A Presentation by the

National Water Resources Board

May 25, 2009

Economic Regulation of Philippine Water Utilities

The National WaterResources Board

PD 424 creating the NWRC (1974)

PD 1067 The WaterCode of the Philippines

(1976)

PD 1206 assigned the residual functions of the Board of Waterworks and the defunct Public Service Commission to NWRB

EO 123 reconstituted the NWRB Board; transferring NWRB to DENR and transferring regulatory functions of LWUA to NWRB (2002)

The National WaterResources Board

PD 424 creating the NWRC (1974)

PD 1067 The WaterCode of the Philippines

(1976)

PD 1206 assigned the residual functions of the Board of Waterworks and the defunct Public Service Commission to NWRB

EO 124-A converted NWRC to NWRB (1987); transferred

BRS to DPWH

EO 123 reconstituted the NWRB Board; transferring NWRB to DENR and transferring regulatory functions of LWUA to NWRB (2002)

Policy Formulation andCoordination

Resource Regulation

Economic Regulation

Water for AllWater for Food

Water for Domestic Water Supply and Sanitation

Water for EnvironmentWater for Economic Development

Our VisionOur Vision

To ensure access to safe, adequate water supply and sanitation at acceptable rates and levels of service;

To allocate sufficient water that will ensure food security and spur economic development of the country; and

To protect the water environment in order to preserve flow regimes, biodiversity and cultural heritage as well as the mitigation of water related hazards.

Our MissionOur Mission

WATERFOR LIVELIHOOD

WATERFOR LIVELIHOOD

WATERAS A RESOURCE

WATERAS A RESOURCE

Water and sanitationfor PEOPLE,

Rainfall and irrigationwater for FOOD

Water for INDUSTRY

Maintaining theRESOURCE BASE, bothsurface and groundwater- and biodiversity.

… while …

Resource RegulationResource Regulation

• The protection of consumers and the economic viability of water utilities by determining service standards and targets, tariff levels and schemes, monitoring and measuring company performance, enforcing compliance, and imposing sanctions

Viability ofUtility Consumers

Water Districts LGU-Run

RWSA/BWSA Cooperatives

Private EnterprisesProperty DevelopersHomeowners Assoc.

Water Peddlers

Economic RegulationEconomic Regulation

• Granting of Certificate of Public Convenience (CPC)

• Tariff setting• Business Plan Review• Conduct of Performance Audit of

CPC grantees• Adjudication and Resolution of

Cases• Testing and Calibration of water

meter• Monitoring of Compliance

Economic RegulationEconomic Regulation

• 5- Year Tariff Methodology

• Economic Regulatory Guidelines• WSPs Responsibilities• Use of Key Performance Indicators

(Technical and Financial)• Customer Service Manual

• Benchmarking of WSPs

Economic Regulatory InstrumentsEconomic Regulatory Instruments

5 – Year Tariff Methodology

• In 2005, the NWRB adopted the 5-Year Tariff Methodology (Res. 001-0105 dtd Jan. 14,

2005)

• Objective: Help WSP’s plan their business and attain full cost recovery.

Main Features:

• Tariff is computed based on agreed levels of service

• Requires the submission of a 5-Year Business Plan with detailed proposed OPEX and CAPEX

• Use of Excel-based tariff model

• Computation of average ROI to reduce price shocks.

• Mechanism for disallowances and upward adjustment in succeeding tariff proposal.

Setting Tariff Goals

• Levels of tariff should be established in consultation with customers or representatives.

• Hours of service• Water quality• Non-revenue water• Service coverage and pressure

Water Supply Planning

Levels of Service intended to be implemented

Projections of demand and supply levels• Projected new connections, volume sold and

population to be served.• Determine production capacity, NRW, water supply

shortage/surplus

Determine required investments Determine operating expenses to be incurred.

SUPPLY AND DEMAND PROJECTIONS            

             

 

2007 2008 2009 2010 2011 2012

Actual Projected    

SUPPLY            

Installed Production Capacity, lps 15.00

15.00

15.00

15.00

15.00

15.00

Production Capacity (m3/year) 473,040

473,040

473,040

473,040

473,040

473,040

% Non-Revenue Water 52% 42% 37% 32% 27% 25%

Production Requirement (m3/year) 414,334

322,821

301,200

282,759

266,844

263,088

Bulk Water Purchases (m3/year) - - - - - -

Total Own Production and Water Purchases (m3.yr)

473,040

473,040

473,040

473,040

473,040

473,040

Water Surplus / (Shortage) (m3/year) 58,706 150,219 171,840 190,281 206,196 209,952

