility can earn in a period.
The maximum average price (MAP) a utiliy can charge should cover all relevant price measures -- change in weighted index, correction factor for over or under recovery of revenue in the previous year, tax adjustment for over or under recovery of corporate income tax in the previous year, and efficiency factor for both operating and capital expenses.
Initial maximum average price is based on specific historical period data, and should be approved by ERC.
The regulatory period will be four years, with one regulatory reset prior to the start of each period. There will be consultations and price controls. For new utilities, initial pricing will take into account inflation.
"Distribution firms will enter the performance-based rate scheme through DWRG on a first-come, first-in basis in any one of the scheduled entry points as defined in the timelines for the five entry points. They must submit a letter of intent to join a specific entry point," ERC said.
In May 2003, ERC already ordered performance-based rate-setting for transmission charges. -- Bernardette S. Sto. Domingo
The Energy Regulatory Commission (ERC) has approved a new formula for electric utilities like Manila Electric Company to compute electricity prices.
The new rate-setting methodology will base electricity prices on a utility's efficiency, as determined by its performance, and no longer on the value of its assets or its total investment in delivering electricity.
With the Distribution Wheeling Rates Guidelines (DWRG), utilities like Meralco can choose not to use the Return on Rate Base (RORB) methodology, ERC said in a statement.
"The RORB methodology allows a distribution utility to set rates or charges for regulated activities to recover costs plus a reasonable rate of return on rate base. DWRG is a performance-based rate-setting approach that employs incentives to induce cost-cutting that is expected to result in lower electricity rates in the long term," said ERC Chairman Rodolfo B. Albano, Jr.
The shift to performance-based pricing is expected to compel utilities to be efficient, since their profits will depend on their efficiency gains.
Ivanna G. dela Peña, Meralco vice-president for utility economics, said the change in methodology was timely.
"It gives distribution utilities the flexibility. We still have to meet and asses the implication. Right now, we're looking at the guidelines, schedules. In due time, we will come to a decision whether we want to opt in," she said.
ERC said it adopted DWRG as an alternative rate-setting formula under Republic Act No. 9136 or the Electric Power Industry Reform Act.
With RORB, regulatory reviews use straight-forward accounting everytime a utility applies for a rate increase.
BWRG will require fewer but more detailed reviews of forecasts and performance, ERC said.
"It provides incentives to distribution utilities to make efficient investments and to lower costs by improving efficiency of utility operations and ultimately bring about long-term benefits to consumers in terms of providing more affordable electricity rates and greater quality and reliable electric service," Mr. Albano said.
ERC said power rates under DWRG would be controlled through an average price cap mechanism -- a limit on the average revenue per unit a utility can earn in a period.
The maximum average price (MAP) a utiliy can charge should cover all relevant price measures -- change in weighted index, correction factor for over or under recovery of revenue in the previous year, tax adjustment for over or under recovery of corporate income tax in the previous year, and efficiency factor for both operating and capital expenses.
Initial maximum average price is based on specific historical period data, and should be approved by ERC.
The regulatory period will be four years, with one regulatory reset prior to the start of each period. There will be consultations and price controls. For new utilities, initial pricing will take into account inflation.
"Distribution firms will enter the performance-based rate scheme through DWRG on a first-come, first-in basis in any one of the scheduled entry points as defined in the timelines for the five entry points. They must submit a letter of intent to join a specific entry point," ERC said.
In May 2003, ERC already ordered performance-based rate-setting for transmission charges. -- Bernardette S. Sto. Domingo
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