rules for setting distribution wheeling rates

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Annex "A"

RULES FOR SETTING DISTRIBUTIONWHEELING RATES

forPRIVATELY OWNED ELECTRICITY

DISTRIBUTION UTILITIESOPERATING UNDER PERFORMANCE

BASED REGULATION

[12 July 2016]

Revised RDWRJuly 2106 Page (i)

Republic of the PhilippinesEnergy Regulatory Commission

Pacific Center, San Miguel Avenue, Pasig City

RULES FOR SETIING

DISTRIBUTION WHEELING RATES

forPRIVATELY OWNED ELECTRICITY DISTRIBUTION UTILITIES

OPERATING UNDER PERFORMANCE BASED REGULATION

Pursuant to Section 43(0 of Republic Act No. 9136, otherwise known as the ElectricPower Industry Reform Act of 2001, and Rule 15, Section 5(a) of the ImplementingRules and Regulations issued pursuant to that Act, the Energy RegulatoryCommission (ERC) hereby promulgates the following Rules for the setting ofdistribution wheeling rates for privately owned distribution utilities operating underperformance based regulation. This set of Rules is an amendment to the initialGuidelines on the Methodology for Setting Distribution Wheeling Rates, publishedby the ERCon December 10, 2004.This document applies to all privately owned distribution utilities operating underPerformance Based Regulation. A set of Rules for Setting Distribution WheelingRates will be issued for privately owned electricity distribution utilities enteringperformance based regulation, following any subsequent amendment by the ERC.

Revised RDWR July 2016 Page (ii)

RULES FOR SETIING'DISTRIBUTION WHEELING RATES

forPRIVATELY OWNED ELECTRICITY DISTRIBUTION

UTILITIESOPERATINP. UNDER PERFORMANCE BASED REGULATION

TABLE OF CONTENTS,

iIJRl1£1[CLEI 1

GENE~ PROVISIONS 1

1.1 PURPOSE 1

1.2 CONTENT OF THE RULES 1

1.3 DfFINITIONS 2

1.4 INTERPRETATION 14,

1.5 RIGHTS AND OBLIGATIONS OF REGULATED ENTITY 15

1.6 SERVICES OTHER THAN REGULATED DISTRIBUTION SERVICES .. 16

1.7 SUBTRANSMISSION ASSETS 18

1.8 PROVISION OF INFORMATION 18

1.9 J\MENDMENT 18

1.10 COSTS OF SUIT 19

1.11 SEPARABILITY 20

1.12 EFFECTIVITY 20

.AR TI CLE II., 21

1£1[MIN~FOR REGULATORY PERIODS 21

2.1 STEPS TO INCENTIVE BASED RATE REGULATION 21I

2.2 SUBSEQUENT REGULATORY PERIODS 21iIJRlTICLEIII 22

PREVIOUS REGULATORY PERIODS 22

3.1 GENERAL PRINCIPLE 22.AR1[1[C~]:\T •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 2~

,

SUBSEQUENT REGULATORY PERIOD 23I

4.1 GENERAL PRICE CONTROL PRINCIPLES 23

4.2 'PRICE CONTROL FORMULA 234.3 ,OVER / UNDER RECOVERY FORMULA 24

Revised RDWR July,2016 Page (iii)

4.4 TAX ADJUSTMENT 28I

4.5 CHANGE IN WEIGHTED INDEX 30I

4.6 GENERAL BUILDING BLOCK PRlNCIPLES 32

4.7 PRlMARY BUILDING BLOCKS 33

4.8 ASSET VALUATION 36

4.9 REPULATORY ASSET BASE 43

4.10 REGULATORY DEPRECIATION 45I

4.11 WEIGHTED AVERAGE COST OF CAPITAL DETERMINATION 48

4.12 CkITAL EXPENDITURE FORECAST 53

4.13 OPERATING AND MAINTENANCE EXPENDITURE 56

4.14 CALCULATION OF CORPORATE INCOME TAX 62

4.15 S¥OOTHING 64

4.16 FORCE MAJEURE AND TAX EVENT PASS THROUGHS 67I

4.17 SERVICE QUALITY MEASURES AND TARGETS 68

4.18 EFFICIENCY ADJUSTMENTS 68

4.19 CHANGE IN WEIGHTED INDEX 68

4.20 SlDE CONSTRAINT 69

4.21 QUANTITY FORECASTS 69,

~1[1[~~~ 1\1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• jT1,

RULE CHANGES 71

5.1 GENERAL PRlNCIPLES 71~1rICLE 1VJ[~•••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 7:!

ANNUAL VERIFICATION AND ADJUSTMENT OF DISTRIBUTION1ri\JRlI~J?s••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••7:!

6.1 ANNUAL DISTRlBUTION RATE SETTING 72

6.2 4NNUAL RATE SETTING TIMETABLE 72

6.3 ANNUAL ACTUAL AND FORECAST DATA REQUIREMENTS 76,

6-4 SIDE CONSTRAINTS ON PROPOSED MAXIMUM DISTRlBUTIONWHEELING RATES 77

6.5 9THER PARAMETERS 79

JIJRlTIC~E~I .......................................................•..•...............................fJ()IlllEIlG>U~TOlitYlllEISETI'litOCESS fJ()

7.1 REGULATORY RESET PROCESS TIMELINES 807.2 IRATEAPPLICATION PRlOR TO START OF THE REGULATORY

PERlOD 82IJ\JRl1rICLE ~II fJ~

SElit~CE QUALITY MEASURES AND TJIJRllG>ETS fJ4

Revised RDWR July?016 Page (iv)

8.1 ESTABLISHMENT OF DISTRIBUTION PERFORMANCESTANDARDS 84

8.2 PERFORMANCE INCENTIVE SCHEME 85

J\JRl1rI~~~I~....•.................•..•................•..•.............•..•..............•.•..........•.fJ~,

OPEX AND CAPEX EFFICIENCY ADJUSTMENTS ••••••••••••••••••••••••••••88I

9.1 GENERAL EFFICIENCY ADJUSTMENT PRINCIPLES 88,

9.2 DEFINITION OF NET EFFICIENCY ADJUSTMENT 88I

9.3 MECHANISM FOR CARRYING OVER NET EFFICIENCYADJUSTMENTS 91

~1rI(;~~~ ~:JFORCE MAJEURE EVENT REGULATED PASS THROUGH ••••••••••••••• 93

10.1 FORCE MAJEURE EVENT PASS THROUGH 93,

10.2 CLAIM FOR A FORCE MAJEURE EVENT 93,

10.3 APPROVAL BYERC 95I

lOA RELEVANT FACTORS FOR ERC CONSIDERATION 96I

10.5 APPLICATION OF APPROVED FORCE MAJEURE PASS THROUGHAMOUNT 97

10.6 RELEVANCE OF APPROVED FORCE MAJEURE PASS THROUGHAMOUNT 97

I

J\JRl1LI<:~~~I ...•.•..•....•..•.•••••.•..•..•..•..•..•.•••••••.••.•..•....•..•.•.•••••••.•..•.•....•.•...•~flI

TAX EVENT REGULATED PASS THROUGH •••••••••••••••••••••••••••••••••••••98

11.1 TAx EVENT PASS THROUGH 98

11.2 CLAIM FOR A POSITIVE TAX PASS THROUGH 98

11.3 REQUIRED NEGATIVE TAX PASS THROUGH 99

11.4 RELEVANT FACTORS 10011.5 APPLICATION OF APPROVED TAX PASS THROUGH AMOUNT OR

NEGATIVE TAX PASS THROUGH AMOUNT 10111.6 RELEVANCE OF APPROVED TAX PASS THROUGH AMOUNT 102

AR TI CLE XII 103

RE-OPENING AND ADJUSTMENT EVENTS ••••••••••••••••••••••••••••••••••••10312.1 INCREASE IN CPI - MAXIMUM ANNUAL PRICE CAP RE-OPENING103

12.2 DEFERRED CAPITAL EXPENDITURE ON MAJOR PROJECTS - XFACTOR ADJUSTMENT FOR SUBSEQUENT REGULATORYPERIOD 104

12.3 MAJOR CHANGES TO ELECTRICITY CONSUMPTION PATTERNS .10612.4 MAJOR UNFORECASTED ACQUISITIONS - X FACTOR

ADJUSTMENT FOR SUBSEQUENT REGULATORY PERIOD 107,

12.5 PHP /$US EXCHANGE RATE ADJUSTMENT 109

Revised RDWR JulY,2016 Page (v)

12.6 WE'IGHTED AVERAGE COST OF CAPITAL ADJUSTMENT 110

12.7 OPERATING AND MAINTENANCE EXPENDITURE ADJUSTMENT 110

12.8 PROCEDURE FOR EVENTS LEADING TO AN ADJUSTMENT OFRATES 112

ARTICLE XIII 1- ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 114

DECISION REVOCATION AND NOTICES ••••••••••••••••••••••••••••••••••••••••114,

13.1 LIMITED DECISION REVOCATION ARRANGEMENTS 114,

13.2 M?DIFICATION OF TIME PERIODS 115

AR1l1lCLE Xl:\T .................•..•..•.......•.......•................................................ I1f)I

EXPERTS AND CONSULTANTS •••••••••••••••••••••••••••••••••••••••••••••••••••••••116,

14.1 ENGAGEMENT OF EXPERTS AND CONSULTANTS 116

14.2 COOPERATION WITH EXPERTS AND CONSULTANTS 116

14.3 REPORT OF EXPERT OR CONSULTANT 117

14-4 PAYMENT OF FEES OF REGULATORY RESET EXPERTS 117

APPENDIX A 120

QUALIFIED FRANCHISE AREAS ••••••••••••••••••••••••••••••••••••••••••••••••••••120

APPENDIX B 122

PERFORMANCE INCENTIVE SCHEME •••••••••••••••••••••••••••••••••••••••••••122

APPENDIX ~ 134

CRITERIA FOR REGULATORY RESET EXPERTS ••••••••••••••••••••••••••••134,

APPEND IX D 138I

FUTURE ENTRY POINTS ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••138,

APPENDIX E 140I

CONTRIBUTION TO REGULATORY RESET COSTS •••••••••••••••••••••••••140

Revised RDWR July 2016 Page (vi)

Rules for Setting Distribution Wheeling Rates

ARTICLEIGENERALPROVISIONS

1.1 Purpose1.1.1 The' purpose of these Rules is to set out the methodology to be used in

setting the maximum distribution wheeling rates that may be charged forthe I provision of Regulated Distribution Services for privately ownedelectricity distribution utilities operating under performance basedregrtlation, where the Entry Points were originally defined in Annex B ofERC Resolution No. 12-02, Series of 2004 "Adopting a Methodology forSetting Distribution Wheeling Rates", dated December 10, 2004 and lateramended to four Entry Points under ERC Resolution No. 24, series of 2007,dated October 24, 2007 and subsequently further amended under ERCResolution No. 20, dated December 8, 2008. The entry groups are noted inAppendix D to these Rules.

1.1.2 This set of Rules is a revised version of the original Distribution WheelingRate Guidelines issued by the ERC on December 10, 2004, as subsequentlyamended in the Rules for Distribution Wheeling Rates (RDWR), re-issuedat several dates.

1.1.3 A yersion of the RDWR will be issued when there are subsequent revisionsand updates on the Rules.

1.2 Content of the Rules1.2.1 These Rules set out:

I

(a) the methodology to be used in setting the maximum distributionwheeling rates that may be charged for the provision of RegulatedDistribution Services by Regulated Entities during the SubsequentRegulatory Period;

,

(b) the pricing principles with which the ERC must observe for the purposeso~regulating tlle maximum distribution wheeling rates that may be chargedfor tlle provision of Regulated Distribution Services by Regulated Entitiesdl,lring Subsequent Regulatory Period;(c) the annual rate verification and adjustment process which the ERC mustundertake in relation to the maximum distribution wheeling rates that maybe charged for the provision of Regulated Distribution Services by suchRegulated Entities during a Regulatory Period;

(d) the regulatory processes and timelines to which both Regulated Entitiesartd tlle ERC must adhere in order for the methodology established by theseRules to be administered and applied in a timely manner; and

,

(e) the performance indicators, performance targets and reportingarrangements with which all Regulated Entities must comply during theStibsequent Regulatory Periods, and which the ERC must monitor, in orderto ensure the effective and efficient delivery of Regulated Distribution

, .ServIces to consumers.

,

Revised RDWRJuly 2016 Page 1


1.3 DefinitionsIn these Rules, unless the contrary intention appears, the following words andphrases have the following meanings:AffectedRegulatedEntity

AncillaryServices

ApplicationYearApprovedForce MajeurePass ThroughAmount

Approved TaxPass ThroughAmount

Business Day

BusinessSeparationGuideline

Revised RDVV'RJuly 2016

(a) In relation to a Force Majeure Event, a Regulated Entitywhich (as a result of that Force Majeure Event) incurs,or is likely to incur, an increase in costs as referred to inthe definition of "Force Majeure Event"; and

(b) in relation to a Tax Change Event, a Regulated Entitywhich (as a result of that Tax Change Event) incursmaterially higher or lower costs as referred to in thedefinition of "TaxChange Event".

Those services that is necessary to support the transmissionof capacity and energy from resources to loads whilemaintaining the reliable operation of the Grid or aDistribution System or a Subtransmission System inaccordance with good utility practice, the Grid Code and theDistribution Code. These include the services rendered bygeneration facilities that are dedicated to providingemergency standby power during emergency situations,where the normal operating conditions of a DistributionSystem are compromised due to bulk supply factors beyondthe control of a Regulated Entity.The Regulatory Year denoted as the Application Year inSection 6.2.1.The lesser of a Force Majeure Pass Through Amountproposed by an Affected Regulated Entity in relation to aForce Majeure Event and the Eligible Force Majeure PassThrough Amount in respect of that Force Majeure Event asreferred to in Section 1O.3.1(b).The lesser of a Positive Tax Pass Through Amount proposedby an Affected Regulated Entity in relation to a Tax ChangeEvent and the Eligible Tax Pass Through Amount in respectof that Tax Change Event as referred to in Section 1l.2.2(b).A day other than a Saturday or a Sunday or an officialPhilippine national public holiday.The Guideline promulgated by the ERC under Rule 10,Section 1 of the IRR as promulgated by the ERC onSeptember 22, 2003 under ERC Case No. 2003-46,Resolution No. 49, Series of 2006 as amended, to providethe framework and rules for the structural unbundling of thebusiness activities of electric power industry participants.

Page 2

Captive Market

CPI

Customer,

CustomerSegment

Revised RDWR July 2016


Electricity end-users connected to the RegulatedDistribution System of a Regulated Entity who receive theirelectricity Retail Services from the Regulated Entity in anon-competitive environment, where there is noeconomically competitive option of sourcing these servicesfrom alternative suppliers.

The All Items Consumer Price Index published by thePhilippine Statistics Authority (PSA).

In respect of a Regulated Distribution System:

(a) a person whose User System or Equipment is directlyconnected to the Regulated Distribution System andwho purchases or receives, or who is seeking to purchaseor receive, Regulated Distribution Services in respect ofthat Regulated Distribution System; and

(b) any other person who purchases or receives, or who isseeking to purchase or receive, Regulated DistributionServices in respect of that Regulated DistributionSystem.

For the avoidance of doubt, this may include a person whooperates an Embedded Generator, a Retail ElectricitySupplier (RES) or an End-user.

In relation to a Regulated Distribution System, a category ofCustomers of that Regulated Distribution System which isapproved by the ERC. For these purposes, a category ofCustomers will comprise Customers of the relevantRegulated Distribution System which have similarconsumption characteristics for Regulated DistributionServices in respect of that Regulated Distribution System,based on their geographic location and consumption profile,as measured by the number of connections, the energythroughput (kWh), the non-coincident peak load (kW), theco-incident peak load (kW), the time-of-day or any otherphysical measure as approved from time to time by the ERC.A Customer Segment in respect of a Regulated DistributionSystem is likely to include all of the Customers of thatRegulated Distribution System who are charged the sametariff by the Regulated Entity which operates that RegulatedDistribution System for the provision of RegulatedDistribution Services in respect of that RegulatedDistribution System.

Page 3

DecisionPeriod

Distribution'.Connection

Assets

DistributionConnectionPointDistributionConnectionServices

I



In respect of a Force Majeure Event Claim, the period withinwhich the ERC must give a notice to the relevant AffectedRegulated Entity under Section 10.3.1 to avoid a deemednotification of its decision under Section 10.3.2 (seeSection 10.3.3).In respect of a Regulated Distribution System, thecomponents of that Regulated Distribution System whichare used to provide Distribution Connection Services inrespect of that Regulated Distribution System.

In respect of a Regulated Distribution System, the point ofconnection of a User System or Equipment to the RegulatedDistribution System, excluding Grid Connection Points.

In respect of a Regulated Distribution System:

(a) the provision of capability at a Distribution ConnectionPoint in respect of that Regulated Distribution System todeliver electricity to or take electricity from thatDistribution Connection Point;

(b) the conveyance of electricity:

(i) to a Distribution Connection Point in respect of thatRegulated Distribution System from any User Systemor Equipment which is directly connected to thatRegulated Distribution System at that DistributionConnection Point; or

(ii) from a Distribution Connection Point in respect ofthat Regulated Distribution System to any UserSystem or Equipment which is directly connected tothat Regulated Distribution System at thatDistribution Connection Point; or

(iii) from an embedded generator to a RegulatedDistribution System, also where the generation plantis installed outside the franchise area of theRegulated Entity operating the RegulatedDistribution System.

(c) the planning, installation, maintenance, augmentation,testing and operation of Distribution Connection Assetsin respect of that Regulated Distribution System; and

(d) the provision of services that support any of the servicesreferred to in paragraphs (a) to (c).

Page 4

I

DistributionSystem I

DistributionService~andOpen AccessRules (DSOAR)DistributionUtility

Effectivity DateEligiblJ ForceMajeuIjePassThroughAmount

Eligible TaxPass ThroughAmount

I

I

EntrY' GroupI

I

Entry Point

I



In respect of a Regulated Entity, a system of wires andassociated facilities extending between the delivery pointson the Grid and any Subtransmission System operated by aperson other than a Regulated Entity, on the one hand, andthe points of connection of User Systems and Equipment ofEnd-users, on the other hand.Distribution Services and Open Access Rules, aspromulgated by the ERC under Resolution NO.1, Series of2006, dated January 18, 2006 and later amended underResolution No. 02, series of 2010, dated February 22, 2010.

An electric cooperative, private corporation, government-owned utility, or existing local government unit, that has anexclusive franchise to operate a Distribution System inaccordance with the EPIRA.

The date on which these Rules take effect.

