pemc draft market fee setting rules
TRANSCRIPT
Philippine Electricity Market Corporation: Draft Market Fee Setting Rules from 2010
22 December 2009
1
Table of Contents
Introduction .............................................................................................. 2
Preliminaries ............................................................................................ 3
Cross references ........................................................................................ 3Definitions ................................................................................................... 3Status of the Market Fee Setting Rules (MFSRs) ....................................... 6
Objective of the Market Fee Setting Rules ............................................. 6
Control of market fees ............................................................................. 6
Form of control ........................................................................................... 6Scope of control .......................................................................................... 7Control period ............................................................................................. 7Output specification and WESM Work Plan ................................................ 7Performance indicators ............................................................................... 8
Derivation of revenue cap and market fee rates ................................... 8
Regulatory years ........................................................................................ 8Revenue control model ............................................................................... 8Annual Revenue Requirement .................................................................... 9Calculation of the Smoothed Maximum Allowable Revenue (SMAR) .......... 9Maximum Allowed Revenue ..................................................................... 11Estimation of cost “building blocks” for ARR estimate ............................... 13Arrangements for recovering establishment costs .................................... 15Prudency and efficiency of Revenue Proposal .......................................... 15Structure of market fees ........................................................................... 16Setting market fees ................................................................................... 16
Process and timelines for Revenue Proposals ................................... 17
Process and timelines for Revenue Proposal ............................................ 17Timeline and process for annual MAR verification .................................... 19
Reopening Revenue Control Determination ........................................ 20
Process for amending MFSRs .............................................................. 20
2
Introduction
1. This document sets out the draft Market Fee Setting Rules (MFSRs). The MFSRs, once finalised, will prescribe the arrangements under which Wholesale Electricity Market Spot Market (WESM) fees are to be set. Under the WESM rules the PEMC or the Market Operator (broadly, the ‘Authorized Entity’) submits a Revenue Proposal to the Energy Regulatory Commission (ERC). These draft MFSRs includes the procedures for developing Revenue Proposals, the specific method for setting the Maximum Allowed Revenues (MAR) and the method for calculating the Market Fee Rates.
2. These draft MFSRs were prepared by an ad hoc Technical Working Group (TWG) within PEMC. The draft MFSRs form part of PEMC’s proposal to the ERC for an output-based ‘building-block’ methodology for estimating MAR. An accompanying discussion paper dated October 2009 considers alternative options and explains the basis for these proposed MFSRs.
3. The discussion paper and these draft MFSRs were developed in response to the ERC’s decision on March 16, 2009.1
4. The draft MFSRs provide detailed rules for preparing Revenue Proposals, but do not in themselves constitute a Revenue Proposal.
The ERC approved further study and development of an output based methodology; the detailed draft rules and guidelines which would result from the study were to be submitted to the ERC for review, prior to the next fee setting process. Together with the TWG, a consultant, Kieran Murray of LECG, was hired by PEMC to assist in the formulation.
5. These draft MFSRs set out:
• Preliminaries
• Fee setting methodology
• Structure of market fees
• Fee setting process
• Transitory and savings provisions
1 ERC Case No 2008 – 050 RC
3
Preliminaries
Cross references
6. The Authorized Entity must apply the MFSRs in developing the structure and level of market fees in accordance with sections 2.10 and 2.11 of the WESM Rules.
7. When approving the structure and level of Market Fees, the PEMC Board and the ERC will consider whether the MFSRs were correctly applied. This consideration is in addition to ensuring that the proposed structure and level of Market Fees comply with all other relevant provisions of the EPIRA and WESM Rules.
8. Section 2.10.2 of the WESM Rules should be amended to say:
“… the Market Operator will develop the structure and level of market fees in consultation with WESM participants and in compliance with applicable Market Fee Setting Rules.”
Definitions
Annual Disclosure Statement
An annual statement produced by the Authorized Entity which includes the MAR for the forthcoming Regulatory Year, any Verification Adjustment value and re-estimates Market Fees for the forthcoming Regulatory Year.
ARR Annual Revenue Requirement before smoothing. This is calculated using the cost building blocks.
