Performance-base rate (PBR)
Objectives
• What is the Performance-based Methodology (PBR)
• PBR under EPIRA
• PBR vs RORB
• Benefits of the PBR Methodology
I. What is the Performance-based
Methodology (PBR)?
Performance-based Rate
• It is an internationally-accepted methodology which uses projections of
operating and capital expenditures to enable the regulator to evaluate
investment in facilities to meet customer requirements and prescribed
service levels.
• An alternative process that evaluates utility performance when
establishing rates, including incentives and penalties.
• is an alternative to the return-on-rate-base (RORB) methodology
currently being used by DUs in measuring their returns.
• PBR has been used in the UK, Australia, New Zealand, USA and many
other countries in Europe and Asia
PBR under EPIRA
RA 9136 or the Electric Power Industry Reform Act
(EPIRA)
• is the legal basis for the shift from Return on Rate Base (RORB) to
Performance Based Regulation (PBR).
• mandates the Energy Regulatory Commission (Commission) to promote
competition, encourage market development, ensure consumer choice, and
penalize abuse of market power in the restructured electricity industry.
• This Act shall provide a framework for the restructuring of the electric
power industry, including the privatization of the assets of NPC, the
transition to the desired competitive structure, and the definition of the
responsibilities of the various government agencies and private entities.
PBR vs RORB
• PBR, also known as incentive regulation, is a rate setting methodology
based on estimates, forecasts and projections.
• RORB, on the other hand, is cost recovery on investments already made or
costs incurred. This methodology meets the recovery standard set in
EPIRA.
• RORB was capped at 12% based on the Public Service Act and
jurisprudence; PBR’s WACC or Weighted Average Cost of Capital has no
ceiling and is determined on the basis of interest rates, CPI or consumer
price index, forex rate and indices not necessarily related to the cost of
service.
• In RORB and under the Supreme Court decision on MERALCO refund,
corporate income tax is not recoverable cost; under PBR, corporate income
tax is a revenue building block.
• In RORB and under the SC decision, incurred costs to be recoverable must
be prudent, reasonable, necessary, recurring and redounding to the benefit
of the consumer; under the present PBR, there is no clear mechanism or
method for enforcing such standards on actual and incurred costs.
• RORB was the rate regime in place at the time EPIRA was passed in June,
2001.
Timeline: Shift from the RORB Methodology
to the PBR Methodology
• Old Regime:
The Rate on Return Base (RORB) Methodology Under the RORB
Methodology, rates are set to recover the cost of service incurred by the
distribution utility plus a reasonable rate of return, whereby historical costs
are used to determine the revenue requirement
Timeline: Shift from the RORB Methodology
to the PBR Methodology
• The ERC, acting in accordance with its rate-setting authority under the
EPIRA, and after the conduct of several public consultations, issued
Resolution No. 4, Series of 2003 dated 29 May 2003 signaling its shift from
the RORB Methodology to the PBR Methodology in fixing the wheeling
rates of regulated entities. It began with the promulgation of the
Transmission Wheeling Rate Guidelines to apply to Transmission
Company.
Timeline: Shift from the RORB Methodology
to the PBR Methodology
• The ERC subsequently issued the following:
1. ERC Resolution No. 12-02, Series of 2004 which promulgated the
Distribution Wheeling Rate Guidelines (DWRG) which would govern the
setting of distribution rates of privately-owned distribution utilities that
will enter into the new PBR System.
2. ERC Resolution No. 39, Series of 2006 which promulgated the Rules for
Setting Distribution Wheeling Rates (RDWR) for privately owned
distribution utilities entering the PBR System.
Reason for the shift to the PBR Methodology
• In its Order dated 12 July 2010 in ERC Case No. 2005-041 RC, the ERC
further explained the reason for adopting the PBR:
• “The ERC adopted the PBR methodology since it has strong efficiency
incentives for the utility embedded in its framework to motivate the
regulated entity to reduce its cost, thus, become more efficient while
maintaining its service delivery performance.”
• “In the light of economic efficiency, R.A. 9136 requires that the rate-setting
methodology to be adopted is one which will promote efficiency. The PBR
methodology has other characteristics which support the implementation of
an internationally-accepted rate-setting methodology, such as strong
incentives to reduce the costs of service delivery and maintain service
quality and performance which are akin to price-cap and revenue regulation
or variants of incentive-based regulation seen overseas. The ‘Rate-of-Return
Regulation’ has gradually given way to ‘Price-Cap Regulation’ as the
preferred method of regulating public utilities.”
Benefits of PBR Methodology
Benefits of PBR Methodology
• The PBR Methodology is consistent with the State Policies of
ensuring Quality, Reliability, Security and Affordability of the supply
of electric power.
[Section 2 of the EPIRA]
Benefits of PBR Methodology
• In the long run, these facilities will result in more efficient and
improved quality of service which, in turn, will lower electricity cost.
Benefits of PBR Methodology
• It also provides for an audit of cost and expenses every reset to check the
reasonableness of the forecasts and ensure just and reasonable rates, while
encouraging efficiency.
Benefits of PBR Methodology
• It supports the “Build, Build, Build” Program of the present Administration
by ensuring that DUs are capable of building required CAPEX to support
the continued development of major infrastructure and government projects.
Benefits of PBR Methodology
• It promotes total electrification through the timely and unhampered
installation of necessary facilities to deliver power to as many consumers of
electricity within the DU’s franchise area
CONCLUSION
CONCLUSION
• The determination of the use of the PBR Methodology is legal and
reasonable.
• More importantly, it is consistent with the promotion of public interest as it
provides substantial economic and reliability benefits to electricity
consumers, ensures continued, sustainable operation of the transmission and
distribution utilities, and encourages stability in the market.
CONCLUSION
• Repealing or modifying the PBR would only result in:
o Regulatory uncertainty
o Inability to keep up with growing customer requirements and service
levels, resulting in a less reliable and inefficient service
o Lack of incentives for DUs to deliver better service and lack of
penalties to DUs for failure to meet service levels
o Inability to support major government projects and total
electrification due to lack of motivation to continue investing in major
Capital expenditures
Thank you!