At any time in respect of a Force Majeure Event, the increasein costs that the relevant Affected Regulated Entity hasactually incurred at that time (as calculated by the AffectedRegulated Entity under Section 10.1.2 or determined by theERC under Section 10.3.1, as appropriate):

(a) in the distribution of electricity to DistributionConnection Points in respect of the relevant RegulatedDistribution System; and

(b) in complying with the provisions of any legislation, or ofany rules, regulations or guidelines made under theEPIRA, including the IRR and the Distribution Code,which must be complied with in relation to thedistribution of such electricity,

as a result ofthe occurrence of that Force Majeure Event.

In respect of a Tax Change Event, the increase in costs in thedistribution of electricity to Distribution Connection Pointsin respect of the relevant Regulated Distribution System thatthe relevant Affected Regulated Entity has incurred and islikely to incur, until the end of the Regulatory Period inwhich the Tax Change Event occurs, as a result of that TaxChange Event (as calculated by the Affected RegulatedEntity under Section 11.2.1(C) or determined by the ERCunder Section 1l.2.2(a), as appropriate).A group of Regulated Entities entering the performance-based regulation program at the same Entry Point. Thereare four Entry Groups, as described in Appendix D.

The date at which an Entry Group become subject toperformance-based regulation. There are four Entry Pointsinto this program, as described in Appendix D.

Pages

EPlRA

EquipmentI

ERC

ExcludedService I

, .Force MajeurePass Through

,

AmountForce MajeureThresholdAmount

Force MajeureEvent I

Force MajeureEvent Claim

I

Force MajeureEvent NoticeForecastPeriodGridC

I.onnectlonPoint

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Revised RDWR July 2016I


Republic Act No. 9136, otherwise known as the ElectricPower Industry Reform Act of 2001.

All apparatus, machines, conductors, etc. used as a part of,or in connection with, an electrical installation, as defined inthe Distribution Code.The Energy Regulatory Commission created by Section 38 ofthe EPIRA.A service that is provided in a Qualified Franchise Area inthe ordinary course of an electricity distribution businessthat is conducted in that area, being a service that is neithera Regulated Distribution Service in respect of a RegulatedDistribution System nor a service that is contestable (forthese purposes, whether or not a service is contestable is amatter that, if disputed, will be determined by the ERC).

An amount that is not greater than an Eligible ForceMajeure Pass Through Amount as referred to inSection 10.1.2.In respect of a Regulatory Year, the amount calculated inaccordance with Section 10.2.

(a) A typhoon, storm, tropical depression, flood, drought,volcanic eruption, earthquake, tidal wave or landslide; or

(b) an act of public enemy, war (declared or undeclared),sabotage, blockade, revolution, riot, insurrection, civilcommotion or any violent or threatening actions,

which results or is likely to result in an increase in the costsincurred by a Regulated Entity in the distribution ofelectricity to Distribution Connection Points in respect of aRegulated Distribution System that is operated by it, or incomplying with the provisions of any legislation, or of anyrules, regulations or guidelines made under the EPIRA,including the IRR and the Distribution Code, which must becomplied with in relation to the distribution of suchelectricity.A written claim that satisfies the requirements set out inSection 10.2.3.A written notice that satisfies the requirements set out inSection 10.2.2.A twelve month period ending on December 31 in anApplication Year (see Section 6.3.3(a)).A "Connection Point" is the point of connection of a usersystem or equipment to the grid, as defined in theTransmission Wheeling Rate Guidelines.

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HistoricillPeriod

IRR

IIssues Paper

ILast ResortSupply Event

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LocalGoverIimentMajor Project

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Negative TaxChange Event

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A twelve month period ending on December 31 (see Section6.2.1(a)).

The Implementing Rules and Regulations issued pursuant tothe EPIRA.The Regulatory Reset Issues Paper published by the ERC toinvite consultation on the ERC's views on the issuespertinent to the Regulatory Reset Process for theSubsequent Regulatory Period.

Any of the following situations where a contestable customeris served by the Supplier of Last Resort:

(a) the customer's Retail Energy Supplier has ceased tooperate;

(b) the license of the customer's Retail Energy Supplier hasbeen revoked or not renewed by ERC;

(c) the arrangements for distribution wheeling servicebetween the customer's Retail Energy Supplier and thedistribution utility have been terminated;

(d) the customer's Retail Energy Supplier is no longerpermitted to trade electric energy through the wholesaleelectricity spot market (WESM), if a WESM member; or

(e) the customer fails to exercise its option to choose itssupplier of electricity upon the implementation of retailcompetition and open access.

Local Government as defined in Executive Order No. 292,otherwise known as the Administrative Code of 1987.

A capital expenditure project:

(a) which is contained in the capital expenditure programthat is approved by the ERC under Section 4.12.5 for aRegulated Distribution System; and

(b) for which the capital expenditure forecasted in anyRegulatory Year for that project (as contained in thatprogram) is greater than PhP30 million or 20% of thetotal capital expenditure forecasted for that RegulatoryYear under that program, whichever is lower.

A Tax Change Event which results in a Regulated Entityincurring materially lower costs than it would have incurredbut for that event in the distribution of electricity toDistribution Connection Points in respect of a RegulatedDistribution System that is operated by it.

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Negativt! TaxPass ThroughAmount I

Non-systemAssets

person I

PhPI

Position Paper

I

Positive TaxChange IEvent

Positive TaxPass ThroughAmount

QualifiedFranc~ise Area

I

Quarter

I

RegulatedDistributionServices

I



An amount that is not greater than a Required Tax PassThrough Amount as referred to in Section 11.1.2.

Those assets forming part of the Regulatory Asset Base thatare required to provide Regulated Distribution Services, butare not Distribution System assets or DistributionConnection Assets.

Refers to a natural or juridical person, as the case may be.

Philippine Peso.The regulatory document which will be prepared followingconsultation on the Issues Paper, to state the ERC's finalposition on the Regulatory Reset Process for the SubsequentRegulatory Period.

A Tax Change Event which results in a Regulated Entityincurring materially higher costs than it would haveincurred but for that event in the distribution of electricity toDistribution Connection Points in respect of a RegulatedDistribution System that is operated by it.

An amount that is not greater than an Eligible Tax PassThrough Amount as referred to in Section 11.1.1.

A Franchise Area that is included in Appendix A, as sucharea may be varied from time to time in accordance with thelaw.A period of three months from January 1 to March 31 (bothdates inclusive), April 1 to June 30 (both dates inclusive),July 1to September 30 (both dates inclusive) or October 1toDecember 31 (both dates inclusive).In respect of a Regulated Distribution System:(a) the conveyance of electricity through the Regulated

Distribution System and the control and monitoring ofelectricity as it is conveyed through the RegulatedDistribution System (including any services that supportsuch conveyance, control or monitoring or the safeoperation of the Regulated Distribution System);

(b) the planning, maintenance, augmentation and operationof the Regulated Distribution System;

Page 8


(c) the prOVISIOn, installation, commissIOning, testing,repair, maintenance and reading both of meters that areused to measure the delivery of electricity to personswhose User Systems or Equipment is directly connectedto the Regulated Distribution System and of othermeters that are used (for the purposes of the WholesaleElectricity Spot Market) to measure the flow ofelectricity into or through the Regulated DistributionSystem;

(d) Distribution Connection Services in respect of theRegulated Distribution System except to the extent thatsuch Distribution Connection Services have beendetermined by the ERC to be Excluded Services (inwhich case, for the purposes of these Rules, suchDistribution Connection Services will be deemed not tobe Regulated Distribution Services in respect of thatRegulated Distribution System with effect from thecommencement of the Regulatory Period first occurringafter the making of that determination);

(e) the provision of Ancillary Services that are providedusing assets which form part of the RegulatedDistribution System' (excluding any such AncillaryServices to the extent they are provided to the SystemOperator under contract, or through a spot marketestablished under the WESM Rules); and

(f) billing, collection and customer services that are directlyrelated to the delivery of electricity through theRegulated Distribution System to DistributionConnection Points in respect of the RegulatedDistribution System and billing, collection and customerservices for persons purchasing or receiving (or seekingto purchase or receive) any Distribution ConnectionServices in respect of the Regulated Distribution System,

but do not include such of these services as are determinedby the ERC to be contestable.Note: These Rules do not extend to inset networks, i.e.networks operated by third parties that are connected to adistribution system and that serve, for example, free portareas (see the definition of Distribution Connection Point).

1 An example of such Ancillary Services is services provided by a series reactor or a static VAR compensator.

Revised RDWR July 2016 Page 9

RegulatedDistributionSystem I

RegulatedEntity ,

RegulatedRetail Services

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RegulatoryAsset~ase

RegulatoryAsset Base(RAB) I

HandbookI

Regulatory, . .

DepreCiatIOn

RegulatoryPeriodRegulatoryReset Expert

Revised RDWR Jul~2016


A Distribution System which is located in a QualifiedFranchise Area and that is operated under an exclusivefranchise, together with such Subtransmission Systems asare connected to that Distribution System and as areoperated only by the Regulated Entity that operates thatDistribution System.

Collectively, any entity or entities who provide anyRegulated Distribution Services in respect of a RegulatedDistribution System, but excluding such persons as the ERCfrom time to time determines (such exclusion may identifythe relevant persons specifically or by description and maybe made subject to such conditions as the ERC considersappropriate). The entity or entities that comprise RegulatedEntities for the purposes of these Rules and their respectiveQualified Franchise Areas are such entities as are includedin Appendix A.

The distribution business segment defined in the BusinessSeparation Guidelines that relates to the provision of RetailServices pertaining to the sale of electricity to end-users whoare included in the Captive Market.Those assets employed by a Regulated Entity to provideefficient Regulated Distribution Services. It covers theRegulated Distribution System assets as well as the Non-system Assets required to support the delivery of RegulatedDistribution ServicesA set of guidelines prepared by the ERC in terms of whichthe roll-forward for the Regulatory Asset Base of RegulatedEntities will be conducted for the Subsequent RegulatoryPeriod, as described in Section 4.8.5.

The depreciation calculated in respect of the RegulatoryAsset Base as described in Section 4.10, being one of thebuilding blocks which forms the basis for calculating theannual revenue requirement for a Regulated DistributionSystem.The First Regulatory Period, the Second Regulatory Periodor a Subsequent Regulatory Period (as the case may be).An expert referred to in Section 14.1.1.

Page 10

RegulatoryReset Process

RegulatoryYear

RegulatoryWACC

Relevant TaxI

I

Required TaxPass 1jhroughAmount



The regulatory reset process before the start of thesubsequent regulatory periods. A regulatory reset processrefers to the actions prior to the start of any RegulatoryPeriod, through which the price control arrangements areestablished that will apply to a Regulated Entity with regardto the provision of Regulated Distribution Services in eachRegulated Distribution System for the next RegulatoryPeriod. This process relies on submissions by RegulatedEntities, decisions by the ERC and consultation with theRegulated Entities and the public in general, as described intheRDWR.Any 12 month period that occurs during a RegulatoryPeriod.The weighted average cost of capital established for thepurposes of the performance based regulation of RegulatedEntities in accordance with section 4.11.

Any Tax payable by a Regulated Entity other than:

Ca) corporate income tax or other income tax; or

Cb) any tax on fringe benefits or capital gains; or

Cc) any franchise tax or donor's tax; or

Cd)penalties, charges, fees and interest on late payments, ordeficiencies in payments, relating to any Tax, unlessthese arise as a result of a challenge by a RegulatedEntity to the imposition of any Tax, where the ERC isadvised of such a challenge in advance and providedwith pertinent supporting documents in advance deemsthe challenge to be based on reasonable and appropriategrounds; or

Ce) any Tax that replaces or is the equivalent of any of theTaxes referred to in paragraphs Ca)to Cd);or

Cf) any franchise fee, or other amount payable under aninstrument granting a franchise, in relation to theoperation of a Regulated Distribution System.

In respect of a Tax Change Event, the costs in thedistribution of electricity to Distribution Connection Pointsin respect of the relevant Regulated Distribution System thatthe relevant Affected Regulated Entity has saved and islikely to save, until the end of the Regulatory Period inwhich the Tax Change Event occurs, as a result of that TaxChange Event Cas determined by the ERC under Section11.1.2).

Page 11

Retail Services

Re-valuation

Re-valuationDateRe-valuationReport '

RevenuePotentiltl

Rolled-forwardDepreciatedRegulatoryAsset Base

I

Rules ofPractice andProcedure

SecondRegulatoryPeriod

• IReVIsed RDWR July 2016


Services provided to end-users pertaining to the sale ofelectricity, which includes:(a) billing, collection, customer service, energy trading and

electricity sales; and(b) provision, installation, commissioning, testing, repair,

maintenance and reading of meters that are used tomeasure the delivery of electricity to customers;

but excludes the cost of generation or actual energyconsumed.

In relation to a Regulated Distribution System, an asset re-valuation as may be required by ERC.A date determined by the ERC during the Regulatory ResetProcess for which the Re-valuation is prepared.

A report prepared to reflect the value of the Regulatory AssetBase at the Re-valuation Date.

In respect of any Transferred Subtransmission Assets, theconsideration for the transfer of those TransferredSubtransmission Assets from National TransmissionCorporation (TRANSCO) or the National Grid Company ofthe Philippines (NGCP) to the Regulated Entity, whichconsideration is required (by Section 8 of the EPIRA andRule 22, Section 13(b) of the IRR) to be:

(a) determined by TRANSCO or NGCP based on therevenue potential of those Transferred SubtransmissionAssets; or(b) in case of disagreement, determined by, or inaccordance with directions given by, the ERC.

The regulatory asset base for a Regulated DistributionSystem as determined by the ERC or as calculated inaccordance with Section 4.9.2 (see also Section 4.9.1) (as thecase may be).A regulatory guideline published by the ERC that guidesparticipation in the ERC's proceedings, including theproceedings described in these Rules for SettingDistribution Wheeling Rates.The period set out in Section 2.2.

Page 12

SubsequentRegulatoryPeriodSupplier ofLast Resort

SystemOperator

Tax

Tax ChangeEvent



A Regulatory Period other than and following the PreviousRegulatory Period.

A Regulated Entity designated by the ERC to serve end-users in the contestable market following a Last ResortSupply Event.

The party identified as the System Operator pursuant to theGrid code which is the party responsible for generationdispatch; the provision of ancillary Services, and operationand control to ensure safety, power quality, stability,reliability and the security of the grid.

Any tax, levy, impost, deduction, charge, rate, duty orwithholding which is levied or imposed by the NationalGovernment or a Local Government or any agency,department, instrumentality or other authority of theNational Government or a Local Government.

(a) A change in (or a change in the application or officialinterpretation of) a Relevant Tax or the way in which aRelevant Tax is calculated; or

(b) the removal of a Relevant Tax; or

(c) the imposition of a Relevant Tax,

which results in a Regulated Entity incurring materiallyhigher or lower costs than it would have incurred but forthat event in the distribution of electricity to DistributionConnection Points in respect of a Regulated DistributionSystem that is operated by it. For these purposes, aRegulated Entity will only be deemed to incur materiallyhigher or lower costs where the change in the relevant coststhat the Regulated Entity has incurred and is likely to incuruntil the end of that Regulatory Period, as a result of thatTax Change Event (or combination of tax change events),exceeds 1% of the total forecast operating and maintenanceexpenditure in relation to the relevant RegulatedDistribution System (expressed in nominal terms andexcluding forecast taxes, levies and duties) as is used for thepurposes of the Regulatory Reset Process under Article VIIfor that Regulatory Period and as pertains to the period fromthe occurrence of that Tax Change Event to the end of thatRegulatory Period.The costs associated with any reasonable steps taken by aRegulated Entity to challenge the imposition or change of aRelevant Tax, in order to protect its customers from therate-impact of such an event, will be deemed to be includedas part of the cost associated with a Tax Change Event.

Page 13

FourthRegulatoryPeriod I

TransferredSubtransmissionAssets

TransitionIRegulatory

Period

I

TransmissionWheeling RateGuidelines

I

UniforIh RateFilingRequirements

IUser System


The Regulatory Period which immediately follows the ThirdRegulatory Period.

Subtransmission Assets that are transferred from theNational Transmission Corporation (Trans Co) or theNational Grid Corporation of the Philippines (NGCP) to theRegulated Entity as contemplated by Section 8 of the EPIRAand Rule 22, Section 13(b) ofthe IRR.

In respect of Distribution Connection Services that the ERChas determined to be Excluded Services, the RegulatoryPeriod first occurring after that determination is made (seeSection 1.6.5).The Guidelines on the Methodology for SettingTransmission Wheeling Rates for 2003 to around 2027promulgated by the ERC under Section 43(f) of the EPIRAand Rule 15, Section 5(a) of the IRR, subsequently amendedas the Rules for setting Transmission Wheeling Rates(RTWR).

The Uniform Rate Filing Requirements dated January 13,2001 resulting from ERC Case No. 2001-873 docketedon October 31, 2001.

A system owned or operated by a user of the grid ordistribution system, as defined in the Distribution Code.

In addition, words and phrases used in these Rules which are defined in theEPIRA or the IRR have the meaning given to them in the EPIRA or the IRR (asthe case Imay be).

1.4 Interpretation1.4.1 lITthese Rules, unless the contrary intention appears:

(a) the singular includes the plural and conversely;(b) where a term is defined, its other grammatical forms have acdrresponding meaning;(c) a reference to any law or the rules and regulations issued implementingsuch a law or to any particular provision of a law or of any rules orr~gulations issued implementing such a law is taken to include anymodification, consolidation, amendment, re-enactment, replacement orcodification of the law, rules and regulations, or provision;

I

(d) mentioning anything after include, includes or including does not limitwhat else might be included; and(e) a reference to any period includes both the day on which that periodc6mmences and the day on which it expires.

Revised'RDWR July 2016 Page 14


1.4.2 All calculations made under or for the purposes of these Rules must berounded to four significant digits, except that any amount which iscalculated solely in PhP (as opposed to, for example, PhP/kWh) must berounded to the nearest peso. For these purposes, significant digits are allthelnon-zero digits of a number and the zeros that are included betweenthem or that are final zeros and signify accuracy (e.g. the significant digitsof 0.01230 are 1, 2, 3 and the final 0, which signifies accuracy to fiveplaces)?

1.4.3 A reference in these Rules to Regulatory Year "t" or year "t" is a reference tothel12 month period ending on June 30 in calendar year t (e.g. a referenceto Regulatory Year 2013 or to year 2013 is a reference to the 12 monthperiod ending on June 30,2013).

1.4.4 wIien a calculation is required under these Rules:(a)Regulatory Year "t" or year "t" is the Regulatory Year or 12month periodending on June 30 in respect of which the calculation is being made;(b) Regulatory Year "t-1" or year "t-1" is the Regulatory Year or 12 monthpepod ending on June 30 immediately preceding Regulatory Year "t" oryear "t";

(c) Regulatory Year "t-2" or year "t-2" is the Regulatory Year or 12 monthpeHod ending on June 30 immediately preceding Regulatory Year "t-l" oryear "t-1"; and(d) Regulatory Year "t-3" or year "t-3" is the Regulatory Year or 12 monthperiod ending on June 30 immediately preceding Regulatory Year "t-2" oryear "t-2".