Water Surplus / (Shortage) (lps) 1.86

4.76

5.45

6.03

6.54

6.66

             

DEMAND            

New Connections 15 3

10

10

10

10

Total Connections 740

743

753

763

773

783

Average Persons per Household 6 6 6 6 6 6

Population Served 4,440

4,458

4,518

4,578

4,638

4,698

Population in Service Area 4,878

4,878

4,878

4,878

4,878

4,878

% Population Served 91% 91% 93% 94% 95% 96%

Ave. Consumption/Conn./Month (m3) 22.63

21.00

21.00

21.00

21.00

21.00

Volume Sold (m3/year) 200,952

187,236

189,756

192,276

194,796

197,316

Full Cost Recovery

• Revenue requirement to cover the cost of delivering service

Revenue Requirements = OPEX + Dep + Max Net Income

• Required tariff derived by dividing revenue requirement by volume sold.

Personnel Power Bulk Water

Purchases Bad Debts Supervision &

Regulation Fee Depreciation

Operating Expenses include:

Management Fees Chemicals Repairs &

Maintenance Annual Water Charge General &

Administrative Taxes

Loans and Interest Expense

• Interest Expense is not allowed as part of OPEX.

• Proceeds of loans are capitalized and are entitled to return.

Depreciation = Acquisition Cost / Estimated Life

Depreciation: Straight Line Method

Depreciation Reserve Fund to cover maintenance, rehabilitation, replacement of assets.

May also be used for improvements, new constructions and extensions.

Maximum Net Income

NBV of Property & Equipment Entitled to Return + Working capital good for two months= Total invested capital entitled to returnx 12% rate of return

NBV of Property Plant and Equipment

Cost of PEER at the beginning of the year+ New investments entitled to return= Total PEER, at cost- Accumulated depreciation of the above assets

RETURN ON INVESTMENTS EVALUATION2007Average Total

Actual year 1 year 2 year 3 year 4 year 5 Years 1-5

Property & Equipment, beg 112,000 862,000 2,437,000 3,539,500 4,514,110 5,110,342

New Investments 750,000 1,575,000 1,102,500 974,610 596,232 -

Property and Equipment in Service Entitled to Return, end 862,000 2,437,000 3,539,500 4,514,110 5,110,342 5,110,342

Less: Accumulated Depreciation (142,200) (543,400) (999,725) (1,515,291) (2,050,731) (2,574,972)

Net Book Value 719,800 1,893,600 2,539,775 2,998,819 3,059,611 2,535,370

Add: Working Capital

Operating Expenses excluding depreciation 2,597,363 3,370,720 3,820,431 4,262,521 4,726,182 5,186,470

Allowed (Disallowed) Expenses

Personnel and Management Fees -

Power (1,296,833)

Chemicals (47,040)

Repairs and Maintenance -

Bulk Water Purchases

Bad Debts

General and Administrative Expenses (57,726)

NRW-related Adjustment -

Adjusted Operating Expenses 1,195,764 3,370,720 3,820,431 4,262,521 4,726,182 5,186,470

2-Months Average Cash Operating Expenses 199,294 561,787 636,738 710,420 787,697 864,412

Total Invested Capital Entitled to Return 919,094 2,455,387 3,176,513 3,709,239 3,847,308 3,399,782 3,317,646

Maximum Allowable Rate of Return 12.0% 12.00% 12.00% 12.00% 12.00% 12.00%

Maximum Allowable Net Income 110,291 294,646 381,182 445,109 461,677 407,974

Maximum Allowable Net Income 110,291 294,646 381,182 445,109 461,677 407,974

Operating Expenses 1,195,764 3,370,720 3,820,431 4,262,521 4,726,182 5,186,470

Depreciation 86,200 401,200 456,325 515,566 535,440 535,440

Revenue Requirement 1,392,256 4,066,566 4,657,938 5,223,196 5,723,300 6,129,884 25,800,883

Volume Sold, m3 176,398 192,936 209,473 226,010 242,548 259,085 1,130,052

Required Average Tariff (Php/cum) 7.89 21.08 22.24 23.11 23.60 23.66 22.83 Average Return on InvestmentsAverage Water Revenues/ m3 Sold 7.09 22.83 22.83 22.83 22.83 22.83 Rate of Return -156.0% 25.8% 15.9% 10.3% 7.2% 5.7% 12.0%

Projected

Quantity Block (m3) Public Tap Residential/ Institutional Commercial/ Industrial

       

First 10 m3 228.32 228.32  

11-20 24.00 24.00  

21-30 26.00 26.00  

31-40 29.00 29.00  

41-50 33.00 33.00  

Over 50 38.00 38.00  

First 25 m3     1150.00

26-1000     57.00

Over 1000     75.00

       