Capital charge A cost building block component calculated by multiplying the Regulated Asset Base plus Working Capital by WACC or an alternative estimate of the cost of capital, expressed as a percentage
Control The mechanism by which the Market Fee Rate(s) are monitored by the Energy Regulatory Commission via a Revenue Control Determination
Controlled outputs Outputs whose prices are subject to control under these Rules, as distinct from other potential outputs that could be delivered by the Authorized Entity but which are not subject to the MFSRs
Control Period The period, measured in years, for which the revenue of the Authorized Entity is set by the ERC on application by the Authorized Entity.
Cost building blocks Operating cost, tax, depreciation and cost of capital Cost of capital The cost of capital represents the opportunity cost of
investment in the Regulated Asset Base and in working capital. It is commonly measured as a weighted average,
4
expressed as a percentage. This is called the weighted average cost of capital or WACC. See ‘capital charge’.
CPI actual Philippine Consumer Price Index series, as reported by the National Statistics Office of the Philippines
CPI forecast Consumer price index forecast series in the Philippines, as forecast by the Development Budget Coordinating Committee (DBCC) and reported by the Bangko Sentral ng Pilipinas, National Economic Development Authority, and the National Statistical Coordination Board
Depreciation The return of capital as an asset is invested, which accounts for the gradual obsolescence or depletion of that asset.
EPIRA Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001
ERC Energy Regulatory Commission Form of Regulation The application of control to revenue, price or a combination Initial Capital Base The opening value of the Regulatory Asset Base (RAB) Input A factor required for the production of an output produced by
the Authorized Entity Input parameter Refers to a variable used to estimate MAR and/or SMAR MAR Maximum Allowable Revenue Market Fees Fees charged by the Authorized Entity to Market Participants
in accordance with these Market Fee Setting Rules and sections 2.10 and 2.11 of the WESM Rules
Market Fee Class A type or class of market fee, for example the Market Transaction Fee or Market Registration Fee
Market Fee Rate The unit price of a market fee MFSR Market Fee Setting Rules Market Information Website
A website maintained by the Authorized Entity where information can be accessed by Market Participants
MAR Model A spreadsheet model containing the calculations of Market Fees in compliance with the MFSRs
MAR Recovery Model
A model for calculation of conversion of the MAR for each Regulatory Year into a Fee for each Market Fee Class
Market Participant A WESM market participant, as defined in the WESM Rules
MTF Market Transaction Fee, a fee which is levied on transactions in the WESM or other markets
Market transaction volume
Market turnover, projected or actual, based on a measurable unit such as MWh traded
MRF Market Registration Fee, a fee which is levied on new or renewed registrations by Market Participants
Nominal Pesos Philippine Pesos of the day - not inflation adjusted Non-controlled outputs
Any services or outputs provided by the Authorized Entity but not subject to Control under these Rules
Operating costs Forecast annual operating expenditure before depreciation,
5
amortisation and all financing charges (i.e. interest and principal repayment). Also known as ‘opex’.
Output A description of the goods and services delivered by the Authorized Entity to WESM participants
PEMC Board The Board of Directors of PEMC PEMC Philippine Electricity Market Corporation Performance indicator
A measure of quality, timeliness etc
Php Philippine Pesos (unit of currency) RAB Regulated Asset Base RAB Roll-forward The calculation whereby the value of the RAB for Regulatory
Year t1, t2, t3 etc. is adjusted in accordance with a Roll-forward model to be included in the MAR Model
Real Philippine Peso Philippine Peso adjusted for inflation Regulated Asset Base
A valuation of the Authorized Entity’s assets.
Authorized Entity The entity that imposes any form of market fees on one or more groups of Market Participant, which makes it subject to the MFSRs. The entity imposing market fees may change from time to time, for example, following separation of an Independent Market Operator
Regulatory Year An annual period within the Control Period Revenue cap The MAR which is set for a given year of the control period Revenue Control Determination
A decision by the ERC setting an approved ARR, SMAR and MAR .
Revenue Proposal The market fee proposal submitted to the ERC according to 2.10 and 2.11 of the WESM Rules
Scope of control The extent of control, as defined in these Rules SMAR Smoothed Maximum Allowable Revenue. Transition period The period over which specified WESM establishment costs
may be recovered from Market Fees Verification Adjustment
An amount in Peso to adjust SMARt for over or under recovery between actual and allowable revenue in the previous Regulatory Year.