1.5 Rights ~nd Obligations of Regulated Entity

1.5.1 Where more than one entity provides any Regulated Distribution Servicesinl respect of a Regulated Distribution System, with the result that therelevant Regulated Entity comprises more than one entity, the rights of thatRegulated Entity under these Rules may be exercised by any of thoseerttities and such exercise of those rights by such an entity will be deemed,for the purposes of these Rules, to irrevocably and unconditionally bindeach of those entities.

I

1.5.2 Where more than one entity provides any Regulated Distribution Servicesin respect of a Regulated Distribution System, with the result that therelevant Regulated Entity comprises more than one entity, each of thoseentities will be jointly and severally liable for the performance of theobligations of the relevant Regulated Entity under these Rules and theperformance of such obligations by any of those entities will be deemed, forthe purposes of these Rules, to be the performance of those obligations byeach ofthose entities.

I

2 Webster's College Dictionary, Random House, New York, 1991.



1.5.3 Where more than one entity provides any Regulated Distribution Servicesin respect of a Regulated Distribution System, with the result that therelevant Regulated Entity comprises more than one entity, the performanceby the ERC of its obligations under these Rules in respect of anyone ofthose entities will be deemed, for the purposes of these Rules, to be theper;formance of those obligations in respect of all of those entities.

1.5.4 Where more than one entity provides any Regulated Distribution Servicesin Irespect of a Regulated Distribution System, with the result that therelevant Regulated Entity comprises more than one entity, these Rules mustbe Iconstrued and applied in such a manner that, as far as is reasonablypracticable, results in all of those entities being treated (in the aggregate) inthe same manner as a single entity would have been treated in thosecircumstances if that single entity alone had comprised that RegulatedEntity.

I

1.5.5 It is acknowledged that a range of ownership, operating, corporate andother structures may be implemented in relation to the provision ofRegulated Distribution Services in respect of a Regulated DistributionSystem. Accordingly, these Rules must be construed and applied by theERC in such a manner that accommodates such structures but that does notpermit the use of such structures to avoid the tenor of the obligationsirriposed by these Rules (even if this means a departure from a literalinterpretation ofthese Rules).

1.6 Services other than Regulated Distribution Services1.6.1 This Section 1.6 only applies to Excluded Services that are provided on or

after July 1, 2011.1.6.2 El'cept as otherwise provided in the DSOAR, a person may only be charged

a fair and reasonable charge for an Excluded Service.

1.6.3 In the event of a dispute in respect of the amount of a charge for anExcluded Service, what is a fair and reasonable charge will be determinedbytheERC.

1.6.4 For the purposes of determining what is a fair and reasonable charge for anExcluded Service, both where a charge for an Excluded Service is beingnegotiated and where a dispute in respect of such a charge is beingdetermined by the ERC, the following matters must be taken into account(~thout limitation to any other matters that may be taken into account forthose purposes):

I

(a) the reasonable costs incurred in efficiently providing the ExcludedService, including:,

an allowance for appropriately attributable operating and maintenanceand overhead costs;an allowance for the depreciation of the assets used to provide theExcluded Service over the economic life of those assets;a reasonable return on the depreciated value of the assets used toprovide the Excluded Service (such reasonable return might, for



example, be an appropriate weighted average cost of capital asIcalculated pursuant to Section 4.11 or Section 5.8); and

an allowance for taxes paid in connection with the provision of theI Excluded Service or the income derived from the provision of theExcluded Service;

(b) the charge that would have been likely to be negotiated for the provisionof the Excluded Service in an arm's length commercial negotiation betweena willing seller and a willing buyer if the market for the Excluded Servicewere competitive;

I

(c) whether any assets used to provide the Excluded Service to the personpurchasing or receiving (or seeking to purchase or receive) the ExcludedSeIjvicewill be or have been specifically constructed for that purpose;

(d}any special value of the Excluded Service to the person purchasing orreceiving (or seeking to purchase or receive) the Excluded Service (forexJmple, as a result of any assets used to provide the Excluded Servicebeing dedicated to the provision of that Excluded Service to that person);and

I

(e) whether any costs incurred in providing the Excluded Service (includingany return on assets used to provide the Excluded Service) have been or arelikely to be recovered from other persons (for example, as a result of anyassets used to provide the Excluded Service subsequently being used toprovide that Excluded Service to such other persons).

I

1.6.5 Without in any way limiting the services that may constitute an ExcludedService, any Distribution Connection Services in respect of a RegulatedDistribution System which may have been determined by the ERC to beEX:cluded Services will, with effect from the commencement of theRegulatory Period first occurring after the making of that determination(the Transition Regulatory Period), be treated as Excluded Services(except to the extent they are determined by the ERC to be contestable).For the purposes of determining what is a fair and reasonable charge forsuch Distribution Connection Services, both where a charge for suchDistribution Connection Services is being negotiated and where a dispute inrespect of such a charge is being determined by the ERC (and withoutlimiting any other matters that may be taken into account for thosepurposes):(a) the matters referred to in Section 1.6-4 must be taken into account; and

I

(b) to the extent any assets used to provide such Distribution ConnectionServices as at the commencement of the Transition Regulatory Period were,immediately prior to the commencement of the Transition RegulatoryPeriod, included in the regulatory asset base for the relevant RegulatedDistribution System, those assets will be valued at the value that was thenattributed to them as part of that regulatory asset base (to the extent suchassets are used to provide Distribution Connection Services in respect of therelevant Regulated Distribution System after the commencement of the'transition Regulatory Period, those assets will cease to form part of theregulatory asset base for that Regulated Distribution System.


Rules for SettingDistribution Wheeling Rates

I

1.7 Subtransmission Assets1.7.1 Each Regulated Entity must maintain an asset register which clearly

identifies each asset owned by it that is a Subtransmission Asset and whichseparately identifies those assets which are Transferred SubtransmissionAssets.

1.8 Provisidn of Information1.8.1 A ~egulated Entity must, on the written request of the ERC or as specified

in these Rules, provide the ERC with such information, calculations,fo~ecasts and other data as the ERC requires from time to time for thepurposes of these Rules and for the purposes of assisting the ERC toperform its functions under these Rules. All information submissions are tobel made in accordance with the terms of the ERC's Rules of Practice andProcedure.

I

1.8.2 By default, all information requested by the ERC has to be provided withinten (10) working days from such a request being formally issued to aR~gulated Entity. However, in exceptional circumstances the ERC mayrequire information to be submitted in a shorter timeframe, which will bepte-agreed with the Regulated Entity involved. For informationsubmissions that is likely to involve more time to prepare than that allowedby the default period, the ERC may grant an extension of time. Such anextension of time may also be requested by a Regulated Entity, in writing tothe ERC. The ERC will consider such requests and within three workingdays of receiving a request advise the Regulated Entity of its approval(which will not be unreasonably withheld), or otherwise.

1.9 Amendment1.9.1 Shbject to Sections 1.9.2 and 1.9.3, these Rules may from time to time be

amended by the ERC:I

(a) in respect of their application in relation to all Regulated Entities and allR,egulated Distribution Systems; or(b) in respect of their application in relation to particular Regulated Entitiesand particular Regulated Distribution Systems,

but only if such amendments are:(b for the purposes of giving effect to a decision made by the ERC inaccordance with these Rules; or

I

(d) made with the agreement of the affected Regulated Entity or RegulatedEntities; or(e) required pursuant to an order that is made by a court with appropriatejurisdiction.

1.9.2 The ERC may amend Appendix A to remove a Qualified Franchise Area(with the result that the charges that may be made for the provision ofservices in respect of the relevant Distribution System that is located in thatQualified Franchise Area, or in respect of any Subtransmission System thatis connected to it and that is operated only by the Regulated Entity that



I

operates the Distribution System, cease to be regulated under these Rules)where:

I

(a) the charges that may be made for the provision of services in respect ofthat Distribution System, and in respect of any Subtransmission Systemthat is connected to it and that is operated onlyby the Regulated Entity thatop~rates the Distribution System, become regulated under other guidelinespromulgated for that purpose by the ERCpursuant to Section 43(0 of theEPIRAand Rule 15,Section5(a) of the IRR; and

,

(b)the Regulated Entity that operates that Distribution System agrees tothat amendment.

Such an kmendment may be made, for example, where the Regulated Entity andthe ERC agree that the form of price control that is to apply in respect of suchcharges iFto be a hybrid cap.1.9.3 The ERCmay amend these Rules so that they apply to regulate the charges

that may be made for the provision of services in respect of aSubtransmission System that is operated by more than one DistributionUtilitywhere:(a) at least one of those Distribution Utilities is a Regulated Entity andopbrates a Regulated Distribution System that is connected to thatSubtransmission System;(b) such of those Distribution Utilities as are Regulated Entities agree tothbse amendments;(c) those amendments are necessary to enable these Rules to apply to thosecHargesin substantially the same way as they apply to the charges that maybe made for the provision of RegulatedDistribution Services in respect of aRegulated Distribution System;and(d) those amendments would not have a materially adverse effect on therights or obligations of any other Regulated Entity under these Rules (ifsuch amendments would have that effect, they must not be made withoutthe agreement of all the RegulatedEntities).

1.9.4 Nbthing in these Rules is to be construed as precluding the ERC frompromulgating other guidelines pursuant to Section 43(0 of the EPIRAandRule 15, Section 5(a) of the IRR for the purpose of regulating the chargesthat may be made for the provision of services in respect of DistributionSystems and Subtransmission Systems that are not subject to these Rules.

,

1.10 Costs of Suit1.10.1 The regulated entities shall bear the regulatory implementation costs or

c6sts associated with the implementation of these Rules, including but notlimited to, costs attendant to the public hearings in the regulated entity'slocalities.

I



1.11 Separability1.11.1If, for any reason, any provision or part of a provision of these Rules is

declared unconstitutional or invalid, those provisions which are not therebyaffected will continue to be in full force and effect.

112 Efti .. I. ectlVlty1.12.1These Rules take effect following its publication in a newspaper of general

circulation.

IRevised RDWR July 2016 Page 20


ARTICLE II

TIMING FOR REGUIATORY PERIODS

2.1 Steps to IIncentive Based Rate Regulation

2.1.1 Subject to Articles VIII, X, XI and XII, the Maximum Annual Price cap for aRegulated Distribution System (MAPDas calculated in accordance with theformula set out in Section 4.2.1 will apply to regulate the maximum averageprice that a Regulated Entity is permitted to charge for the provision by it,duting the Subsequent Regulatory Period, of Regulated DistributionServices in respect of that Regulated Distribution System.

,

2.1.2 Subject to Articles V,X and XI, the price cap that is calculated in a mannerdetermined by the ERe in accordance with the provisions of Article V willapply to regulate the maximum average price that a Regulated Entity ispermitted to charge for the provision by it, during a Subsequent RegulatoryPeriod, of Regulated Distribution Services in respect of a RegulatedDihribution System.

2.2 Subsequent Regulatory Periods

2.2.1 Edch Subsequent Regulatory Period will:(a) commence on the day that immediately follows the day on which theimmediately preceding Regulatory Period ends; and(b) end on the fourth anniversary of the day on which the immediatelypreceding Regulatory Period ends,(c) both dates inclusive.

I

Revised RDWR Jul)\ 2016 Page 21


ARTICLE IIIPREVIOUS REGULATORY PERIODS

3.1 General IPrinciple3.1.1 All Regulated Entities has been subject to Performance Based Regulation

during the Previous Regulatory Period.3.1.2 Amounts earned during the Previous Regulatory Period in terms of the

M¥imum Annual Price Cap (MAP) determined by the ERC under theseRules, as well as any amounts over- or under-recovered by a RegulatedEntity during the Previous Regulatory Period form inputs into thecal,culation of the MAPfor the Subsequent Regulatory Period. This includesthe recovery of amounts disallowed by the ERC as a regulatory interventionduring the previous regulatory periods. The mechanism by which theseamounts are accounted for is described in Section 4.

3.1.3 Service and quality performance levels achieved by a Regulated Entitydu:ring the Previous Regulatory Period will be considered under theperformance incentive scheme (PIS) for the Subsequent Regulatory Period.These historical performance levels will be used both in settingperformance targets for the Subsequent Regulatory Period (described inSection 4.15-4), and also in determining the S-factor that will apply duringyear 1ofthe Subsequent Regulatory Years (as per Section 4.2.1).

I



ARTICLE IV

SUBSEQUENT REGULATORY PERIOD

4.1 General'Price Control Principles4.1.1 Sul;>jectto Section 6.2.1(f) and (g), the maximum distribution wheeling

rates that a Regulated Entity is permitted to charge for the provision by it,during each Regulatory Year that occurs in the Subsequent RegulatoryPeriod, of Regulated Distribution Services in respect of a RegulatedDistribution System will be set under a Maximum Annual Price cap for thatRegulated Distribution System that is determined in accordance with thisArticle IV and the Regulatory Reset Process for the Subsequent RegulatoryPeriod under Article VII.

,

4.1.2 A Regulated Entity must ensure that the maximum average price that itcharges for the provision by it, during a Regulatory Year t that occurs in theSJbsequent Regulatory Period, of Regulated Distribution Services inrespect of a Regulated Distribution System does not exceed the MaximumMnual Price cap for that Regulated Distribution System for RegulatoryYear t as calculated in accordance with Section 4.2.1. Notwithstanding thefo~egoing, a failure to comply with this obligation will not be a violation ofthese Rules. (Any revenue that is derived as a result of that MaximumAnn ual Price cap being exceeded will effectively be returned to Customersof that Regulated Distribution System by way of a reduction in theMaximum Annual Price cap for that Regulated Distribution System for thefollowing Regulatory Year t+1 to an amount that is lower than that whichwould otherwise have applied. This correction is carried over betweenR!egulatory Periods as well.)3

4.2 Price Control Formula,

4.2.1 Subject to Articles VIII, X, XI and XII, the maximum average price(expressed in PhP /kWh) that a Regulated Entity is permitted to charge forthe provision by it, during a Regulatory Year t that occurs in the SubsequentRegulatory Period, of Regulated Distribution Services in respect of aRegulated Distribution System (the Maximum Annual Price cap for thatRegulated Distribution System for Regulatory Year t or MAP,) is calculatedin accordance with the following formula:

(a) Where Regulatory Year t is the First Regulatory Year of the RegulatoryP,eriod,MAP, = SMAP" + S, - K, + ITA, ; and

(b) Where Regulatory Year t is a Regulatory Year (other than the firstl}egulatoryYear) in the Subsequent Regulatory Period,MAP, = [MAP,_, x {l + CWI, - X}] + S, - Kt + ITA,

3 No monthly determination of tariffs by the ERe is required under these Rules.,

Revised RD'WRJuly 2016 Page 23


Where:

SMAP" is as calculated under Section 4.15-4;

MAP'-l = Previous year's MAP excluding incentive and correction factor;

CWI, = Change in Weighted Index for Regulatory Year t as calculated inaccordance with Section 4.5;

x = An Efficiency Factor in respect of that Regulated DistributionSystem for Regulatory Year t. X equals the value calculated bythe ERC for the Subsequent Regulatory Period under Section4.15.3, or recalculated (and, if applicable, increased) underSections 12.2.2 or 12-4.6 (as the case may be) (subject to anyrecalculation under Sections 12.2.2 or 12-4.6, it is constant forthe whole of the Subsequent Regulatory Period). For theavoidance of doubt, X may be a positive or negative value or maybe zero;

S, = A performance incentive factor calculated in accordance withSection 4.18.2 to reward each Regulated Entity for achievingspecified target levels of performance and penalize eachRegulated Entity for failing to achieve specified target levels ofperformance during the twelve-month period ending onDecember 31 of Regulatory Year t-1). For the avoidance ofdoubt, S, may be a positive or negative value or may be zero;

K, = Correction Factor to adjust for over or under recovery ofrevenue in Regulatory Year t-1. K, is calculated in accordancewith Sections 4.3.1 and 4.3.2; and

ITAt = Tax Adjustment to adjust for over or under recovery ofcorporate income tax in Regulatory Year t-1. Where RegulatoryYear t is any Regulatory Year in the Subsequent RegulatoryPeriod, ITAt equals 0 (zero). Where Regulatory Year t is aRegulatory Year in a later Regulatory Period, ITA, is calculatedin accordance with Section 4.4.

4.2.2 All the provisions in this Article IV apply for the Subsequent RegulatoryPeriod only, except to the extent Article V specifically carries forward all ora part of those provisions for the purposes of their application in aSubsequent Regulatory Period.

4.3 Over / Under Recovery Formula4.3.1 Except as otherwise provided in Section 4.2.1, the Correction Factor for

Regulatory Year t (K,), where Regulatory Year t is a Regulatory Year thatoccurs in the Subsequent Regulatory Period, is calculated in accordancewith Section 4.3.2. For the purposes of this Section 4.3:(a) The actual weighted average tariff (expressed in PhP /kWh) forRegulatory Year t (AWAT,)is calculated as follows:



CRt-.+ RBRt-.+AISDAt-.- FISDAt-.

CQt-.