AFFORDABILITY CRITERIA  

Household Income of Low-Income Household 9,257

Ceiling, 5% of such Income 463

Monthly Revenue from Minimum Charge 230

RESULT     ACCEPTABLE

Affordability Criteria

• Notice thru publication and posting

• Hearing on the tariff application has due process

• Approved tariff must be posted within 7 days

PROCESSING PERIOD

Fili

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of

ap

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on

A

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Process:

6 months

Extra-Ordinary Price Adjustments

Utility may request for tariff increase before the end of the 5 year period due to extra-ordinary events, such as:

• Extra-ordinary price increase• Legislated wage increase• Service Area Extension• Etc.

WSP’s Review and Audit

• Agreed service level targets that were used in tariff determination were translated to:

• Level of Service Standards

• KPIs and KFIs Targets.

• Failure to meet agreed standards and targets will result to adjustments in revenue requirements for next tariff proposal.

Service Standards Or Levels Of Service

Water Quality

- in accordance with Philippine National Standard for Drinking Water (PNSDW)

Pressure Adequacy - not less than 5 psi (municipal) - not less than 25 psi (industrial zones)

Continuity of Supply - at least 8 hrs/day

Consumption Per Capita - 100 lpcd (municipal) - > 100 lpcd (industrial zones)

Service Standards Or Levels Of Service

FINANCIAL

VIABILITY

ProductionEfficiency

PersonnelManagement

Others

LIQUIDITY

PROFITABILITY

COST CONTROL

SUSTAINABILITY

Key Result Areas

OPERATIONAL PERFORMANCE INDICATORS

FINANCIAL RATIOS

Key Performance Indicators

CollectionPerformance

NWRB Plans, Program and On-going ActivitiesNWRB Plans, Program and On-going Activities

Finalization of NWRB guidelines on light handed regulation for small-scale water service providers and water cooperatives

Study on the Tariff-setting methodology adjusted for small-scale water service providers

Proposed capacity building program for water service providers under the Philippine Water Supply Roadmap

Capacity Development Strategic Alliance Building

14 Development ofSocial Assessment

Reporting(i.e., Report Card)

15 Rural WaterSupply and

Sanitation Project(VisMin)

6 LGU InstitutionalFramework and

Advocacy

11 IntegratedPlanning

Frameworkand Process

4 AdvocacyProgram for a

Single IndependentEconomic Regulator

2 Raw WaterAssessment forCritical Areas

13 Review ofLWUA's Financing

Frameworkand Structure

3 Inventory ofFinancing Windowsfor WSS Projects

1 EstablishingSector Baselinefor Planning andPolicy-making

9 LGU CapacityDevelopment for

Planning, Monitoringand Regulation

5 Social Marketing forthe PWSSR, IWRM,

Portal for variousStakeholders

10 WSP CapacityDevelopment for

Utility Performanceand Technology

Innovations

7 NGA CapacityDevelopment

8 Extension ofLWUA SupportServices to all

WSPs

12 EO 279 Programs

(i.e., SWIF)

Service Delivery

Priority Medium Term Programs

2010

Capacity Development Strategic Alliance BuildingCapacity Development Strategic Alliance Building

14 Development ofSocial Assessment

Reporting(i.e., Report Card)

15 Rural WaterSupply and

Sanitation Project(VisMin)

6 LGU InstitutionalFramework and

Advocacy

11 IntegratedPlanning

Frameworkand Process

4 AdvocacyProgram for a

Single IndependentEconomic Regulator

2 Raw WaterAssessment forCritical Areas

13 Review ofLWUA's Financing

Frameworkand Structure

3 Inventory ofFinancing Windowsfor WSS Projects

1 EstablishingSector Baselinefor Planning andPolicy-making

9 LGU CapacityDevelopment for

Planning, Monitoringand Regulation

5 Social Marketing forthe PWSSR, IWRM,

Portal for variousStakeholders

10 WSP CapacityDevelopment for

Utility Performanceand Technology

Innovations

7 NGA CapacityDevelopment

8 Extension ofLWUA SupportServices to all

WSPs

12 EO 279 Programs

(i.e., SWIF)

Service Delivery

Priority Medium Term Programs

2010

Philippine Water Supply Sector RoadmapPhilippine Water Supply Sector Roadmap

NWRB Plans, Program and On-going ActivitiesNWRB Plans, Program and On-going Activities

Finalization of Registration system and procedure for Non-pipe Water Service Providers (WSPs)

Proposed project for Small Water Supply Improvement and Financing (Phase 2) – Registration of Water Utilities for Regulation