WACC Weighted Average Cost of Capital WESM Wholesale Electricity Spot Market WESM Rules The detailed rules that govern the administration and
operation of the WESM. Distinct from the Market Fee Setting Rules (MFSRs).
Working Capital A component of the capital charge which accounts for the Authorized Entity’s Current Assets and Current Liabilities.
6
Status of the Market Fee Setting Rules (MFSRs)
9. These draft MFSRs form part of a proposal to the ERC.
10. Once approved by the ERC, the MFSRs will constitute a rule by the ERC.
Objective of the Market Fee Setting Rules
11. The primary objective of the MFSRs is to prescribe arrangements for setting and approving the Market Fees payable by registered WESM Market Participants under 2.10 and 2.11 of the WESM Rules.
12. The Market Fees set under these MFSRs must:
a. Comply with EPIRA.
b. Comply with PEMC Articles and By-laws.
c. Be consistent with WESM objectives (Rule 1.2.5) ‘...to establish a competitive, efficient, transparent and reliable market for electricity where:
i. A level playing field exists among WESM Participants;
ii. Trading of electricity is facilitated among WESM Participants within the spot market;
iii. Third parties are granted access to the power system in accordance with the Act;
iv. Prices are governed as far as practicable by commercial and market forces; and
v. Efficiency is encouraged.
Control of market fees
Form of control
13. The Authorized Entity shall collect Market Fees fromMarket Participants . Market Fees must be set in accordance with the MFSRs and are charged for delivering outputs within the Scope of Control.
14. Total revenues from Market Fees are controlled under these MFSRs and the amended WESM Rules.
15. The control takes the form of a Maximum Allowable Revenue (MAR) cap, with annual verification of tariffs.
16. Before the beginning of a Control Period, the ERC will determine the level of Smoothed Allowable Revenue (SMAR) for each Regulatory Year of the
7
Control Period. The SMAR is used to set the parameters which determine how revenue is ‘rolled-forward’ to determine the Maximum Allowable Revenue (MAR) that the Authorized Entity may charge Market Participants in any year.
17. The Authorized Entity’s revenues will be subject to an Annual Verification, following which, adjustments to the level of MAR for the upcoming Regulatory Year may be made in accordance with paragraphs 88 to 95.
18. The Authorized Entity may recover MAR from any class of Market Fee, provided the Fee Structure is approved in accordance with paragraphs 64 to 69 of these Rules.
19. Market Fees may be applied to all outputs within the Scope of Control or may be sub-divided to correspond to particular output classes.
Scope of control
20. The MFSRs apply to outputs produced or procured by the Authorized Entity that are recovered using any class of Market Fee.
21. In the event that the Authorized Entity produces other outputs that are not recovered using Market Fees, and are thus not subject to the MFSRs, these outputs are ‘non-controlled’.
22. While the same personnel may be involved in producing both controlled and non-controlled outputs, the Authorized Entity must put in place policies and procedures to ensure financial separation between controlled and non-controlled outputs. The Authorized Entity should disclose the existence and broad nature of non-controlled outputs, and a description of separation policies and procedures, in its Revenue Control Proposal and in its Annual Disclosure Statement.
Control period
23. The Control Period may have duration of between two and five Regulatory Years.
24. In its Revenue Proposal, the Authorized Entity must set out the proposed duration of the Control Period. This period of duration may be expressed in calendar years or other annual periods as determined by the PEMC Board.
Output specification and WESM Work Plan
25. In preparing its Revenue Proposal, the Authorized Entity must provide a specification of the major outputs or services provided to WESM Participants within the Scope of Control (an Output Specification).
8
26. The Authorized Entity must ensure that the Output Specification is quantifiable and verifiable. For the Output Specification to be quantifiable and verifiable, it is not necessary for the Revenue Proposal to quantify inputs, provided the principles for allocating costs between outputs are stated.
27. The Output Specification and estimation of efficient Annual Revenue Requirements (ARR) must be consistent with achieving the WESM objectives as set out in clause 1.2.5 of the WESM Rules.
Performance indicators
28. Nothing in these MFSRs affects paragraph 1.3.3.3 of the WESM Rules which requires the Market Operator to publish performance indicators annually.