Where:CRt-. = The amount (expressed in PhP) billed to Customers of the relevant

Regulated Distribution System for the provision of RegulatedDistribution Services by the Regulated Entity that operates thatRegulated Distribution System, during the 12 month periodending on December 31 in Regulatory Year t-1, the amount:

so billed being determined in a manner that is approved for thispurpose by the ERC and adjusted to:

(A)exclude any amounts by which the Regulated Entity's revenueis increased due to the application of Articles X or XI and anysurcharges ofthe kind referred to in Section 8.2.2(b);

(B)include any amounts by which that revenue is decreased dueto the application of Article Xl or the payment of any rebatesof the kind referred to in Section 8.2.2(b);

(C)reflect the impact of re-opening or adjustment events due tothe application of Article XII; and

as so determined and adjusted being audited to the satisfaction of theERC by a person that is approved for this purpose by the ERC;

RBRt-.= Such portion (expressed in PhP) of the net income derived, duringthe 12 month period ending on December 31 in RegulatoryYear t-1, from each related business undertaking, examples ofwhich are provided in Section 4.3-4, which is engaged in directlyor indirectly by the Regulated Entity that operates the relevantRegulated Distribution System and which utilizes assets that formpart of the regulatory asset base for that Regulated DistributionSystem (see Section 4.8.6), being a portion that is determined bythe ERC pursuant to Section 26 of the EPlRA and that may vary asbetween such business undertakings but which, for each suchbusiness undertaking, will be set at 50% of the net income that isso derived from that business undertaking;

AISDAt-.= The actual income (expressed in PhP) derived by a RegulatedEntity from the sale of disposed assets that were previously part ofthe rolled forward regulatory asset base for a RegulatedDistribution System during the 12 month period ending onDecember 31 in Regulatory Year t-1, after deducting any expensesassociated with the sale but excluding the value at which thedisposed assets were removed from the rolled forward regulatoryasset base. This includes any income derived from the disposal ofassets that were previously used beyond their Regulatory Lives, asdescribed in Section 4.8.12;

FISDAt-. = The estimated income (expressed in PhP) to a Regulated Entitythat would arise from the sale of disposed assets that were



previously part of the rolled forward regulatory asset base for aRegulated Distribution System during the 12-month periodending on December 31 in Regulatory Year t-l, calculated as:

FISD~ = 'i,FISDAj,H + 'i,FISDAj,,_2"7-1 2

Where

I,FISDAj,l_1 = The sum of the estimated income (expressed inPhP) to a Regulated Entity that would arise duringRegulatory Year t-l from the sale of disposedassets in each asset category j (see Section 4.10.1(a)), that were previously part of the rolled forwardregulatory asset base for a Regulated DistributionSystem, as determined by the ERC as part of theRegulatory Reset Process for the Previous orSubsequent Regulatory Period under Article VII,after deducting any forecast expenses associatedwith the sale but excluding the value at which thedisposed assets were forecast to be removed fromthe rolled forward regulatory asset base;

'L,FISDAj,I_2 = The sum of the estimated income (expressed inPhP) to a Regulated Entity that would arise duringRegulatory Year t-2 from the sale of disposedassets in each asset category j (see Section4.1O.1(a)), that were previously part of the rolledforward regulatory asset base for a RegulatedDistribution System, as determined by the ERC aspart of the Regulatory Reset Process for thePrevious or Subsequent Regulatory Period underArticle VII, after deducting any forecast expensesassociated with the sale but excluding the value atwhich the disposed assets were forecast to beremoved from the rolled forward regulatory assetbase; and

CQt-l= The total amount of energy (expressed in kWh) delivered throughthe relevant Regulated Distribution System, during the 12-monthperiod ending on December 31 in Regulatory Year t-l, toDistribution Connection Points in respect of that RegulatedDistribution System, such amount of energy:

being determined in a manner that is approved for this purpose by theERC; andas so determined being audited to the satisfaction of the ERC by aperson that is approved for this purpose by the ERC.

(b)The differential amount (expressed in PhPjkWh) for Regulatory Year t(DAt) is calculated as follows:



DA, = AWAT, - [(P'-2 x MAP'-2) + (P,-, X MAP,-,)]

Where:MAP'-1 = The maximum average price (expressed in PhP/kWh) that the

I Regulated Entity is permitted to charge for the provision by it,during Regulatory Year t-1, of Regulated Distribution Services inrespect of the relevant Regulated Distribution System, ascalculated in accordance with Section 4.2.1;

Pt-1 = The percentage share in the period covered by the MAPt-1 in thecomputation of the AWAT;

MAP'-2 = The maximum average price (expressed in PhP/kWh) that theI Regulated Entity is permitted to charge for the provision by it,

during Regulatory Year t-2, of Regulated Distribution Services inrespect of the relevant Regulated Distribution System, ascalculated in accordance with Section 4.2.1; and

Pt-21 = The percentage share in the period covered by the MAPt-2 in thecomputation of the AWAT.

4.3.2 The Correction Factor for each of the Regulatory Years in the SubsequentR~gulatory Period (K,) is calculated as follows:

(a) if DA, <0, thenI

Kt~DA, X (1 + it/lOO) (in such a case K, will be a negative amount because DA,is a negative amount);

I

(b) ifDA, > 0

andl[AWAT, -(RBR,-,/CQ,-,)]/[(P,-, x MAP,-,)+(P'-2 X MAP'-2)]< 1.07

thenKt =; DA,[(1+(it)/lOO];

(c) ifDA,>0

and [AWAT, -(RBR,-,/CQ,-,)]/[( P'-1X MAP'-1)+( P'-2 X MAP'-2)]>= 1.07

(where >= means greater than or equal to)

thehKt = DA,[(1+(it+4)/100]-0.04[(RBR,-,/CQ,-,)+ 0.07(P,-, X MAP'-1+ P'-2 X MAP'-2)];

I

and(d)1 ifDA,~o, then

Kt~o

Where:MAP'-2 = Except as provided below, the maximum average price (expressed in

PhP/kWh) that the Regulated Entity is permitted to charge for theprovision by it, during Regulatory Year t-2, of Regulated DistributionServices in respect of the relevant Regulated Distribution System, as

I



calculated in accordance with Section 4.2.1. (MAP'-2 may fall in thePrevious Regulatory Period);

P'-2 = The percentage share in the period covered by the MAPt-2 in thecomputation of the AWAT;

MAP'-t -, The maximum average price (expressed in PhP/kWh) that theRegulated Entity is permitted to charge for the provision by it, duringRegulatory Year t -1, of Regulated Distribution Services in respect ofthe relevant Regulated Distribution System, as calculated inaccordance with Section 4.2.1. (MAP'-2 may fall in the PreviousRegulatory Period);

P'-t =' The percentage share in the period covered by the MAPt-1 in thecomputation of the AWAT; and

it - The simple average of the monthly 364-days T-bill rate as publishedI by the Bangko Sentral ng Pilipinas (BSP), for the period from January

10f Regulatory Year t-2 to December 31 of RegulatoryYear t-1.

4.3.3 Related business undertakings that utilize Regulated Distribution Systemas~ets may include, but are not limited to, the following:

(a) service fees (for service connection or re-connection);,

(b) rental for distribution transformers;

(c) rental for poles, boom and truck crane;

(d) testing and calibration fees;

(e) relocation and transfer fees;

(f) inspection and installation fees;

(g) illegal connection surcharge;

(h,)jobbing and contract fees;,

(i) engineering design on special projects;

CD rental of other utility property;I

(k) revenue from miscellaneous operations;(I) dividend income from investments made by Regulated Entities relatedtd or using assets of the Regulated Distribution System; and(m) bad debts recovery.

4.4 Tax Adjustment4.4.1 Except as otherwise provided in Section 4.2.1, the Tax Adjustment for

Regulatory Year t (ITA,) is calculated as follows:I

(ActTaxp, '-2 - Taxp, '-2) X (1 +WACC,)2

CQ'-t



Where: I

ActTaxp,t-2= The amount of corporate income tax (expressed in PhP) that isactually paid, by the Regulated Entity that operates the relevantRegulated Distribution System, for Regulatory Year t-2 to the extentsuch tax relates to taxable income of that Regulated Entity (net ofany related accumulated tax losses) which arises from the provisionof Regulated Distribution Services in respect of that RegulatedDistribution System by the Regulated Entity (whether or not suchtaxable income arises in Regulatory Year t-2);

Taxp,t-2 I = The estimated corporate income tax payable by that RegulatedEntity in respect of the relevant Regulated Distribution System inRegulatory Year t-2 as calculated by the ERC in accordance withSections 4.14.1 to 4.14.3;

WACC, = The weighted average cost of capital as determined by the ERCwhich applies for the purposes of these Rules in respect ofRegulatory Year t; and

CQ'-l = The total amount of energy (expressed in kWh) delivered throughthe relevant Regulated Distribution System, during the 12 monthperiod ending on December 31 in Regulatory Year t-1, toDistribution Connection Points in respect of that Regulated

. Distribution System, such amount of energy:I

(a) being determined in a manner that is approved for this purpose by theEltc; and(b) as so determined being audited to the satisfaction of the ERC by aperson that is approved for this purpose by the ERC.

4.4.2 For the purposes of Section 44.1:I

(a) the amount of corporate income tax that is actually paid by a RegulatedEHtity for a Regulatory Year must be verified by returns received by theBureau of Internal Revenue and evidence of payment by Authorized AgentB~nks; and(b) the extent to which the tax referred to in paragraph (a) relates to taxablein;come of a Regulated Entity (net of any related accumulated tax losses)which arises from the provision of Regulated Distribution Services inrespect of a Regulated Distribution System by the Regulated Entity must becertified by an auditor who:

,

is registered as a certified public accountant under the RevisedAccountancy Law (Presidential Decree No.692);possesses the independence as defined in Part II Section 14 of the Codeof Professional Ethics for Certified Public Accountants as promulgatedby the Board of Accountancy and approved by the ProfessionalRegulation Commission; andis one of the five largest auditing firms in the Philippines (as measuredby annual revenue derived in the Philippines) or is approved by the

Revised RDWR JUlY;2016 Page 29


ERC for the purposes of giving the certification referred to in thisI paragraph (b).

4.4.3 In 'accordance with Sections 4.7.7 and 4.14-4, the corporate income taxallowance for the Previous Regulatory Period is set to zero. As a result,there will be no tax adjustment applied for the Subsequent RegulatoryPeriod.

4.5 Change in Weighted Index4.5.1 Thk change in Weighted Index for Regulatory Year t (CWI,) is calculated as

follows:CWiI, = {(W1 x DeltaCPI,) + (W2 x DeltaUSER,)}

Where:

Subject to Section 4.20:(a) if Sectio.n 12.5.1 applies in respect of Regulatory Year t, W1 = 0.80; or

(b) if Section 12.5.1 does not apply in respect of Regulatory Year t, W1 = 1;

Subject to Section 4.20:(a)1 if Section 12.5.1 applies in respect of Regulatory Year t, W2 = 0.20; or

(b) if Section 12.5.1 does not apply in respect of Regulatory Year t, W2 = 0;

DeltaCPI, is the change in CPI for Regulatory Year t and is calculated inaccordance with Section 4.5.2; andD~ltaUSER, is the change in the PhP/$US exchange rate for Regulatory Yeart and is calculated in accordance with Section 4.5.3.

4.5.2 The change in CPI for Regulatory Year t (DeltaCPI,) is calculated as follows(~ssuming all index data is derived from, or adjusted to, the same baseyear4):

DeltaCPI, = (CPI,_. / CPI'-2) - 1

Where:CPI,_. = {CPIcQ4.1-2)+ CPICQ.,I-1)+ CPICQ2,1-1)+ CPICQ3,1-1)};and

CPI'-2 = {CPICQ4,'-3)+ CPICQ.,1-2)+ CPICQ2,1-2)+ CPICQ3,'-2)}

where:CPICQ4,1-2)is the CPI for the Fourth Quarter ending in year t-2;CPI(Q.,I-1)is the CPI for the First Quarter ending in year t-1; 5

4 CPI information I from the Philippine Statistics Authority (PSA) currently uses an index base of "2000 ~ 100". Inthe future, should the PSA change the base year for its reported CPl. the CPI values used in Section 4.5.2 must all beadjusted to use the same base year (see Section 4.5.4).

5 Note that the reference to year refers to Regulatory Year. For example, if the Regulatory Year is 2014 and ends onJune 30, 2014, the term CPI(QI,t_I)Jefers to the CPI index for the first quarter in the previous Regulatory Year, or theend of the September Quarter of Regulatory Year 2013. That is the Quarter ending on September 30, 2012.

I

Revised RDWR July 2016I

Page 30

= {USER.{Q4,1-2)+ USER.{Ql,l-I) + USERCQ2,l-I) + USER.{Q3,l-I)}; and

= {USER.{Q4,1-3)+ USERCQl,1-2)+ USERCQ2,1-2)+ USER.{Q3,1-2)}


CPIIQ2,l-I) is the CPI for the Second Quarter ending in year t-1;

CPICQ3,l-I) is the CPI for the Third Quarter ending in year t-1;

CPI(Q4,1-3)is the CPI for the Fourth Quarter ending in year t~3;

CPICQl,1-2)is the CPI for the First Quarter ending in year t-2;

CPIb2,1-2) is the CPI for the Second Quarter ending in year t-2; and

CPICQ3,1-2)is the CPI for the Third Quarter ending in year t-2.

4.5.3 The change in the PhP/$US exchange rate for Regulatory Year t(DeltaUSERI) is calculated as follows (assuming all US consumer priceindex data is derived from, or adjusted to, the same base year6):

I

DeltaUSERI= {(USERI-l/ USERI_2)X (USCPI1-1 / USCPII_2)}- 1

Where:I

USERI-l

USERI-2Where:

USER for a Quarter (Q) is the average of the Philippine Peso/United StatesDojlar inter-bank mid-rates prevailing on each of the last 5 Business Days ofthat Quarter, each such rate being as published by the Bangko Sentral ngPilipinas, expressed as PhP /US$1 (for example, if PhP50 can purchase US$1,then USER is 50);USERCQ4,1-2)is the USER for the Fourth Quarter ending in year t-2;

US,ER.{Ql,l-I) is the USER for the First Quarter ending in year t-1;

USERCQ2,l-I) is the USER for the Second Quarter ending in year t-1;

U~ER.{Q3,l-I) is the USER for the Third Quarter ending in year t-1;

USERCQ4,1-3)is the USER for the Fourth Quarter ending in year t-3;

USER.{Ql,1-2)is the USER for the First Quarter ending in year t-2;I

USER.{Q2,1-2)is the USER for the Second Quarter ending in year t-2; and

U~ER.{Q3,1-2)is the USER for the Third Quarter ending in year t-2; and

USCPII-l = {USCPICQ4,1-2)+ USCPICQl,l-I) + USCPICQ2,l-I) + USCPI(Q3,l-I)}; and

USCPII-2 = {USCPICQ4,1-3)+ USCPI(Ql,1-2)+ USCPICQ2,1-2)+ USCPICQ3,1-2)}I

where:USCPI for a Quarter (Q) is the Consumer Price Index for all urbancustomers, US city average published by the US Bureau of Labour Statisticsfor the last month of that Quarter in series CUUR ooooSAO;U~CPI(Q4,1-2)is the USCPI for the Fourth Quarter ending in year t-2;

6 If the base year ~or any such US consumer price index data should change, the values used in Section 4.5.3 must allbe adjusted to use the same base year (see Section 4.5.4).



USCPI(Ql,l-1)is the USCPI for the First Quarter ending in year t-1;I

USQ;PI(Q2,1-1)is the USCPI for the Second Quarter ending in year t-1;

USCPI(Q3,1-1)is the USCPI for the Third Quarter ending in year 1-1;

USCPI(Q4,'-3)is the USCPI for the Fourth Quarter ending in year t-3;

USyPI(Ql, '-2)is the USCPI for the First Quarter ending in year t-2;USCPI(Q2,1-2)is the USCPI for the Second Quarter ending in year t-2; and

USCPI(Q3,1-2)is the USCPI for the Third Quarter ending in year t-2.

4.5.4 If a source of data described in this Section 4.5 is no longer published, or ifany other change occurs in relation to such data which would cause thecoNtinued use of the source to result in inaccurate comparisons betweendata calculated using the source prior to the change and data calculatedusing the source after the change, then such alternative source as the ERCreasonably determines, after consultation with each Regulated Entity, willbe Isubstituted.

4.6 General Building Block Principles4.6.1 As part of the Regulatory Reset Process for the Subsequent Regulatory

Period under Article VII, the ERC must determine the Annual RevenueRequirement for each Regulated Distribution System for each RegulatoryYe~r t in the Subsequent Regulatory Period (ARR,). The ARR, must bebased on a forward-looking analysis of forecast cash flow requirements andmust represent the optimal forecast revenue requirement, in relation to thatRegulated Distribution System and for each Regulatory Year of theSubsequent Regulatory Period, of the Regulated Entity that operates thatRegulated Distribution System. The ARR, must reasonably compensate theRdgulated Entity for the economically efficient costs and risks it incurs inproviding Regulated Distribution Services in respect of that RegulatedDistribution System in order to encourage:(a) a commercial environment which is transparent and stable, and whichdoes not discriminate between the users of those Regulated DistributionS I •emces;(b) the same outcomes in the market for those Regulated DistributionServices as would be achieved if that market were competitive;(c) competition in the provision of those Regulated Distribution Serviceswherever practicable;(d)the commercial viability of the Regulated Entity through allowing it torecover its efficient costs associated with the provision of those RegulatedDistribution Services, together with a reasonable return on the RegulatedEntity's approved capital invested in that Regulated Distribution System, asdJtermined by the ERC;(e) competition in upstream and downstream markets;(f) stability in the distribution wheeling rates charged for those RegulatedDistribution Services;

I



(g) recovery of only those costs which are related to the provision of thoseRegulated Distribution Services;(h) fairness in the charges made for those Regulated Distribution Services,including through the progressive removal of cross-subsidies;(i) las a minimum, maintenance of service delivery levels subsisting at thebeginning of the Subsequent Regulatory Period and an improvement ofservice delivery levels during that period as contemplated by Article VIII;andG) Imaintenance of that Regulated Distribution System such that, at the endof the term of the Subsequent Regulatory Period, that RegulatedDistribution System is able to continue to provide sustainable electricitydistribution service delivery into the future without above averageexpenditure on upgrades or critical maintenance, and with the ability ofcOlhinuing the service delivery levels previously achieved.

4.6.2 The ARR, for a Regulated Distribution System must result from aneconomic and financial analysis of the forecast cash flow requirements, inrelation to that Regulated Distribution System, of the Regulated Entity thatophates that Regulated Distribution System, such forecast cash flowrequirements being based on a Building Block analysis pursuant to Section4.7 which uses a 'classical' weighted average cost of capital as defined inSection 4.11.

4.6.3 Atiy taxes, other than corporate income tax, must be included as a specificline item in the Building Blocks alongside the operating and maintenanceexpenditures to which they are related.

4.6.4 When undertaking the economic and financial analysis to determine the,

ARRt for a Regulated Distribution System, the ERC will adequatelycompensate the relevant Regulated Entity for all identified and justifiablerisks inherent in an electricity distribution business in the Philippines, itbeing recognized that the over compensation for such risks will be to thedi$advantage of Customers of that Regulated Distribution System because itwill permit unjustifiably high tariffs and that the under compensation forsuch risks will be to the disadvantage of the Regulated Entity (andultimately Customers of that Regulated Distribution System) because it willadversely affect the viability of the Regulated Entity.

4.7 PrimarYBuilding Blocks4.7.1 The financial Building Blocks which will form the basis of calculating the

ARRt for a Regulated Distribution System are as follows:• operating and maintenance expenditure;

I

• taxes other than corporate income tax;• regulatory depreciation;• return 'on' capital; andI

• corporate income tax

Revised RDWR July d016 Page 33

Rules for Setting Distribution Wheeliug Rates

4.7.2 The operating and maintenance expenditure for Regulatory Yeart isconstituted by the forecasts of such expenditure in relation to the relevantRegulated Distribution System for that Regulatory Year, as approved by theERC in accordance with Section 4.13.

