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THE RATE REBASING
FRAMEWORK
MWSS REGULATORY OFFICE
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Presentation Outline
Rate Setting vs Service Levels
Rate Rebasing Guidelines
What the Concession Agreement Provides
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Concession Agreement Framework
Economic Regulation
TARIFF ASPECTSTariffs
Revenue Requirements
Financial Monitoring
TECHNICAL ASPECTSService 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
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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
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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, capitalmaintenance 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.
WHAT THE CA PROVIDES ON RATE REBASING
o
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THE RATE REBASING FORMULA
+
+TARIFF = F. RECEIPTS FROM RATES
F. BILLED VOLUME
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RATE REBASING FORMULA
Opening CashPosition
(OCP)
Net of HistoricalReceipts andExpenditures
Stated in CurrentPrices
Negative amount
Net FutureExpenditures
Expenditures netof other Receipts,
and ExpirationPayment
Stated in CurrentPrices
Efficiently andprudently incurred
Cost ofMoney
Project Return(not Equity)
REAL Rate ofReturn (insulated
from inflation)
RepresentsWeighted Average
Cost of Capitalafter Taxes
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TARIFF
TechnicalAspects
RATE REBASING PROCESS
Review Actual vs.Committed Performance on
Service Obligations andOperational Efficiency
Reinforce, Modify orEnhance Service Obligationsand Establish Performance
Targets
Historical Cash Flows orOpening Cash Position Future Cash Flows
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THE RATE REBASING PROCESS
DemandProjections
Population growthConsumption patterns
Demand vs. supply for reasonableness ofprojections
OPEX
Check for reasonableness of projections
Check prudency and efficiency
Benchmark
CAPEX
Check for reasonableness of projection
Check prudency and efficiency
Benchmark
MWSS-CO review
ADR
Cost of Equity Cost of Debt
Gearing Ratio
Others
Check accuracy of estimates of Concession Fees
Check inclusion of other operating reciepts
Determine appropriate macro-economicassumptions (i.e. inflation, forex rates)
RECEIPTS
Check accuracy and completeness
OPEX
Audit for accuracy
Prudency and efficiency test; benchmark
determine intercompany costs for disallowances
Ring-fencing
CAPEX
Audit for accuracy
Prudency and efficiency test, benchmark
determine related party transactions fordisallowances
Ring-fencing
Rewards andpenalties
Service Obligations
KPIs, BEMsNRW, OPEX
Others
Review non-recurring costs such as retirement pay
Review accuracy of recorded concession feepayments
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RATES vs LEVELS OF SERVICE
T
AR
I
FF
L
EV
E
L
S
O
F
S
E
RV
I
CE
HOW??
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LEVELS OF SERVICE
COVERAGE
AVAILABILITY
PRESSURE
QUALITY
RESPONSE TO CUSTOMER COMPLAINT/REQUEST
INFORMATION TO CUSTOMERS
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OpeningCash Position
(OCP)
REFLECTS THE PAST ACTIVITIESOF THE CONCESSIONAIRES
THAT RESULTED IN THEPRESENT LEVELS OF SERVICE
INCLUDES PENALTIES FOR FAILURETO MEET SERVICE LEVEL TARGETS
Net FutureExpenditures
BASED ON TARGET LEVELS OFSERVICE
REFLECTS FUTURE ACTIVITIES OFTHE CONCESSIONAIRES TO MEET
THE SERVICE LEVEL TARGETS
Cost ofMoney
AFFECTS WILLINGNESS OF
CONCESSIONAIRES TO INVEST INF. EXPENDITURES
IN TURN, LEVELS OF F.
EXPENDITURES AFFECTS BILLEDVOLUME AND LEVELS OFSERVICE
Future BilledVolume
AFFECTED BY LEVELS OF F.EXPENDITURES
AFFECTS LEVELS OF SERVICE(I.E. COVERAGE, AVAILABILITY
AND PRESSURE)
RATES vs SERVICE LEVELS
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THANK YOU