Derivation of revenue cap and market fee rates
Regulatory years
29. When a calculation is required under these MFSRs:
a) Regulatory Year “t” or calendar year “t” is the Regulatory Year or calendar year (as the case may be) in respect of which the calculation is being made;
b) Regulatory Year “t-1” or calendar year “t-1” is the Regulatory Year or calendar year (as the case may be) immediately preceding Regulatory Year “t” or calendar year “t”;
c) Regulatory Year 1 is the first Regulatory Year of the Control Period;
d) Regulatory Year 0 is the year prior to the first Regulatory Year of the Control Period.
Revenue control model
30. The PEMC Board must publish a MAR Model in electronic spreadsheet form no later than the date at which it publishes its draft Revenue Proposal.
31. The MAR Model must be made available to WESM participants and the Department of Energy by publication on the Market Information Website.
32. The purpose of the MAR Model is to calculate the Smoothed Maximum Allowable Revenue under the Revenue Proposal. The MAR Model, together with the Revenue Proposal, form the basis on which WESM participants and the ERC assesses a Revenue Proposal and the ERC makes a Revenue Control Determination.
9
33. The content of the MAR Model will:
a) Summarise operating costs according to outputs;
b) Calculate the SMAR 36series, in accordance with paragraph of these Rules;
c) Calculate MAR1
d) Include a MAR Recovery Model, in accordance with paragraphs
, in accordance with paragraph 39-43 of these Rules;
71 to 75 of these MFSRs.
34. In interpreting the requirements for the MAR Model, the Authorized Entity and the PEMC Board must apply the Principle of Proportionality. This principle means that the costs of complying with these MFSRs should not exceed the benefits, taking into account the nature and scale of the operations undertaken, and assets managed, by the Authorized Entity.
Annual Revenue Requirement
35. The Authorized Entity will calculate in its Revenue Proposal an Annual Revenue Requirement (ARR) for each regulatory year of the Control Period. The ARR for each year of the Control Period (ARRt
a) ARR
) will equal the sum of the following components:
t= sum(Ot, Tt, Dt, Ct) + TA
Where:
O
t
t = Operating costs, as defined in paragraph 44 of these MFSRs;
Tt = Taxation, as defined in paragraph 45 of these MFSRs;
Dt = Depreciation, as defined in paragraph 46 of these MFSRs;
Ct = Capital charge, as defined in paragraph 47 of these MFSRs;
TAt
Calculation of the Smoothed Maximum Allowable Revenue (SMAR)
= A transitional allowance for recovering establishment costs, as described in paragraphs 59 to 61 of these MFSRs.
36. It is unlikely that there will be a linear increase in the Annual Revenue Requirement for each Regulatory Year calculated under paragraph 35. To reduce the likelihood of price shocks to Market Participants and revenue shocks to the Authorized Entity, the Authorized Entity will smooth the allowed Annual Revenue Requirement for each year in the Control Period by starting at the Maximum Annual Revenue for the last Regulatory Year prior to the Control Period.
10
37. The first step in smoothing the revenue over the Control Period is to calculate the present value of the unsmoothed revenues for each year in the Control Period and the revenue for the last Regulatory Year prior to the Control Period (PVRaw
PV
) as follows:
Raw = (MAR0 - Po ) + ARR1 / (1 + WACC) 1 + ARR2 / (1 + WACC) 2 + ARR3/ (1 + WACC)3+ Where: MAR0
P
= Maximum Allowed Revenue determined for the last Regulatory Year prior to the Control Period.
0 = is such amount (expressed in PhP) as represent windfall gains
and windfall losses in revenue resulting from exogenous factors in MAR0
96 which if had occurred in a prior year would have
satisfied the criteria for a Re-opening under paragraph ; the P0
ARR
adjustment may be a positive or negative value.
1
35 = the annual revenue requirement for the first Regulatory Year in
the Control Period calculated under paragraph of these Rules. ARR2
35 = the annual revenue requirement for the second Regulatory Year in
the Control Period calculated under paragraph of these Rules. ARR3
35= the annual revenue requirement for the third Regulatory Year in the
Control Period calculated under paragraph of these Rules. WACC = the weighted average cost of capital calculated under paragraph
49 to 51 of these Rules.