,

4.7.3 The taxes, other than corporate income tax, for Regulatory Yeart areconstituted by the forecasts of payments of such taxes as are expected to beincurred in relation to the relevant Regulated Distribution System for thatRegulatory Year, as approved by the ERC in accordance with Section 4.13.

4.7.4 The Regulatory Depreciation for Regulatory Year t is that which isdetermined by the ERC in respect of the relevant Regulated DistributionSystem on the basis of the methodology for its determination set out inSection 4.10.2.

4.7.5 The return 'on' capital for Regulatory Year t is the Regulatory Asset Base forthe relevant Regulated Distribution System for that Regulatory Year (RAB.),as Idetermined by the ERC on the basis of the methodology for itsdetermination set out in Section 4.9, increased by an allowance for workingcapital in accordance with Section 4.7.7, multiplied by the classicalweighted average cost of capital (WACC), as determined by the ERC inaccordance with Section 4.11.

4.7.6 The corporate income tax for Regulatory Year t is the estimated corporateindome tax payable by the Regulated Entity in respect of the relevantRegulated Distribution System in that Regulatory Year as determined bythe ERC in accordance with Sections 4.14.1 to 4.14.3. For the SubsequentRegulatory Period, this will be set to zero.

4.7.7 The Building Block formula to be used in calculating the ARR. for aRegulated Distribution System is as follows:

I

ARR. = qpex. + Taxm,' + RegDepn, + [ ( RAB,+ WC, ) x WACC] + Taxp,'

Where:Opex, =

Taxm,. =

IRegDep~, =

The nominal? operating and maintenance expenditure in relationto the relevant Regulated Distribution System for Regulatory Year twhich is forecasted for that Regulatory Year and approved by theERC in accordance with Section 4.13;The payment of taxes, other than corporate income tax, forRegulatory Year t in nominal terms which are forecasted to beincurred in relation to the relevant Regulated Distribution Systemfor that Regulatory Year and which are approved by the ERC inaccordance with Section 4.13;The Regulatory Depreciation for Regulatory Year t in real8 terms asdetermined by the ERC in respect of the relevant Regulated

7 In these Rules the word 'nominal' is used with its financial meaning, such that nominal peso numbers arerepresented with inflation applied, and are in pesos of the day.

8 In these Rules the word 'real' is used with its financial meaning, such that real peso numbers are representedwithout inflation applied.



Distribution System on the basis of the methodology for itsdetermination set out in Section 4.10.2;

RAEt = The Regulatory Asset Base for the relevant Regulated DistributionSystem for Regulatory Year t in real terms as determined by theERC on the basis of the methodology for its determination set outin Section 4.9;

WCt = The working capital allowance for Regulatory Year t, which is set ata proportion of the difference between:(a) the real operating and maintenance expenditure in relation to

the relevant Regulated Distribution System which isforecasted for that Regulatory Year and approved by the ERCin accordance with Section 4.13; and

(b) the real amount of the bad debts in relation to the relevantRegulated Distribution System which are forecasted for thatRegulatory Year and approved by the ERC in accordance withSection 4.13,

such proportion being determined by the ERC, as part of theRegulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, after an analysis of the relevant payables andreceivables (which analysis could take the form of a lead/lag study,a benchmark study, or an industry average study focused onprivate utilities) or may consider the regulated entities latest actualworking capital requirement such that it should reflect its lead/laganalysis for the past three (3) years;

WACC = The weighted average cost of capital calculated using a 'classical'formula and as determined by the ERC in accordance with Section4.11. This value is determined by the ERC as part of the RegulatoryReset Process for the Subsequent Regulatory Period underArticle VII and remains constant for each Regulatory Year in theSubsequent Regulatory Period unless a re-opening event occurs asdescribed in Section 12.6 ; and

Taxp,t = The estimated corporate income tax payable by the relevantRegulated Entity in respect of the relevant Regulated DistributionSystem in Regulatory Year t in nominal terms as determined by theERC in accordance with Sections 4.14.1 to 4.14.3. For theSubsequent Regulatory Period, this value will be set to zero.

4.8 Asset Valuation4.8.1 As part of the Regulatory Reset Process under Article VII for Subsequent

Regulatory Periods, the ERC must require that either one of the followingbe adopted:(a)ithe regulatory asset base for a Regulated Distribution System isre-/o'alued. The re-valuation must value the material items of plant andequipment either:

Revised RDWRJuly2016 Page 35


at their optimized deprival value (i.e. at the lesser of their optimizeddepreciated replacement cost and their recoverable amount (theirrecoverable amount being the greater of their economic value and netrealizable value)); or

using some other method of internationally-accepted valuationmethodology as determined by the ERC; or(b) the previous value of the regulatory asset base for a RegulatedDistribution System is rolled-forward.In this regard, the ERC shall issue the required documents to advise theRegulated Entities of which valuation methodology to apply in the relevantSubsequent Regulatory Period.However, any assets previously optimized out of the regulatory asset basefor a Regulated Distribution System will be included in that regulatory assetbase if the ERC is satisfied that those assets are required to support theprovision of Regulated Distribution Services in respect of that RegulatedDistribution System by the Regulated Entity, in which case the principlesset out in Section 4.8.2 must be employed in relation to the treatment ofthose assets.

4.8.2 Where the valuation undertaken pursuant to Section 4.8.1 shows that anasset that has previously been optimized out of the regulatory asset base fora Regulated Distribution System should be included in the regulatory assetbase for that Regulated Distribution System for the Subsequent RegulatoryPeriod, the following principles relating to the treatment of that asset mustbe employed:(a) the value at which that asset must be included in that regulatory assetbase is its regulatory asset base value as at the date of its exclusion from theregulatory asset base; and(b) that asset must be included in that regulatory asset base in theRegulatory Year in the Subsequent Regulatory Period in which the asset isforecasted to be required to support the provision of Regulated DistributionServices in respect of that Regulated Distribution System by the RegulatedEntity, and the asset must be depreciated (in an accelerated manner) overits remaining economic life as if it had never been optimized out of theregulatory asset base.

4.8.3 Notwithstanding Section 4.8.2(a), the value of any TransferredSubtransmission Assets must be determined in accordance with Section4.8.11.

4.8.4 The regulated entities have already undergone the ODRC valuation duringthe previous regulatory period; unless otherwise specified in subsequentissuances, the Commission will adopt a rolled-forward approach indetermining the value of the regulatory asset base for the SubsequentRegulatory Period. This will require a roll forward based on actual efficientcapital expenditure and actual depreciation of the previous RegulatoryPeriod.


Rules for Setting Distribution Wheeling Rates,

I

4.8.5 In determining the value of the regulatory asset base for a RegulatedDisttibution System using a rolled-forward approach, the ERC, with theassistance of a Regulatory Reset Expert, shall develop a Regulatory AssetBase (RAB) Handbook that will specify the following:

Review of the existing Asset Register template;

Revisit the replacement costs of distribution assets, both network andnon-network assets, including power transformers and switchgears;

Provide a review and audit information and process to assess the actualexistence and condition (use and usefulness/idle/retired) and actual costing(historicaljacquisition cost) of all distribution assets;

Details and process of the rolled forward approach in accordance withthe ERC requirements;

- <Griteria on the selection of reasonable actual CAPEX projects and therole Iof optimization process in the rolled-forward approach;

The treatment of any difference on the forecast and actual depreciation;

Treatment of any difference between the replacement costs of assetsprocured after the valuation date and the same asset included in aRegulated Entity's financial accounting base.

4.8.6 The details of the valuation must be reconciled back to the relevantRegulated Entity's asset register or general ledger (as required), and suchreconciliation must be fully documented in the submission of the relevantValuation Report to the ERC. The Valuation Report must specify thereported asset values for the following Asset Categories j:

(a) Regulated Distribution Services Assets

1. Distribution services

• Land and Land Rights (dedicated to distribution purposes)• Structures and Improvements (dedicated to distribution purposes).: Substation Equipment Power transformers

SwitchgearProtective equipmentMetering and control equipmentCommunications equipmentOther station equipment

• Poles, Towers and Fixtures• Overhead Conductors and Devices• Underground Conduits• Underground Conductors and Devices• Distribution transformers



• Power conditioning equipment9• Meters, Metering Instruments & Metering Transformers (dedicated

to distribution purposes)• Information technology equipment (dedicated to distribution

purposes)• Regulated Entity property on Consumers' Premises (not forming part

of Distribution Connection Assets)• Street Lights and Signal Systems• Submarine Cables

ii. General Plant (Non-network Assets)

• Land and Land Rights (non-network related)• Structures and Improvements (non-network related)• Office Furniture and Equipment• Transportation Equipment• Stores Equipment• Tools, Shop and Garage Equipment• Laboratory Equipment• Information systems equipment (non-network related)• Power-operated Equipment• Communication Plant and Equipment• Miscellaneous Equipment

iii. Materials and Supplies, including spares

iv. Transferred Sub-transmission Assets

b) Distribution Connection Services Assets

i. Distribution services

• Poles, Towers and Fixtures• Overhead Conductors and Devices• Underground Conduits• Underground Conductors and Devices• Distribution Transformers• Information technology equipment (dedicated to Distribution

Connection Services)ii. General Plant (Non-network Assets)

• Land and Land Rights (non-network related)

9 This refers to equipment such as capacitor banks for power factor correction, voltage regulators, generators used forspinning reserve or voltage stability, VAR compensators etc.,



• Structures and Improvements (non-network related)• Office Furniture and Equipment• Transportation Equipment• Stores Equipment• Tools, Shop and Garage Equipment• Laboratory Equipment• Information systems equipment (non-network related)• Power-operated Equipment• Communication Plant and Equipment• Miscellaneous Equipment

iii. Materials and Supplies, including spares

c) Regulated Retail Services Assets• Meters, Metering Instruments & Metering Transformers - Consumer

consumption metering• Land and Land Rights• Structures and Improvements• Office Furniture and Equipment• Transportation Equipment• Stores Equipment• Tools, Shop and Garage Equipment• Laboratory Equipment~ Information systems equipment• Communication Plant and Equipment• Miscellaneous Equipment

d) any other Asset Categories specified by the ERC.Where construction projects have commenced before the valuation date butwill only be completed after this date, assets fully completed andcommissioned before the date of the valuation will be included in theValmltion Report (unless optimized out in terms of the RAEHandbook). Inaddition, capital expenditure incurred on completed and commissionedassets added to the Regulatory Asset Base in the period between thevaluation date and the start of the Subsequent Regulatory Period, will alsobe included in the Valuation Report, unless optimized out in terms of theRAE Handbook. Such assets will be included in the Regulatory Asset Baseand valued in terms of the RAEHandbook.

I

A Construction Work in Progress (CWIP) factor as described in Section4.8.9 will be applied by the ERC to the assets included in the valuationwhen determining the value of the Rolled-forward Depreciated RegulatoryAsset Base.

Revised RDWRJuly 2~:n6 Page 39


4.8.7 The optimization principles will be described in the RAB Handbook.Further optimization principles, as long as these do not contradict the RABHandbook, may be used as approved by the ERC, following any advice froma Regulatory Reset Expert or Regulatory Reset Experts. Such principlesmust include the manner in which windfall gains and losses arising fromthel valuation are to be treated. It is given that changes in the RDWR,including the aforementioned further optimization principles, are subjectedto full public consultations.

4.8.8 The Valuation Report for a Regulated Distribution System mustdifferentiate between those assets which are to be included in theRegulatory Asset Base for that Regulated Distribution System and thoseassets which are to be excluded from that Regulatory Asset Base on thebasis that the Regulatory Asset Base must only include assets to the extentthat such assets:(a)are necessary to meet Customer requirements for RegulatedDi~tribution Services in respect of the Regulated Distribution System withinthe electricity distribution network planning horizon referred to in theoptimization principles described in RABHandbook;(b) ,except in the case of spares, are in service (Le. have been commissionedan~ are providing a service);(c) in the case of spares, are in reasonable quantities as determined by theERiC (following the provision to the ERC, pursuant to Section 7.1.2(b), ofinformation relating to usage and delivery lags); and(d):in the case of easements, are clearly documented as being owned by theRegulated Entity.

4.8.9 For the purposes of the Construction Work in Progress (CWIP) Factor as itapplies in respect of all assets or an Asset Category is intended tocompensate for the investment cost (Le. the time value of money),calculated using a typical spend profile for assets of the relevant type (at theweighted average cost of capital determined by the ERC), over the typicalperiod from the commencement of the construction of such assets to thecommissioning of those assets (excluding any periods of unjustified delay).For these purposes, the "spend profile" is to be determined as the averageexpenditure on those types of assets in relation to past projects undertakenin respect of the relevant Regulated Distribution System, calculated on aproject and month-by-month basis over the whole life of each such projectfrom budget approval to commissioning.lO The CWIP Factor must bederived from a calculation method approved by the ERC which could taketh~formof:(a) uniformly escalating the optimized depreciated replacement cost of there-valued assets by a constant factor; or

10 This average can be calculated on the basis of two or more projects of similar size and complexity, but should bereasonably representative of capital expenditure projects undertaken in respect of the relevant Regulated DistributionSystem in the normal course of business.



(b) directly estimating the investment cost for specific past projects andadding this cost to the optimized replacement cost of the re-valued assets;or(c) another method approved by the ERC.

Th~ CWIP Factor may be the same for all valued assets or may differ asbetWeen Asset Categories.

4.8.10The ERC must estimate, in respect of that Regulated Distribution System,the value of the Rolled-forward Depreciated Regulatory Asset Base for eachAsset Category j as at the commencement of the first Regulatory Year (t) inthe Subsequent Regulatory Period (RABoj,,). For these purposes, RABoj,, isequal to RABcj,,_.as calculated in accordance with the formula specified inSeqtion 4.9.2 except that, for the purposes of applying that formula:

(a) RABoj.'-' will be deemed to be the value of each asset in Asset Category jthat is to be included in the regulatory asset base for that RegulatedDistribution System (as defined in Section 4.8.6) and that is in existence asat the date of the valuation in relation to that Regulated DistributionSystem, such value being:

- I where Asset Category j does not comprise Transferred SubtransmissionAssets - the rolled forward value of those assets as at the valuation dateincreased by the application of the relevant CWIP Factor (except that theCWIP Factor must not be applied to the extent an asset is categorised aspart of spares, easements, buildings, civil works and establishment, or non-system assets); and

- ,where Asset Category j comprises Transferred Subtransmission Assets- the value of those assets as at the valuation date.

I

(b)'Capexj, ,_.will be deemed to be the actual or budgeted capital expenditureof the relevant Regulated Entity on assets in Asset Category j for the periodfrom the date of that valuation in relation to that Regulated DistributionSystem to the date of commencement of the Subsequent Regulatory Periodto the extent such expenditure is reasonable and to the extent it isattributable to assets which would (if they had been in existence as at thevaluation date) be included in the regulatory asset base for that RegulatedDihribution System, increased by the application of the relevant CWIPFactor, except that the CWIP Factor must not be applied to the extent therelevant capital expenditure is:

on an asset that is categorised as part of spares, easements, buildings,civil works and establishment, or non-system assets; or

- I on a Transferred Subtransmission Asset;(c) RegDepnoj,,-. will be deemed to be the Regulatory Depreciation of thoseassets in Asset Category j that are to be included in the Regulatory AssetBase for that Regulated Distribution System, and that are in existence as atvaluation date in relation to that Regulated Distribution System, excludingspares" easements and land, such Regulatory Depreciation being calculatedin accordance with Section 4.10.1 (but as if the reference to Regulatory Year

I



t in that Section were instead a reference to the period from the valuationdatb to the date of commencement of the Subsequent Regulatory Period);

(d) RegDepncj, '-1 will be deemed to be the Regulatory Depreciation of thecapital expenditure on assets in Asset Category j, excluding spares,easements and land, such Regulatory Depreciation being calculatedconsistently with the methodology set out in Section 4,10,1 (but as if thereference to Regulatory Year t in that Section were instead a reference tothe' period:

from (in the case of an asset that is not a Transferred SubtransmissionAsset) the actual or budgeted date of commissioning of the asset or (in thecase of an asset that is a Transferred Subtransmission Asset) the actual orbuclgeted date of the transfer of the asset from TransCo or NGCP to therel~vant Regulated Entity;

,

to the date of commencement of the Subsequent Regulatory Period);and(e) Disposalsj,l-l will be deemed to be the actual or budgeted net receiptsfrom the disposal, during the period from the valuation date in relation tothat Regulated Distribution System to the date of commencement of theSubsequent Regulatory Period, of assets in Asset Category j that are to beincluded in the regulatory asset base for that Regulated Distribution Systemto the extent such net receipts are reasonable. The net receipts from thedisposal of such an asset will be determined as the receipts from thedisposal of that asset, minus the value of that asset at the actual or budgeteddate of its disposal. The value of that asset at the actual or budgeted date ofits' disposal will be determined as the rolled-forward depreciationregulatory asset base value of that asset at that time.

4.8.11Notwithstanding the foregoing, any Transferred Subtransmission Assetsmust be valued at their Revenue Potential adjusted for the effect ofinflation, capital expenditure on them and depreciation between:

I(a) the date of the transfer of those assets from TransCo or NGCP to therelevant Regulated Entity; and(b)the date ofthe valuation,(c) such adjustment to be made in such manner as is specified for thatpurpose in these Rules or (in the absence of such specification) as is

Iapproved for that purpose by the ERC.

4.8.12Assets remaining in service beyond their regulatory life as described inSection 4.1O.1(a), will remain part of the regulatory asset base and will bevalued at 5% of their optimized replacement cost. Such assets and theirresidual value must be separately identified in the Valuation Report. Sincethe Regulatory Depreciation on these assets would have been completelyretovered, this 5% residual value is used for the purposes of calculating areturn on the regulatory asset base only (in accordance with Sections 4.7.7and 4.9.1). There will be no further depreciation on these assets and at suchtime that they are finally removed from service, there will be no furtherdisposal value in terms of Section 4.10.1. Any revenue derived from the sale



of \,ssets thus disposed will however be taken into account for the purposesof ~ection 4.3.1.

4.9 Regulatory Asset Base4.9.1 The Regulatory Asset Base for a Regulated Distribution System for any

Regulatory Year t (RAB,) is derived from a roll-forward calculation of thevalue of each Asset Category j and is calculated as follows:

RAB, = [( RABo.' + AORLo,') + (RABe,' + AORLc.,)] / 2

Where:

I

~c,t

AORLo.'