38. The second step in calculating the smoothed revenue is to calculate the Efficiency Factor (X) for the Control Period from the solving the following equation (where only X is unknown) using the results for PVRaw
37 on the left
hand side of the equation from the output of the calculation in paragraph above:
PVRaw = (MAR0- P0) x [1 + (1 + Inflation1 - X) / (1 + WACC) + (1 + Inflation1 - X) (1 + Inflationt2 - X) / (1 + WACC)2 + (1 + Inflation1 - X) (1 + Inflationt2 - X) (1 + Inflation3- X) / (1 + WACC)3 Where:
11
Inflationt
WACC = the weighted average cost of capital calculated under paragraph
= the forecast inflation for Regulatory Year t, expressed in decimal (as opposed to percentage) terms, which is used by the ERC for the purpose of the Regulatory Reset Process for the Control Period.
49 to 51 of these Rules. MAR0= Maximum Allowed Revenue in the last Regulatory Year prior to the
Control Period. P0 = is such amount (expressed in PhP) as represent windfall gains
and windfall losses resulting from exogenous factors in MAR0,
39. Lastly, calculate the SMAR targets for each of the three years in the regulatory period, where:
and determined under paragraph 37 of these Rules.
a) The target for year 1 is SMAR1 40 as per paragraph (a), below.
b) The target for years 2 & 3 are:
SMAR2 = SMAR1 x (1+ inflation2 – X)
SMAR3 = SMAR3 x (1+ inflation3
Maximum Allowed Revenue
– X)
40. The Maximum Allowed Revenue that the Authorized Entity may earn in a Regulatory Year, will be determined as follows:
(a) Where the relevant Regulatory Year is the first Regulatory Year in the Control Period, the Maximum Annual Revenue for that Regulatory Year (MARt
MAR
) shall be set out in the Revenue Proposal and shall be calculated as follows:
1 = SMAR1 = (MAR0 - P0) x (1+Inflation1 -X) + VA
(b) Where the relevant Regulatory Year is any Regulatory Year in the Control Period after the first Regulatory Year, the Maximum Annual Revenue for that Regulatory Year (MARt) shall be set out in the Annual Disclosure Statement and shall be calculated as follows:
0
MARt = MARt-1 x (1 + Inflationt - X) + VA
MAR
t
Where:
t = the Maximum Allowed Revenue (expressed in PhP) for a given Regulatory Year in the Control Period, year t.
12
Inflationt
X = Efficiency Factor (X) for the Control Period determined under paragraph
= the percentage change in the Consumer Price Index from the previous year.
38; the X factor may be a positive or negative value.
VAt
41
= the Verification Adjustment to adjust for over or under recovery between actual and allowable revenue in the previous Regulatory Year, determined in accordance with paragraph ; the Verification adjustment may be a positive or negative value.
P0
41. The Verification Adjustment (VA) will be determined as follows:
= is the amount (expressed in PhP) representing gains and losses resulting from exogenous factors determined in paragraph 37 above.
VAt = (MARt-1 – MARt-1a) + (MARt-1 - TRt-1)
Where:
MARt-1 = Maximum Allowed Revenue that was determined for the previous Regulatory Year.
MARt-1a = The Maximum Allowed Revenue that would have been determined for the previous Regulatory Year, if the inflation forecast was equal to actual inflation for that period..
TRt-1
42. If VA is negative, then there is a revenue shortfall in the Regulatory Year to which the Verification Adjustment applies. The Verification Adjustment will be recovered by adding it to the MAR for the following year as provided for in paragraph
= is the amount expressed in Peso billed or expected to be billed by the Authorized Entity to Market Participants in the previous Regulatory Year, the fee rates having been approved by the ERC in accordance with these Market Fee Setting Rules and sections 2.10 and 2.11 of the WESM Rules, that amount being determined using actual transaction volumes for the year or using the most up-to-date transaction volume figures available at the time the calculation is performed, forecast to the end of the year.
40.
43. If VA is positive, then the Authorized Entity has billed Market Participants an amount in excess of the MAR. This excess amount must be returned to Market Participants by deducting it from the MAR for the following year.
44. For the avoidance of doubt the Authorized Entity will not be compensated or compensate Market Participants for the time value of money associated with the Verification Adjustment.
13
Estimation of cost “building blocks” for ARR estimate
45. Operating costs are calculated as the sum of the reasonably efficient personnel costs and non-personnel costs necessary to deliver the controlled outputs, including an amount for estimated bad debts.
46. Taxation costs represent all national and local taxes incurred on revenue and on input costs by the Authorized Entity in delivering the controlled outputs.
47. Depreciation costs are calculated as the return of capital invested in fixed or intangible assets, as per the Regulated Asset Base (RAB), excluding any land or other assets that do not depreciate. Depreciation shall be in accordance with a depreciation method to be determined by the Authorized Entity.
48. The Capital Charge is calculated by multiplying the average value of the Regulated Asset Base (RAB) for each year of the Control Period plus Working Capital by the WACC, expressed as a percentage.
Capital charge = (RAB+WC) x WACC (%)
49. The Authorized Entity may elect to calculate WACC using following default method, which incorporates the Capital Asset Pricing Model (CAPM). The default method is deemed an acceptable method for estimating WACC for the purposes of estimating ARR. The default method is as follows:
WACC = (re * E/V) + (rd*D/V) +Kw
Where:
re = the cost of equity (in percent)
rd = the cost of debt (in percent)
E = the amount of equity funding assumed for Control purposes (in PhP)
D = the amount of debt funding assumed for Control purposes (in PhP)
V = E+D (in PhP)
Kw
50. If the Authorized Entity elects not to follow the default method provided above, the reasons for the decision and the alternative method used must be stated in the Revenue Proposal.
= correction factor to compensate for WACC model and parameter estimation error (in percent)
51. In proposing WACC under the default or any alternative method, the WACC is to take a post-tax nominal form in order to be consistent with the MAR formula.
14
52. In its MAR Model and Revenue Proposal, the Authorized Entity must publish the calculation of the WACC which will apply for the Control Period. The Authorized Entity shall disclose values for the following parameters:
a) nominal risk free rate;
b) forecast inflation rate;
c) debt risk premium;
d) market risk premium;
e) gamma (in the event tax is payable and imputation or franking credits are relevant);
f) proportion of debt funding;
g) equity beta
h) The value attributed to the correction factor (Kw
53. RAB is a regulatory valuation of the Authorized Entity’s assets, insofar as those assets are used, directly or indirectly, in producing controlled outputs.
) to compensate for WACC model and parameter estimation error.
54. In its revenue proposal for the first Control Period under which the MFSRs apply, the Authorized Entity must set out the level of its estimated Initial Capital Base (ICB) or “opening RAB”. The ICB will be estimated from the accounting value of the Authorized Entity’s asset base, subject to any adjustments deemed necessary and justifiable to ensure future Controlled revenues are set at efficient levels.
55. The basis for adjustments made under paragraph 54 must be clearly and transparently set out in the Revenue Proposal and MAR Model, including provision of reconciliation between the ICB and financial statements.
56. The estimated ICB and subsequent capital base will include an allowance for Working Capital. The Working Capital allowance represents an estimate of the Authorized Entity’s working capital requirements at a point in time. .
57. The Revenue Proposal and MAR Model must specify the method for estimating the Working Capital allowance. This method will recognise the variations in current assets and current liabilities from month to month and hence peak working capital requirements, using a weighted average.
58. In its MAR Model and Revenue Proposal, the Authorized Entity must prepare and publish in the Market Information Website a Roll-Forward Model for determining the Roll-Forward of the RAB during the Control Period, calculated as follows:
Average RAB for Regulatory Year t = Sum (RABta, RABtb) /2
Where:
RABta = the value of the RAB on the first day of the Regulatory Year t
15
RABtb = the value of the RAB on the last day of the Regulatory Year t
RABtb is derived from RABt1 as follows;
RABtb
59. In its revenue proposal for the second and subsequent Control Periods under which the MFSRs apply, the Authorized Entity may propose an alternative method for valuing its “opening RAB”, where an alternative method can be justified to ensure future Controlled revenues are set at efficient levels.
= Sum (RABta, C) - (D, A)
Where:
C = Capital expenditure
D = Depreciation
A = Sale or other disposal of an asset, the disposal being recorded at the asset’s depreciated historical cost.
Arrangements for recovering establishment costs
60. The MAR incorporates a separate building block item for the recovery of establishment costs, the Transitional Allowance (TA).