AORLej,'

Revised RDWR July ,1'6

= In the case where Regulatory Year t is the first RegulatoryYear in the Subsequent Regulatory Period, the sum acrossthe Asset Categories j of the Rolled-forward DepreciatedRegulatory Asset Base for each Asset Category j as at thecommencement of the first Regulatory Year in theSubsequent Regulatory Period (RABoj,t,,) as determined bythe ERC under Section 4.8.1; or

= In the case where Regulatory Year t is a Regulatory Year(other than the first Regulatory Year) in the SubsequentRegulatory Period, the sum across the Asset Categories j ofthe opening Rolled-forward Depreciated Regulatory AssetBase for each Asset Category j for that Regulatory Year t(RABoj,'=RABej",,), as defined in Section 4.9.2;

= The sum across the Asset Categories j of the closing Rolled-forward Depreciated Regulatory Asset Base for each AssetCategory j for Regulatory Year t (RABej,,), as defined inSection 4.9.2;

= In the case where Regulatory Year t is the first RegulatoryYear in the Subsequent Regulatory Period, the sum acrossthe Asset Categories j of the 5% residual value of assetsthat are remaining in service beyond their regulatory livesfor each Asset Category j as at the commencement of thefirst Regulatory Year in the Subsequent Regulatory Period(RABoj,"1),as determined by the ERC under Section 4.8.12;or

= In the case where Regulatory Year t is a Regulatory Year(other than the first Regulatory Year) in the SubsequentRegulatory Period, the sum across the Asset Categories j ofthe opening 5% residual value of assets remaining inservice beyond their regulatory lives for each AssetCategory j for that Regulatory Year t (AORLoj,t '" AORLej,l-l)as determined by the ERC under Section 4.8.12;The sum across the Asset Categories j of the 5% closingresidual value of assets that are remaining in servicebeyond their regulatory lives for each Asset Category j for

Page 43


Regulatory Year t as determined by the ERC under Section4.8.12; and

AORLcj,t=AORLoj,t+ (AORLAj,t - AORLRj,t)

Where:

AORLAj,t= The 5% residual value of assets in category jreaching the end of their regulatory livesduring Regulatory Year t; and

AORLRj,t = The 5% residual value previously recorded aspart of RABt for assets in category j that werepreviously used beyond their regulatory livesbut have been disposed of during RegulatoryYear 1.(This value should not be included as part ofthe disposals described in Section 4.9.2.)

4.9.2 The closing Rolled-forward Depreciated Regulatory Asset Base, in respectof a Regulated Distribution System, for Asset Category j for Regulatory Yeart (~cj,t) is calculated as follows:

RABcj,t = RABoj,t - RegDepnoj,t + Capexj,t - RegDepncj,t

Where:

RABoj,t =

RegDepnoj,t =

ICapexj,t =

RegDepncj,t =


The opening Rolled-forward Depreciated Regulatory AssetBase for Asset Category j for Regulatory Year t, which isnumerically equal to RABcj,l-lexcept that, where RegulatoryYear t is the first Regulatory Year in the SubsequentRegulatory Period, RABoj,tis the Rolled-forward DepreciatedRegulatory Asset Base for Asset Category j as at thecommencement of the first Regulatory Year in theSubsequent Regulatory Period as determined by the ERCunder Section 4.8.10;The Regulatory Depreciation, for Regulatory Year t, of thoseassets in Asset Category j (excluding spares, land andeasements) that were included in the Rolled-forwardDepreciated Regulatory Asset Base for Asset Category j as atthe commencement of the first Regulatory Year in theSubsequent Regulatory Period as determined by the ERCconsistently with its determination under Section 4.8.10 andwith the method for calculating the Regulatory Depreciationfor that Asset Category as set out in Section 4.10.1;The forecast capital expenditure of the Regulated Entity onassets in Asset Category j for Regulatory Year t as approvedby the ERC for that Regulated Distribution System underSection 4.12.5 after applying the CWIP factor described inSection 4.8.9;The Regulatory Depreciation, for Regulatory Year t, of theforecast capital expenditure of the Regulated Entity on

Page 44


assets (excluding spares, land and easements) in AssetCategory j (as approved by the ERC under Section 4.12.5 forthat Regulated Distribution System) to the extent that suchforecast capital expenditure relates to a Regulatory Year inthe Subsequent Regulatory Period which precedesRegulatory Year t, such Regulatory Depreciation beingcalculated consistently with the methodology set out inSection 4.10.1.

4.9.3 Fot the purposes of this Section 4.9 and Section 4.10, assets are to beincluded in the same categories as specified in, or in accordance with,Section 4.8.6 or in smaller categories (Asset Categories j : L.n) such thateach category includes similar assets with similar economic lives (such livesbeing calculated in accordance with Section 4.10.1).

4.10 Regulatbry Depreciation

4.10.1 The Regulatory Depreciation, for Regulatory Year t, in respect of assets thatare in an Asset Category j (RegDepnj.t ) is calculated on a straight line basisas follows:(a)lwhere Asset Category j does not comprise Transferred SubtransmissionAssets - using either of the following methods depending on the availabledata:

RegDepnj,t :

or

or

Where:

ORCj,t

RegLj,t

(ORCj,t / RegLj,t) + Disposalj,t - FISDAj,t

(ODRCj,t / RemLj,t) + Disposalj,t - FISDAj,t

(RFVj,t / RemLj,t) + Disposalj,t - FISDAj,t

the optimized replacement cost, as at thecommencement of Regulatory Year t, for the assetsthat are in Asset Category j;

the Regulatory Life of Asset Category j as at thecommencement of Regulatory Year t and is equalto the weighted averagen economic life of therelevant assets as at the commencement ofRegulatory Year t, where the economic life of anasset is taken to expire when the costs ofmaintenance and repair of that asset exceed theefficient replacement cost of it on a projectcomparison basis, using a forward lookingdiscounted cash flow analysis, or as otherwisedetermined by the ERC. As a result of the reportreferred to in Section 4.10.3, RegLj,t may differfrom the asset life used for financial reporting ortaxation purposes;

11 Weighted by optimized replacement cost, optimized depreciated replacement cost or by the rolled-forward value,depending on the information availability for asset age in the relevant Regulated Entity's asset register systems.

I



I Disposalsj,t

FISDAj,t

=

=

the forecast receipts from the disposal, duringRegulatory Year t, of assets in Asset Category j thatare included in the regulatory asset base for thatRegulated Distribution System (as defined inSection 4,8,6), as determined by the ERC as part ofthe Regulatory Reset Process for the SubsequentRegulatory Period under Article VII. Such forecastreceipts will be at the rolled-forward depreciatedregulatory asset value for the relevant assets.These receipts should not include the 5% residualvalue allocated to disposed assets previously usedbeyond their Regulatory Lives in terms of Section4.8.12.the forecast income (expressed in PhP) to aRegulated Entity that would arise duringRegulatory Year t from the sale of disposed assetsin Asset Category j, that were previously part of therolled forward regulatory asset base for aRegulated Distribution System, as determined bythe ERC as part of the Regulatory Reset Process forthe Subsequent Regulatory Period under ArticleVII, after deducting any forecast expensesassociated with the sale but excluding the value atwhich the disposed assets were forecast to beremoved from the rolled forward regulatory assetbase;

=

=

=

=

RFV,t

ODRCj,t

RemLj,t

Agej,t

the optimized depreciated replacement cost for therelevant assets as at the commencement ofRegulatory Year t, calculated (on the basis of theapplication of straight line depreciation of theoptimized replacement cost for those assets) bymultiplying their optimized replacement cost bythe weighted average Remaining Life of AssetCategory j (RemLj,t) and dividing that product bythe Regulatory Life of Asset Category j (RegLj,t);the rolled forward value for the relevant assets asat the commencement of Regulatory Year t,calculated (on the basis of the application ofstraight line depreciation of the those assets);

(RegLj,t - Agej,t); andthe weighted average age of the relevant assets asat the commencement of Regulatory Year t; and

(b) where Asset Category j comprises Transferred Subtransmission Assets -using the following method:

I


RegDepnj,t

Where:

RPj,t

RemLj,t

RegLj,t

Disposalj,t

FISDAj,t


= RPj,t/RemLj,t + Disposalj,t - FISDAj,t

= the value of those assets, as at the commencementof Regulatory Year t, as determined in accordancewith Section 4.8.10;

= (RegLj,t- Agej,t);

= the Regulatory Life of Asset Category j as at thecommencement of Regulatory Year t and is equalto the weighted averaget2 economic life of thoseassets as at the commencement of Regulatory Yeart, where the economic life of an asset is taken toexpire when the costs of maintenance and repair ofthat asset exceed the efficient replacement cost ofit on a project comparison basis, using a forwardlooking discounted cash flow analysis, or asotherwise determined by the ERC. As a result ofthe report referred to in Section 4.10.3, RegLj,tmaydiffer from the asset life used for financialreporting or taxation purposes;

= the weighted average of the relevant assets as atthe commencement of Regulatory Year t;

= the forecast receipts from the disposal, duringRegulatory Year t, of assets in Asset Category j thatare included as part of the TransferredSubtransmission Assets for a RegulatedDistribution System, as determined by the ERC aspart of the Regulatory Reset Process for theSubsequent Regulatory Period under Article VII.Such forecast receipts will be at the rolled-forwarddepreciated regulatory asset value for the relevantassets. These receipts should not include the 5%residual value allocated to disposed assetspreviously used beyond their Regulatory Lives interms of Section 4.8.12; and

= the forecast income (expressed in PhP) to aRegulated Entity that would arise duringRegulatory Year t from the sale of disposed assetsin Asset Category j, that were previously part of theTransferred Subtransmission Assets for aRegulated Distribution System, as determined bythe ERC as part of the Regulatory Reset Process forthe Subsequent Regulatory Period under ArticleVII, after deducting any. forecast expenses

12 Weighted by the value of the assets in Asset Category j, as determined in accordance with Section 4.8.9.



associated with the sale but excluding the value atwhich the disposed assets were forecast to beremoved from the rolled forward regulatory assetbase.

4.10.2 The Regulatory Depreciation in respect of a Regulated Distribution Systemfor Regulatory Year t in real terms (RegDepnt) is calculated as follows:

RegDepnt = (RegDepno, t + RegDepnc,t)

Where:RegDepno,t = Sum of RegDepnoj,t for Regulatory Year t for each Asset

Category j, as defined in Section 4.9.2; and

RegDepnc,t = Sum of RegDepncj,t for Regulatory Year t for each AssetCategory j, as defined in Section 4.9.2.

4.10.3 For the purposes of this Section 4.10, the regulatory life that is attributableto an Asset Category j will be set in accordance with the schedules in theRAE Handbook described in Section 4.8.5, and such regulatory life must bethe same for the same Asset Category for each Regulated DistributionSystem.

4.l0AAssets remaining in use after reaching the end of their Regulatory Lives asdescribed in Section 4.8.12 will not be subject to further depreciation.

4.11 Weighted Average Cost of Capital Determination

4.11.1 The purpose of calculating the weighted average cost of capital is to providea cost of capital for regulatory purposes which can be applied to a BuildingBlock cash flow model that generates a regulated revenue stream over adefined regulatory period for a Regulated Entity that provides RegulatedDistribution Services in respect of a Regulated Distribution System.

4.11.2 For these purposes a classical weighted average cost of capital (WACC) is tobe used as, in the ERC's view, it best balances the financial Building Blocksin Section 4.7.7 and the principles in Section 4.6.1. The ERC must retain aRegulatory Reset Expert or Regulatory Reset Experts pursuant to ArticleXIV for the purpose of assisting the ERC to determine the WACC during theRegulatory Reset Process for the Subsequent Regulatory Period underArticle VII. The WACC as so determined must be the same for all RegulatedEntities and all Regulated Distribution Systems in an Entry Group.However, since the WACC will be determined for each Entry Group, subjectto Section 4.11.13 there may be differences in the figures used for differentEntry Groups.

4.1 1.3The WACC (expressed in decimal, as opposed to percentage, terms) is to becalculated as follows:

WACCWhere:

re


[re x E / V] + [rd x D / V]

the cost of equity and is calculated in accordance withSection 4.11.4;

Page 48

rd

E

D

v


the cost of debt and is calculated in accordance with Section4.11.10;the amount of equity funding assumed for regulatorypurposes in the capital structure of a Regulated Entity, being60% of V for the Subsequent Regulatory Period;

the amount of debt funding assumed for regulatorypurposes in the capital structure of a Regulated Entity, being40% of V for the Subsequent Regulatory Period; and

E + D.4.11.4 The cost of equity (re), expressed in decimal terms, is calculated as follows:

re = rr + RM x (rm - rr)

Where:rf = the risk-free rate within the Philippines, expressed in

decimal terms, as determined in accordance with Section4.11.5;

RM = the average risk factor determined for a specific regulatedentity used as a multiplier of MRP in Section 4.11.8 to obtainan estimated overall risk exposure for the regulated entity asdetermined by' the ERC for regulatory purposes inaccordance with Sections 4.11.7 to 4.11.8. The RM is usedinstead ofthe traditional Equity Beta; and

(rm - rr) = the Market Risk Premium (MRP), expressed in decimalterms, adopted by the ERC as specified in Section 4.11.9.

4.11.5 The best approximation of a risk-free rate is generally the yield on thelongest dated government borrowing instrument, usually a Treasury Bill orequivalent. In the USA this is either the 10 year government bond or the 30year government bond. Some regulators in overseas jurisdictions prefer touse the yield for a government bond with the same duration as the relevantregulatory period. In the Philippines, the average lO-year PDST-R2 isavailable and being monitored and published by the Philippine Dealing andExchange Corporation (PDEx) and it is more reflective of the regulatorycycle for distribution business. Unless otherwise specified in subsequentissuances of the ERC, the ERC shall adopt the direct approach which isdeemed appropriate and reasonable considering the availability ofPhilippine Oocal) data which reflects sufficient liquidity.

4.1 1.6 The ERC recognizes that determining the underlying parameters on whichthe WACC is based, is subject to a significant degree of uncertainty. Toaddress this, the ERC may consider a varying rate of WACC for each of theregulated entities based on a range of possible risks a regulated entity willbe exposed to in a project. Given the developing nature of the regulatoryenvironment, especially performance-based regulation, in the Philippinesand the fact that many of the regulatory decisions may still be subject tochallenges and delays while the processes are embedded, Regulated Entitiesface an unusual degree of regulatory uncertainty. Further, the regulated



entities' investments are also exposed to the environmental, climate,geographical and other physical risks when compared to other investmentsto which it has limited exposure. This affects the risk profile of theseRegulated Entities and the commensurate rate of return to investors inelectricity distribution infrastructure. To compensate for theseuncertainties, the ERC will incorporate a risk-based evaluationmethodology in computing for the WACC.

4.l1.7The Risk Adjustment Factor is the average risk factor determined for aspecific Regulated Entity to be used as a multiplier of the MRP in Section4.11.9 to obtain an estimated overall risk exposure for the Regulated Entity.This Risk Adjustment Factor (RAf) will be used instead of the traditionalEquity Beta, unless otherwise specified by ERC in subsequent PositionPaper, to arrive at individually determined risk-based compensation for theuse ofthe investor's equity.For the Subsequent Regulatory Period, the ERCwill determine the AverageRisk Adjustment Factor (RAf) for regulated entities which shall becalculated similar to the illustration below:

Risk Category Preliminary Weighting Final AdjustmentAdjustment Factor Factor

EnvironmentallJ 1.4 10 0.14

Peace and Order" 1.5 20 0.30Local Government15 1.2 10 0.12

Susceptibility to losses - written off 1.3 20 0.26bad debts, Systems Loss and OtherPhysical losses

Geographical" 1.4 10 0.11

Managementt7 1.3 10 0.13

Governance18 1.4 20 0.28

TOTAL 100 1.34

13 Environmental risk category refers to the Entity exposures to unusual climate or weather changes includingcalamities.

14 Peace and order refers to the susceptibility of the entity to civil disturbances resulting from the presence ofrecognized local rebel groups (NPAs, MILF, etc.)

15 Local Government refers to unusual experiences with certain local governments that impact the entity operations(Rights-of-Way Issues, conflicting claims on properties and changing local government laws/policies.

16 Geographical refers to any unusual circumstances in customer servicing (like customer density, length of installedlines, urban vs. rural and residential vs. commercial.

17 Management refers to the maturity and capability of management and may take into consideration management'srisk awareness or risk averseness, including ability to identify and enter into any other alternative investment(Opportunity cost of alternative investment)

18 Governance refers to the evaluation of the maturity of the entity with respect to Corporate Governance (withapproved manual on governance, use of written policies and procedures, internal audit involvement, practice of riskmanagement, with corporate social responsibility policies in place and observed, no major records of non-compliance to regulatory matters., financial and management reports in place, etc.)

Revised RDWR July 2016 Page SO


4.11.8The Preliminary Adjustment factor represents a preliminary assessment ofhow much the average Risk Premium should be adjusted to compensate theregulated entity for any exposure in addition to what is perceived to beincluded in the Average Risk Premium.

4.11.9The Market Risk Premium (MRP) is a measure of the risk associated withholding a portfolio of equity market assets rather than a portfolio of long-dated government bonds. The premium effectively measures the differencebetween the long-term average return to investors in the equity market ofthe Philippines (rm) and the risk-free rate within the Philippines (rr). Due tothe smaller size, and potential lower liquidity, of the publicly traded equitymarket in the Philippines, the absence of history on long-term governmentbonds with reasonable liquidity and the absence of a reasonably long time-series of market data, unless otherwise specified thru subsequent issuanceof the ERC, the ERC will adopt, for the Subsequent Regulatory Period, anM~Pofo.o6.

4.11.10 I The cost of debt (rd), expressed in decimal terms, is calculated asfollbws:

rr + DM=rdWhere:rr = the risk-free rate within the Philippines, expressed in

decimal and nominal terms, as determined in accordancewith Section 4.11.5; and

DM = the industry average debt margin (or premium) within thePhilippines (expressed in decimal and nominal terms) asdetermined by the ERC, which conceptually represents themargin above the risk-free rate within the Philippines that isrequested by debt providers for providing funds toelectricity distribution businesses in the Philippines (otherthan electricity distribution businesses conducted byElectric Cooperatives) to the extent such debt arrangementsare representative of arms length negotiated rates in liquidmarkets and are financially efficient.

In the Philippines, there may be an expectation that the debt margin for aregulated electricity distribution business will be higher than in moredeveloped countries. The size and availability of debt funding sources fromwithin the Philippines may be limited due to either bond market size or banklending covenants. As a result access to the required debt levels may requirethe inclusion of a "guarantee" premium of one form or another in the cost ofdebt, which is above the debt margin seen in overseas markets. This marginmigfut be for either a peso guarantee (where debt funds are sought in thePhilippines and are guaranteed by an offshore bank) or a partial riskguarantee from the World Bank or similar international funding agency(where debt funds are sought outside the Philippines). The ERC must notallow the risks associated with the provision of debt finance to be doublecounted or over compensated within the industry average debt margin, but

Revised RDWRJuly 201? Page 51

Rules for Setting Distribution Wheeling RatesI

I

the i~dustry average debt margin must reflect a realistic market outcome atthe time it is determined. The ERC will determine the industry average debtmargin for the purposes of calculating the cost of debt only after consideringalterpative sources of debt funds which may be appropriate in the context offunding an electricity distribution business within the Philippines, suchconsideration to occur during the Regulatory Reset Process for theSubsequent Regulatory Period under Article VII.