61. Establishment costs may only be recovered using Market Fees if recovering the costs through Market Fees does not result in duplicate recovery. The establishment costs shall include the remaining annual repayments of the TransCo loan , inclusive of interest repayments at the agreed rate of interest, and the annual amortisation of the Market Management System (MMS) asset.
62. Recovery of establishment costs is limited to a Transition Period. In its first Revenue Proposal, the PEMC Board may set out proposals on the remaining duration of the Transition Period. The PEMC Board must also disclose the calculation of establishment costs on the Market Information Website. Accordingly, the MAR Model must include a sheet that details the calculation of the proposed recovery of establishment costs.
Prudency and efficiency of Revenue Proposal
63. In developing its Revenue Proposal, the Authorized Entity must consider:
a) The efficiency and prudency of each of the cost building blocks; and
b) The quantity and quality of outputs produced by the Authorized Entity.
16
Structure of market fees
64. The Authorized Entity may impose more than one type of Market Fee, using different Fee Classes.
65. The Authorized Entity must submit, in the Revenue Proposal, a Fee Structure Proposal that determines the Fee Classes for Market Fees.
66. Fee Classes may include, but are not limited to the following:
a) A Market Transaction Fee (MTF) for every kWh of electricity traded through the WESM (both Metered Energy and Scheduled Reserve as defined in the WESM Rules);
b) A Market Registration Fee (MRF) relating to the cost of registration; and
c) One or more fees for New Market Services (NMS) that may be introduced by the Authorized Entity.
67. The Fee Structure Proposal must include proposals about how costs will be allocated to each Fee Class, and how each Fee Class will be charged to different categories of Market Participants.The Authorized Entity may propose to apply different rates to different categories of Market Participant in a given Fee Class, provided that every participant is charged the same fee rate as others in the same category.
68. In the event that the governance and operational functions undertaken by the Authorized Entity are separated, the Authorized Entity should submit a new Fee Structure Proposal which reflects these changes.
69. In developing the Fee Structure Proposal, the Authorized Entity must take into account whether the fee structure:
a) Is reasonable given the relative involvement of each category of Market Participant in the output(s) provided;
b) Favours or discriminates against a category or categories of Market Participant; and
c) Prevents duplication of recovery of costs.
Setting market fees
70. In developing its Revenue Proposal and MAR Model, the Authorized Entity must convert the MAR for each Regulatory Year into a Market Fee Rate or set of Market Fee Rates, denominated in nominal Philippine Pesos, for each Fee Class and for each category of Market Participant.
71. The MAR Model must incorporate a MAR Recovery Model, which converts MARt to Market Fee Rate(s). The MAR Recovery Model must stipulate the volume assumptions used to convert revenues into Market Fee Rates for each Fee Class and for each year of the Regulatory Control Period.
17
72. The Authorized Entity must specify annual target recovery amounts for each fee class in the Revenue Proposal and the MAR Recovery Model.
73. The formula for setting the MTF Rate is:
Annual target recovery amount for Market Transaction Fees /
[Forecast Total Generation Metered Quantity for the Year (kWh) + Forecast Total Reserve Scheduled for the Year (kWh)]
Where:
Annual target recovery amount for Market Transaction Fees = MARt
74. The MAR Recovery model must apply the following formula to convert the MTF rate to the fixed fee rate for each regulatory year:
less the sum of annual target recovery amounts from all other Fee Classes.
Monthly MTF charge (PhP/kWh) for each category ofMarket Participant =
[MTF Rate * (Total Generation Metered Quantity for the Month (kWh) + Total Reserve Scheduled for the Month (kWh)).
75. Market Transaction Fees will be recovered from Market Participants on a monthly basis. The Authorized Entity must issue invoices and the MTFs will be payable by Market Participants within the periods specified under the WESM Rules.
Process and timelines for Revenue Proposals
Process and timelines for Revenue Proposal
76. The Revenue Proposal process must begin no less than six (6) months before expiry of the existing Control Period.
77. To initiate the process, the Authorized Entity must issue notices on the Market Information Website that a Revenue Control is due to expire and that a new Revenue Proposal is being prepared.