4.11.11 During the Regulatory Reset Process for the Subsequent RegulatoryPeriod under Article VII, the ERC will give each Regulated Entity and otherinterested parties the opportunity to make written submissions to the ERCon the method and data sources which the ERC should rely upon in itsdetermination of the risk-free rate within the Philippines, the average RiskAdjustment Factor, the cost of debt and gearing ratio for the purposes ofcalculating WACC.

4.11.12 Once these Rules have come into effect, the formula for calculatingWACC and its components as set out in this Section 4.11 must not be alteredby the ERC for the Subsequent Regulatory Period except as the result of aconsultative process in which all Regulated Entities and other interestedparties have opportunity to participate and after due consideration ofsubmissions received as a result of such consultation. The ERC mayhowever from time to time amend the manner in which it determines theunderlying parameters on which its calculation of the WACC is based andshall issue the corresponding document in the form of an amendment tothese Rules or subsequent Position Paper.

4.11.13 If the ERC decides to adopt similar WACC applicable to each EntryGroup, the ERC will determine an updated value for the WACC that willapply to the new Entry Group. If this WACC differs by more than 10% fromthe WACC currently applied to a previous Entry Group, the WACC for thisprevious Entry Group will be amended in accordance with the latestdetermination of the ERC. That will give rise to a re-opening event asdescribed in Article XII, Section 12.6.

4.11.14 The difference between the actual return on capital earned by aRegulated Entity over the Subsequent Regulatory Period, and the valuewhich would have resulted had the newly derived equivalent WACC Periodapplied for the Subsequent Regulatory Period, will be calculated. Thisdifference, unadjusted for the time value of money, will be added to orsubtracted from the allowed revenue requirement for that Regulated Entityfor the Subsequent Regulatory Period.

4.11.15 The ERC will explore the possibility of categorizing what are short andlong-lived assets in setting the WACC. It is worthy to note that for regulatedentities where regulation is inherently long-lived considerations should bemade on the rate of return (WACC) because most of the investments arelong-term and the regulated entities need some assurance that it be allowedto lock-in the regulatory WACC. The primary objective is to ensure that theregulated entities would be entitled to a full investment recovery of itsregulated assets at an appropriate rate of return. It is recognize that usingcurrent data for short-lived assets provides efficient investment signals.

Revised RDWR July 2016 PageS2

4.12


However, it is also recognized that there are advantages in using long-termave~age data, which provide greater stability, reduce re-financing risks forlong-lived assets.

Capital E~enditure Forecast

4.12.1During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity must provide the ERC with itsforward forecasts of its proposed annual capital expenditure, for eachRegulated Distribution System that is operated by it, for each RegulatoryYear in the Subsequent Regulatory Period. This capital expenditureprogram must separately identify each capital expenditure project inrespect of which the forecast capital expenditure in any Regulatory Year orsubsequent Years during or after the Subsequent Regulatory Period isgreater than PhP 30 million or 20% of total capital expenditure forecastedfor that Regulatory Year, whichever is lower. For both these separatelyidentified projects and the remaining forecasted capital expenditure, theforecasts must each be broken down into the asset categories specified in,or in accordance with, Section 4.8.6. The capital expenditure program willbe subject to review by a Regulatory Reset Expert or Regulatory ResetExp~rts under Section 4.12-4.

4.12.2For ~ach ofthe capital expenditure projects which are separately identifiedin atcordance with Section 4.12.1, the capital expenditure program must beaccdmpanied by:

(a) a description of the project;(b)the reason for the ranking of the project relative to other projects interms of its proposed commissioning date;(c) the impact the project is expected to have on those measures of theperformance of the relevant Regulated Distribution System which aredetermined by the ERC under Article VIII;(d) a classification of the project into the following categories:

renewal related (identifying why the assets need replacing, whatremaining asset value is sought to be written off, if any, and the potentialdisposal value ofthe replaced assets); or

refurbishment related (identifying the increase in operational lifeexpected from the refurbishment, if any); or- krowth-related or new assets (identifying which assets are for shared

hetwork infrastructure and which are for new connections); and(e) al division of the forecast capital expenditure for that project into theforecast annual capital expenditure on that project, with a further divisioninto directly attributable expenditures and allocated overheads.

To avoid confusion over what constitutes load growth, renewal orrefurbishment related projects, the following should be noted.



(i) Projects undertaken to provide Regulated Distribution Services to newCustomers or to increase the capacity of Regulated DistributionSystems in order to meet growing demands for Regulated DistributionServices from existing Customers, should be classed as load growthprojects.

(ii) Projects undertaken to renew assets because they can no longer meetgrowing demands should be classed as load growth projects.

(iii) Renewal projects are those that replace existing assets due to theirdeteriorating condition, when the anticipated economic cost ofoperating, refurbishing and maintaining these assets exceed that torenew them.

(iv) Renewal projects can also be to replace assets due to technologicalobsolescence.

(v) There is often a significant degree of overlap between maintenance andrefurbishment projects. In general, maintenance works are defined asthose works required to ensure that an asset performs its designatedfunction for its full standard asset life. Refurbishment projects on theother hand, are those that are used to increase the serviceability ofassets to beyond their normal standard asset lives. Expenses incurredfor maintenance activities should not be capitalized.

(vi) Refurbishment projects often involve at least a degree of assetreplacement, which may give rise to some ambiguity. Such projectsshould be classed in accordance with their underlying activities thatConstitute the largest part of the project value.

4.12.3 For Ithe remaining forecast capital expenditure which i's not allocated toseparately identified capital expenditure projects in accordance withSection 4.12.1, the capital expenditure program must be accompanied by ajustification, against each of the asset categories specified in, or inaccordance with, Section 4.8.6, as to why the forecasted expenditures arenecessary and are of reasonable magnitude, and must be categorized asfollows:(a) renewal-related;

(b) refurbishment-related; or(c) growth-related or new assets;

as defined in Section 4.12.2(d).4.12.4 The ERC must review both the capital expenditure program for a Regulated

Disd'ibution System and the accompanying documentation to determine:(a) Jhether the capital expenditure program has been represented fairlysuch that all related capital expenditure is grouped together into the oneproject and has not been sub-divided to place it below the individual projectreporting threshold in Section 4.12.1, is based upon the best available prices(adjusted to PhP) obtainable from international markets, is reasonablyefficient from a design and implementation point of view, is likely tosupport the forecast growth in connections, co-incident peak demand and

Revised RDWR July 2016 PageS4


energy delivered and is sufficient to allow the relevant Regulated Entity toachieve or exceed the applicable target levels of performance specifiedunder Article VIII; and

(b) whether the PhP/$US exchange rate and CPI forecasts referred to inSection 4.12.6 are reasonable.For this purpose the ERC may retain a Regulatory Reset Expert orRegulatory Reset Experts pursuant to Article XIV to conduct the review onits own or in cooperation with ERe staff, or the ERC may decide to conductthe review internally.

4.12.5If the ERC has opted to use a Regulatory Reset Expert or Regulatory ResetExperts as referred to in Section 4.12-4, once they have presented theirwritten reports to the ERC, the ERC must decide, following a considerationof the recommendations of the Regulatory Reset Expert or Regulatory ResetExperts as provided in their written reports:

(a) whether the relevant capital expenditure program is based upon the bestavailable prices (adjusted to PhP) obtainable from international markets, isreasonably efficient, is likely to support the forecast growth in connections,co-incident peak demand and energy delivered and is sufficient to allow therelevant Regulated Entity to achieve or exceed the applicable target levels ofperformance specified under Article VIII; and

(b) whether the PhP/$US exchange rate and CPI forecasts referred to inSection 4.12.6 are reasonable.If the ERC decides these conditions have been met it must approve:

(c) the capital expenditure program proposed by the Regulated Entity; and

(d)the PhP/$US exchange rate and CPI forecasts used by the RegulatedEntity for that purpose.If the ERC decides these conditions have not been met it must, afterconsulting with the Regulated Entity, approve such program or forecastswith such amendments as it considers necessary for those conditions to bemet. Such consultation can be conducted through inviting submissions onthe ERC's draft determination on the price control arrangements for theSubsequent Regulatory Period. These submissions will be considered inpreparing the final determination on the price control arrangements.

4.12.6The capital expenditure forecasts provided by a Regulated Entity as part ofa capital expenditure program referred to in Section 4.12.1 must beprovided in real and nominal terms and must be supported by detaileddocumentation which clearly and comprehensively substantiates thoseforecasts, including details of the PhP/$US exchange rate and CPIforecasts, for each Regulatory Year, which have been used by the RegulatedEntity to generate those forecasts. These exchange rate and CPI forecastsmust be consistent with those used for forecasting operating andmaintenance expenditure, as described in Section 4.13.6.



4.12.7The ERC must determine the capital expenditure forecast to be included inthe Building Block analysis based on consideration of the informationavailable to it including any reports of a Regulatory Reset Expert orRegulatory Reset Experts referred to in Section 4.12-4. Unlesscontradictory evidence exists for particular projects, expenditure forecastsmust be based on the standard replacement rates contained in the RAEHandbook, adapted by the multiplier ranges provided, as appropriate.

4.12.8During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity has to provide historical records ofcapital expenditure on Distribution System Assets and Non-system Assetsrelated to the Distribution System for each of the four Regulatory Years, theactual expenditure for Regulatory Year t-2 and the budgeted expenditurefor Regulatory Year t-1. These expenditure records and budgets have to bebroken down into the categories described in Section 4.8.6. Projectscompleted over this period, with individual items with values exceedingPhP30 million or 20% of the total annual capital expenditure separatelyidentified.

4.13 Operating and Maintenance Expenditure

4.13.1During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity must provide the ERC with:

(a) its historical operating and maintenance expenditure, in relation to eachRegulated Distribution System that is operated by it, for each year of theprevious Regulatory Period; and

(b) its forward forecasts of its proposed annual operating and maintenanceexpenditure, in relation to each such Regulated Distribution System, foreach Regulatory Year in the Subsequent Regulatory Period.

Such annual historical and forecast operating and maintenance expendituremust separately identify operating and maintenance expenditure groupedinto the following categories and sub-categories in relation to the relevantRegulated Distribution System:

(c) Regulated Distribution Services expenses - operation(i) Operation supervision and engineering(ii) Contractor services(iii) Load Dispatching(iv) Structures(v) Substations(vi) Overhead lines & devices(vii) Underground cables & devices(viii)Street Lighting and Signal System (non-roadway and roadways)(ix) Metering (distribution network related including meteringrelated to monitoring and managing system losses)(x) Rents(xi) Information technology (distribution network related)



(xii) Miscellaneous

(d) Regulated Distribution Services expenses - maintenance

(i) Maintenance supervision & engineering(ii) Contractor services(iii) Structures(iv) Substation equipment(v) Overhead lines & devices(vi) Underground cables & devices(vii) Street Lighting and Signal System (non-roadway and roadways)(viii)Distribution transformers(ix) Information technology (distribution network related)(x) Metering (distribution network related including meteringrelated to monitoring and managing system losses)(xi) Miscellaneous

(e) Regulated Distribution Services expenses - Administrative & general

(i) Company management costs

(ii) Administrative and General Salaries

(iii) Office Supplies and Expenses

(iv) Information technology (admin & general)

(v) Outside Services Employed

(vi) Property Insurance

(vii) Injuries and Damages

(viii) Employee Pension and Benefits(ix) Regulatory liaison and compliance

(x) Rents

(xi) Maintenance of Office and General Plant(xii) Officers Allowances and Benefits

(xiii) Travel(xiv) Training

(xv) Water and electricity

(xvi) Miscellaneous

Revised RDWR July 2016 Pages?


(xvii)WESM compliance - market fees19

Registration fees

Metering fees

Billing and settlement fees

Administration fees

Costs for the PEM Board, committees & working groups

Market Management Software and upgrades costs recovery

WESM - provision and maintenance of securit

(f) Distribution Connection Services - Operation

(i) Operation supervision and engineering(ii) Contractor services(iii) Structures(iv) Substations(v) Overhead lines & devices(vi) Underground cables & devices(vii) Consumer installations(viii) Information technology (distribution connection services

related)(ix) Miscellaneous

(g) Distribution Connection Services - Maintenance

(i) Maintenance supervision & engineering(ii) Contractor services(iii) Structures(iv) Substations(v) Overhead lines & devices(vi) Underground cables & devices(vii) Distribution transformers(viii) Information technology (distribution network related)(ix) Miscellaneous

(h) Distribution Connection Services - Administrative & general

(i) Administrative and General Salaries(ii) Office Supplies and Expenses(iii) Information technology (admin & general)

19 Only to the extent that these costs apply to Regulated Distribution Services

Revised RDWR July 2016 Pages8


(iv) Outside Services Employed

(v) Property Insurance

(vi) Injuries and Damages

(vii) Employee Pension and Benefits

(viii) Regulatory liaison and compliance

(ix) Rents

(x) Maintenance of Office and General Plant

(xi) Officers Allowances and Benefits

(xii) Travel

(xiii) Training

(xiv) Water and electricity

(i) Regulated Retail Services(i) Administration and management of the provision of

regulated retail services(ii) Planning, installation and maintenance of consumer

metering installations(iii) Consumer Meter Reading Expenses(iv) Information technology (retail related)(v) Consumer Records, Billing and Collection Expenses(vi) Bad debts(vii) Informational and Instructional Advertising Expenses(viii) Energy trading expenses (excluding energy purchases)(ix) Rents(x) Water and electricity2!(xi) Miscellaneous Consumer Services Expenses(xii) Regulatory liaison and Compliance

CD Any other categories or sub-categories specified by the ERC.(k) The regulatory liaison and compliance cost category included above is for all

reasonable costs associated with complying with applicable ERC rules andregulations, which includes the costs of any Regulatory Reset Expert that theRegulated Entity is required to bear under Section 14-4.1.

Where Regulated Entities engage in alternative business activities outsidethe operation of their Regulated Distribution Systems and incur operatingand maintenance expenditure for services that that are shared betweenthese alternative business activities and the Regulated Distribution Services,

21 This is for electricity consumption incurred in providing Regulated Retail Services, not bulk energy purchases.



Regulated Entities must provide full details of the magnitude of these costsand the manner in which these costs are allocated between the alternativebusiness activities and the Regulated Distribution Services. Such alternativebusiness activities can include related business activities as noted in Section4.34.

4.13.2During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity must also provide the ERCwith:(a) a summary of its historical payments of taxes, levies and duties (otherthan corporate income tax), incurred in relation to each RegulatedDistribution System that is operated by it, for each year of the previousRegulatory Period; and

(b) its forward forecasts of its expected payments of taxes, levies and duties(other than corporate income tax), to be incurred in relation to each suchRegulated Distribution System, for each Regulatory Year in the SubsequentRegulatory Period.The cost that a Regulated Entity is required to bear for Regulatory ResetExperts, as described in Article XIV, is to be included as a levy in thesesummaries or forecasts.

4.13.3The annual operating and maintenance expenditure forecasts referred to inSection 4.13.1 must be accompanied by a justification against each of theexpenditure categories referred to in Section 4.13.1 as to why the forecastexpenditures are necessary and are of reasonable magnitude (such forecastscould, for example, be supported by benchmarks against overseas electricitydistribution businesses). The written justification must also demonstrateimprovements in operational efficiency and productivity over theSubsequent Regulatory Period. For these purposes, benchmarks againstoperational parameters such as staff numbers, energy throughput, serviceperformance or other measures. may be used to justify the relevantexpenditures.

4.13.4The ERC must review both the operating and maintenance expenditureforecasts as well as the forecast expenditure for taxes, levies and duties(other than corporate income taxes) in relation to a Regulated DistributionSystem and the accompanying documentation to determine:

(a) whether the forecast expenditure is reasonably efficient, is likely tosupport the forecast growth in connections, co-incident peak demand andenergy delivered and is sufficient to allow the relevant Regulated Entity toachieve or exceed the applicable target levels of performance specifiedunder Article VIII;(b) whether the forecasts for bad debts reflect a responsible approach tocollections and are consistent with a reasonable strategy for improvingcollections; and(c) whether the PhP/$US exchange rate and CPI forecasts referred to inSection 4.13.6 are reasonable.For this purpose the ERC may retain a Regulatory Reset Expert orRegulatory Reset Experts pursuant to Article XIV to conduct the review in



isolation or in cooperation with ERC staff, or the ERC may decide toconduct the review internally.

4.13.5If the ERC has opted to use a Regulatory Reset Expert or Regulatory ResetExperts as referred to in Section 4.13-4 for the review, once they havepresented their written reports to the ERC, the ERC must decide, followinga consideration of the recommendations of the Regulatory Reset Expert orRegulatory Reset Experts as provided in their written reports:

(a) whether the relevant forecast operating and maintenance expenditure isreasonably efficient, is likely to support the forecast growth in connections,co-incident peak demand and energy delivered and is sufficient to allow therelevant Regulated Entity to achieve or exceed the applicable target levels ofperformance specified under Article VIII;(b) whether the forecasts for bad debts reflect a responsible approach tocollections and are consistent with a reasonable strategy for improvingcollections; and(c) whether the PhP/$US exchange rate and CPI forecasts referred to inSection 4.13.6 are reasonable.

If the ERC decides these conditions have been met it must approve:

(d) the forecast operating and maintenance expenditure (and forecastpayments of taxes, levies and duties referred to in Section 4.13.2 (b))proposed by the Regulated Entity; and(e) the PhP /$US exchange rate and CPI forecasts used by the RegulatedEntity for that purpose.If the ERC decides these conditions have not been met it must, afterconsulting with the Regulated Entity, approve such forecasts with suchamendments as it considers necessary for those conditions to be met.

4.13.6The operating and maintenance expenditure forecasts, and forecastpayments of taxes, levies and duties referred to in Section 4.13.2 (b),provided by a Regulated Entity must be provided in real and nominal termsand must be supported by detailed documentation which clearly andcomprehensively substantiates those forecasts, including details of thePhP/$US exchange rate and CPI forecasts, for each Regulatory Year, whichhave been used by the Regulated Entity to generate those forecasts. Theseexchange rate and CPI forecasts must be consistent with those used forforecasting capital expenditure, as described in Section 4.12.6.

4.13.7The ERC must determine the operating and maintenance expenditureforecasts to be included in the Building Block analysis based onconsideration of the information available to it including any reports of aRegulatory Reset Expert or Regulatory Reset Experts referred to in Section4.13.5.

4.14 Calculation of Corporate Income Tax

4.14.1The estimated corporate income tax payable by a Regulated Entity inrespect of a Regulated Distribution System in Regulatory Year t (Taxp. t)must be calculated by the ERC in accordance with the following formula:



NTlncomet-t x Tc=Taxp,t

Where:

NTlncomet-l = the Net Taxable Income of the Regulated Entity forRegulatory Year t-1 as determined by the ERC on thebasis of the methodology for its determination as set outin Section 4.14.2; and

Tc = the corporate tax rate applicable in respect of theRegulated Entity pursuant to the laws of the Philippines.

4.14.2 For the purposes of Section 4.14.1, NTIncomet-t is calculated as the greaterof zero and:

TIncomet-t + ATt-2Where:TIncOmet-l = the taxable income of the Regulated Entity for Regulatory

Year t-1 as calculated on the basis of the methodology for itsdetermination set out in Section 4.14.3; and

ATt-2 = the net tax losses carried forward at the end of theRegulatory Year in the Previous Regulatory Period whichprecedes Regulatory Year t-1,

where the net tax losses:(i) arise from the provision of Regulated Distribution Services in respect of

the relevant Regulated Distribution System by the Regulated Entity;

(ij) are calculated from the start of the last year of the First RegulatoryPeriod to the end of the Regulatory Year in the Subsequent RegulatoryPeriod which precedes Regulatory Year t-1;

(iii) carried forward at the end of any Regulatory Year in the period coveredare calculated as the sum of the tax losses carried forward into thatRegulatory Year and the taxable income or tax loss for that RegulatoryYear; and

(iv) only exist where it is a negative amount, with positive amounts resultingin a zero net tax loss carried forward.

For these purposes, taxable income will be treated as a positive amount andtax losses will be treated as a negative amount.

4.14.3 For the purposes of Section 4.14.2, TIncOmet-l is calculated as:

TIncOmet-l= (SMAPt-1 x Qt-l) - OpeXt-l - HCDepnt-l - RegInh-l

Where:In the First Regulatory Year,SMAPt-l = MAPt-1 as determined during the last Regulatory Year of the

Previous Regulatory Period;



In the subsequent Regulatory Years,

SMAPt-1 = the Smoothed Maximum Annual Price cap (expressed inPhP /kWh) that the Regulated Entity is permitted to charge forthe provision by it, during Regulatory Year t-1, of RegulatedDistribution Services in respect of that Regulated DistributionSystem, as calculated in accordance with Section 4.15-4;

Qt-l = the total amount of energy (expressed in kWh) that isforecasted to be delivered through the relevant RegulatedDistribution System, during Regulatory Year t-1, to ConnectionPoints in respect of that Regulated Distribution System, suchamount of energy being forecasted in a manner that isapproved for this purpose by the ERC;

OpeXt-l = the nominal operating and maintenance expenditure, (otherthan corporate income taxes), which are forecasted to beincurred in relation to the relevant Regulated DistributionSystem for Regulatory Year t-1 and which are approved by theERC in accordance with Section 4.13;

HCDepnt-l = the regulatory historical cost depreciation of the RegulatoryAsset Base for the relevant Regulated Distribution System forRegulatory Year t-1 (see Sections 4.9) in real terms asdetermined by the ERC on the basis of the methodology for thedetermination of RegDepnt-l as set out in Sections 4.10.1 and4.10.2, with the substitution, in the depreciation calculation, ofhistorical cost valuations (as per Philippine accountingpractice) for replacement cost valuations or valuations inaccordance with Section 4.8 (as the case may be); and

RegIntt-l = the interest payments on outstanding debt for Regulatory Yeart-1 as determined by the ERC in accordance with the followingformula:

RegIntt-l =

Where:RABt-1 ==

AORu-l ==

Where:

AORLo,l-l =


(RABt-l - AORLt-l)x D / V x rd

the Regulatory Asset Base for the relevant RegulatedDistribution System for Regulatory Year t-1 in real termsas determined under Section 4.9.1;

(AORLo,t-l+ AORLc,t-l)]/2

the opening 5% residual value of assets that areremaining in service beyond their regulatory lives forRegulatory Year t-1 in real terms as determined underSection 4.9.1; and

Page 63


AORLc,'-l = the closing 5% residual value of assets that areremaining in service beyond their regulatory lives forRegulatory Year t-1 in real terms as determined underSection 4.9.1;

D and Vare as defined in Section 4.11.3; and

rd = the cost of debt as calculated in accordance with Section4.11.10.

4.14.4Notwithstanding the actual corporate income tax payable by RegulatedEntities, for the Subsequent Regulatory Period, the value of the corporateincome tax (Taxp,, as defined in Section 4.14.1) will be set to zero for thepurposes of determining the allowed revenue requirement in Section 4.7.7.

4.15 Smoothing

4.15.1As a result ofthe Building Block approach, it is unlikely that there will be alinear increase, for each Regulatory Year in the Subsequent RegulatoryPeriod, in the allowed annual revenue requirement for a RegulatedDistribution System. Accordingly, so as to reduce the likelihood of priceshocks to Customers of that Regulated Distribution System and of revenueshocks to the Regulated Entity that operates that Regulated DistributionSystem, subject to the proposal of the Regulated Entity, the ERC willsmooth the Maximum Annual Price caps for that Regulated DistributionSystem for each Regulatory Year in the Subsequent Regulatory Period inaccordance with this Section 4.15. Such smoothed Maximum Annual Pricecaps will incorporate a recovery of efficiency savings in costs. It may alsoinclude under- or over-recoveries carried over from the Previous RegulatoryPeriod, where the full correction for such recoveries in the First RegulatoryYear is deemed by the ERC to represent an excessive step-change over theprevious year's MAP (determined for the last year of the PreviousRegulatory Period). In addition, the smoothed Maximum Annual Pricecaps may also include a recovery of regulatory interventions made by theERC in the Allowed Revenue Requirement of a Regulated Entity duringearlier Regulatory Periods.

4.15.2The first step is to calculate the present value of the allowed annual revenueresulting from the maximum average prices that the relevant RegulatedEntity is permitted to charge for the provision by it, during each of theRegulatory Years in the Subsequent Regulatory Period, of RegulatedDistribution Services in respect of the relevant Regulated DistributionSystem (PVR'-l), such amount being calculated as follows:

PVR'-l


= (ARRu) / (1+ WACC) +

(ARR'2) / (1 +WACC)2 +

(ARR'3) / (1 +WACC)3 +(ARR14)/ (1 +WACC)4

Page 64


where:ARR, = the allowed annual revenue requirement for that

Regulated Distribution System for Regulatory Year t (t =t1 to t4) as calculated in accordance with Section 4.7.7;and

WACC = the classical weighted average cost of capital asdetermined by the ERC in accordance with Section 4.11.

4.15.3 The second step is to calculate the Efficiency Factor (X) in respect of therelevant Regulated Distribution System for the Subsequent RegulatoryPeriod from the solution of the following equation (where only X isunknown) using the results of the calculation in Section 4.15.2:

PVR'-1 = [MAP,-, - Po] X

[{(1 + Inflationl1 - X) x FQl1I (1 + WACC)}+{(1 + Inflation'2 - X) x (1 + Inflation'2 - X) x FQ'2 I (1 + WACC)2 }+{(1 + Inflation'3 - X) x (1 + Inflation'3 - X) x (1 + Inflation'3 - X) x FQ'3 1(1 +WACC)3}+

{(1 + Inflationl1 - X) x (1 + Inflation'2 - X) x (1 + Inflation'3 - X) x (1 +Inflation14 - X) x FQ14I (1 +WACC)4}]where:

PVR'-1 is as calculated pursuant to Section 4.15.2;MAP'-1 = The MAP determined by the ERC for the last year of the

Previous Regulatory Period;FQ, = The total amount of energy (expressed in kWh) that is

forecasted to be delivered through the relevant RegulatedDistribution System, during Regulatory Year t (t = t1 to t4),to Distribution Connection Points in respect of thatRegulated Distribution System, such amount of energybeing forecasted in a manner that is approved for thispurpose by the ERC;

Po is such amount (expressed in PhP/kWh) as the ERC determines inrespect of that Regulated Distribution System to take into account a balancebetween windfall gains and windfall losses in revenue resulting fromexogenous factors, and to assist with the reduction of price shocks duringthe transition from the previous Regulatory Period distribution prices to theSubsequent Regulatory Period, provided only that such amount must be:

less than or equal to MAP,-, - [(ARRl1 I FQl1) 1(1 + WACC)] (but mustnot be a negative amount)where MAP,-, >= [(ARRl1 I FQl1) I (1 +WACC)]( >= meaning greater than or equal to); or

RevisedRDWRJulY2016 Page 65


greater than or equal to MAP'-1- [(ARR" / FQ,,) / (1 + WACC)] (butmust not be a positive amount)

where MAP'-1<= [(ARR" / FQ,,) / (1 +WACC)]( <= meaning less than or equal to);

WACC = the classical weighted average cost of capital as determinedby the ERC in accordance with Section 4.11; and

Inflation, is the forecast inflation for Regulatory Year t (t = t1 to 4),expressed in decimal (as opposed to percentage) terms, which is used by theERC for the purpose of the Regulatory Reset Process for the SubsequentRegulatory Period under Article VII. The inflation calculation is based onthe Philippines CPI index and annual inflation is determined in accordancewith the DeltaCPI calculation described in section 4.5.2.

4.15.4The Smoothed Maximum Annual Price cap (SMAP) for each RegulatoryYear in the Subsequent Regulatory Period is calculated as follows:

(a) where the relevant Regulatory Year is the first Regulatory Year in theSubsequent Regulatory Period, the Smoothed Maximum Annual Price capfor that Regulatory Year (SMAP,) is:

SMAP, = (MAP,-, -Po) x (1 + Inflation, - X); and

(b) where the relevant Regulatory Year is any Regulatory Year in theSubsequent Regulatory Period after the first Regulatory Year, the SmoothedMaximum Annual Price cap for that Regulatory Year (SMAP,) is:

SMAP, = SMAP,-, x (1 + Inflation, - X) ,

Where:

MAP'-1 = The MAP determined by the ERC for the last year of thePrevious Regulatory Period;

Inflation, = the forecast inflation for Regulatory Year t, expressed indecimal (as opposed to percentage) terms, which is used bythe ERC for the purpose of the Regulatory Reset Processfor the Subsequent Regulatory Period under Article VII;

Po is the amount determined by the ERC as described in Section 4.15.3;

andX is as calculated pursuant to Section 4.15.3.

4.15.5Where the ERC in terms of Section 4.15.1 decides that earlier under- orover-recoveries are to be recovered as part of the smoothed price pathduring the Subsequent Regulatory Period (rather than be fully recovered interms of Section 4.3), the outstanding recovery amount will be split andadded (if it is an under-recovery) or subtracted (if it is an over-recovery)from the annual revenue requirement for two or more Regulatory Yearsduring the Subsequent Regulatory Period. The annual revenuerequirements thus adapted will be applied for the calculation of PYR'-1described in section 4.15.2. For the purposes of this calculation, with theexception of the allowance made in Section 4.15.2 and 4.15.3, no interest or



any other compensation to reflect the time-value of money under- or over-recovered will be applied.

4.15.6 Earlier regulatory interventions by the ERC, that affected the price controlarrangements for the Previous Regulatory Period for any Regulated Entity,will be recovered during the Subsequent Regulatory Period. The totalregulatory intervention amount will be evenly split and added to the annualrevenue requirement for each Regulatory Years during the SubsequentRegulatory Period. The annual revenue requirements thus adapted will beapplied for the calculation of PVRt-1 described in section 4.15.2. For thepurposes of this calculation, with the exception of the allowance made inSection 4.15.2 and 4.15.3, no interest or any other compensation to reflectthe time-value of money involved in a regulatory intervention will beapplied.

4.16 Force Majeure and Tax Event Pass Tbroughs4.16.1 Cost recovery arising from an approved Force Majeure Pass Through

Amount, an Approved Tax Pass Through Amount or a Negative Tax PassThrough Amount as determined under Article X or XI (as the case may be),that has not been resolved at the end of the Previous Regulatory Period willnot form part of the Building Block analysis for the Subsequent RegulatoryPeriod, even if these have not been resolved at the end of the PreviousRegulatory Period. Similarly, cost recoveries that has not been resolved atthe end of the Subsequent Regulatory Period, will not be carried forward tothe next Regulatory Period.

4.17 Service Quality Measures and Targets

4.17.1 The ERC must implement a performance incentive scheme that rewardseach Regulated Entity for achieving specified target levels of performance,and penalizes each Regulated Entity for failing to achieve specified targetlevels of performance, during the Previous Regulatory Period in accordancewith Article VIII, as described in Sections 8.2.5 and 8.2.6.

4.17.2The performance incentive scheme for the Subsequent Regulatory Periodwill include a price-linked incentive component which will be used todetermine the St factor described in 4.2.1 for each Regulatory Year t.

4.17.3 The performance incentive scheme for the Subsequent Regulatory Periodwill include a guaranteed service level scheme in terms of which RegulatedEntities will compensate a Customer directly if certain service deliveryperformance thresholds are not met.

4.17.4 The performance targets used for the Subsequent Regulatory Period may bebased on historical service performance levels achieved by a RegulatedEntity, or may reflect a measure of improvement as determined by the ERC,based on benchmarking performance levels against other Philippines andinternational electricity distribution utilities. Such benchmarking andsubsequent performance improvements will be subjected to publicconsultation before being adopted into a performance incentive scheme forthe Subsequent Regulatory Period.



4.18 Efficiency Adjustments

4.18.1The ERC must comply with Article IX in respect of the treatment of NetEfficiency Adjustments (as defined in Article IX) which arise during theSubsequent Regulatory Period.

4.18.2Efficiency Adjustments will also be made to reflect efficiency gains achievedby Regulated Entities during the Previous Regulatory Period.

4.19 Change in Weighted Index

4.19.1During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, the ERC must review the values of WI and W2 as set outin Section 3.3 to determine whether they appropriately reflect thoseproportions of the capital expenditure forecasts, and the operating andmaintenance expenditure forecasts, for that Regulatory Period which areapproved by the ERC in relation to a Regulated Distribution System underSections 4.12.5 and 4.13.5 and which are to be undertaken in or areotherwise referable to a foreign currency.

4.19.2If, as a result of its review under Section 4.20.1, the ERC determines thatthe values of any of WI or W2 as set out in Section 3.3 should be altered tomore appropriately reflect those proportions of the capital expenditureforecasts, and the operating and maintenance expenditure forecasts,referred to in Section 4.20.1, then the ERC must determine the alteredvalues and those altered values must be used in applying the formula for thecalculation of MAP, for the relevant Regulated Distribution System as setout in Section 4.2.1. Without limiting the way in which the ERC maydetermine to alter the values of WI or W2 for the purposes of this Section4.20.2, the ERC may determine values which are constant for the whole ofthe Subsequent Regulatory Period or that are different for each RegulatoryYear in the Subsequent Regulatory Period. The values of WI and W2 asdetermined pursuant to this Section 4.20.2 must not be changed during theSubsequent Regulatory Period.

4.19.3For the avoidance of doubt, the values of WI and W2 that are used inapplying the formula for the calculation of MAP, for a RegulatedDistribution System as set out in Section 4.2.1 may vary as betweenRegulated Distribution Systems.

4.20 Side ConstraintDuring the Regulatory Reset Process for the Subsequent Regulatory Period underArticle VII, the ERC must determine, in respect of each Regulated DistributionSystem, the amount of the Side Constraint referred to in Section 6-4.1, whichamount must be the same for each Regulatory Year in the Subsequent RegulatoryPeriod (but may vary as between Regulated Distribution Systems).

4.21 Quantity Forecasts4.21.1During the Regulatory Reset Process for the Subsequent Regulatory Period

under Article VII, each Regulated Entity must provide the ERC with itsforecasts, for each Regulatory Year in the Subsequent Regulatory Period, ofthe total amount of energy (expressed in kWh) forecasted to be deliveredthrough each Regulated Distribution System operated by it, during that



Regulatory Year, to Distribution Connection Points in respect of thatRegulated Distribution System, such amount of energy being forecasted in amanner that is approved for this purpose by the ERC.

4.21.2During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity must provide the ERC with itsforecasts, for each Regulatory Year in the Subsequent Regulatory Period, ofthe total maximum demand22 (expressed in MW23) forecasted of eachRegulated Distribution System operated by it, during that Regulatory Year.These demand forecasts should be broken down into the following level ofdetail for each Regulatory Year:(a) co-incident maximum demand for the Regulated Distribution System, asmeasured at all Grid Connection Points and connection points togenerators, including embedded generation;

(b) maximum demand at each Grid Connection Point and connection pointsto generators, including embedded generation;(c) maximum demand at each major substation forming part of a RegulatedDistribution System;(d) maximum demand on each sub-transmission feeder (or combination offeeders where redundancy is built into the system); and(e) maximum demand on each major distribution feeder (or combination offeeders where redundancy is built into the system).

4.21.3During the Regulatory Reset Process for the Subsequent Regulatory Periodunder Article VII, each Regulated Entity must also provide the ERC with itshistorical energy consumption and maximum demand figures, in relation toeach Regulated Distribution System that is operated by it, for each of thefour Regulatory Yearsof the Previous Regulatory Period, for the FirstRegulatory Year of the Subsequent Regulatory Period as well as thebudgeted consumption and maximum demand for the Second RegulatoryYear (the budget period must include the Regulated Entity's bestestimates).

4.21.4The ERC must review the forecasts and historical figures referred to inSections 4.23.1, 4.23.2 and 4.23.3 to determine whether they arereasonable. For this the ERC may engage a Regulatory Reset Expert orRegulatory Reset Experts pursuant to Article XIV, or may conduct thereview internally. If the review is conducted by a Regulatory Reset Expertor Regulatory Reset Experts, once they present their written reports to theERC, the ERC must decide, following a consideration of the

22 The maximum demand at any point is defined as the highest peak demand experienced there (or forecast to beexperienced) over any half-hour period (or other period as approved) during a Regulatory Year. Half-hourly demandwill be determined by integrating (numerically or otherwise) the instantaneous demand experienced at that point forthe half-hourly period.

23 Where demand is measured in apparent power terms (MY A), an appropriate conversion should be made to realpower (MW) using historical evidenc'e of the power factor experienced during peak demand times.



recommendations of the Regulatory Reset Expert or Regulatory ResetExperts as provided in their written reports, whether the relevant forecastsare reasonable. If:

(a) the ERC decides that those forecasts are reasonable, it must approvethem;(b) the ERC decides that those forecasts are not reasonable, it must, afterconsulting with the relevant Regulated Entity, approve those forecasts withsuch amendments as the ERC considers necessary to make themreasonable.


rules for setting distribution wheeling rates

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