78. The Authorized Entity will then prepare the following consultation documents and post them on the Market Information Website:
a) A brief paper summarising the package of documents;
b) A draft output specification for the duration of the following Control Period, including proposed changes to the specification of outputs in line with the current Work Program, performance indicators and including details of the cost allocation methodology used to share costs between different outputs;
c) A draft Revenue Proposal for the duration of the following Control Period, including changes in the outlook for the major cost building blocks and designated input parameters;
18
d) A draft MAR Model and MAR Recovery Model in spreadsheet form; and
e) A proposal regarding the timing of the Verification Adjustment.
79. The Authorized Entity is required to publish its forecast and actual operating expenditures in accordance with WESM Rule 2.11. For the avoidance of doubt, these should be published in ‘output’ form.
PEMC Board to facilitate consultation 80. All WESM Market Participants and the Department of Energy may furnish
submissions to the PEMC Board on any matter contained in the consultation documents.
81. In setting the due date for submissions, the Authorized Entity should provide Market Participants and the Department of Energy no less than one month to prepare submissions.
82. The Authorized Entity is required to publish all submissions received (provided they are received on or before the due date) on the Market Information Website.
83. The PEMC Board may choose to hold a hearing or hearings to enable an interactive discussion of any issues arising in relation to the consultation materials or submissions received.
Final Revenue Proposal for ERC Control Decision 84. The Authorized Entity must consider matters identified in submissions
received by the due date and prepare a final Revenue Proposal to the PEMC Board not less than four (4) months before expiry of the existing Control Period. In this respect, the Authorized Entity must identify and address all material matters reasonably raised by Market Participants.
85. The ERC will consider the final Revenue Proposal submitted by the Authorized Entity against the criteria set out in paragraph 12. If the final Revenue Proposal reasonably meets the criteria set out in paragraph 12 the ERC will approve the Revenue Proposal. If the ERC considers that the criteria in paragraph 12 have not been met, the ERC, after consulting with the Authorized Entity, will approve a Revenue Proposal with such modifications as it considers are necessary for those criteria to be met. The approved Revenue Proposal is referred to under these rules as the Revenue Control Determination.
PEMC response to Revenue Control Determination 86. The Authorized Entity must publish the entire Revenue Control
Determination in the Market Information Website immediately upon official receipt of the Revenue Control Determination.
87. Within one calendar month from publication of the Revenue Control Determination, the Authorized Entity must inform Market Participants how it intends to implement the Revenue Control Determination and whether the
19
Revenue Control Determination affects the proposed Output Specification or Market Fee Rates. The Authorized Entity may inform Market Participants by publishing a notice on the Market Information Website.
Timeline and process for annual MAR verification
88. Annual MAR Verification is to occur no later than two months before the end of each Regulatory Year, on a date which is to be specified in the Revenue Proposal (the verification date).
89. If no verification date is specified in the Revenue Proposal, the annual verification date will be 30 November.
90. The purpose of Annual MAR Verification is to:
a) Determine the Verification Adjustment, if any, to adjust for over or under recovery between actual and allowable revenue.
b) Verify the MAR for the forthcoming Regulatory Year, which incorporates the most recent available forecast of CPI for the forthcoming Regulatory Year.
91. In its Annual MAR Verification, the Authorized Entity will calculate and present to the ERC for verification the Maximum Allowed Revenue the Authorized Entity may charge Market Participants in the forthcoming Regulatory Year by applying the revenue control formula set out in paragraph 0 and the Verification Adjustment set out in paragraph 41
92. The Authorized Entity will also calculate and present to the ERC for verification the Market Transaction Fees that will be charged to each class of Market Participant, using the most recent available forecasts of market volumes for the forthcoming Regulatory Year.
93. The Adjustment Value and re-estimates of Fee Rates are to be presented to the ERC in an Annual Disclosure Statement within ten working days following the verification date.
94. If the ERC does not object to the Verification Adjustment value, the MAR, and Market Transaction Fees, by the end of the Regulatory Year, or within two (2) months of the verification date, then the Authorized Entity may make the change to the MAR for the following Regulatory Year and recalculate the Fee Rates for the following Regulatory Year.
95. The Authorized Entity must publish the Annual Disclosure Statement and modified Fee Rates on the Market Information Website no later than 10 business days from the start of the new Regulatory Year. It may then invoice Market Participants in accordance with the monthly billing cycle.
20
Reopening Revenue Control Determination
96. The ERC may reopen a Revenue Control Determination, on application by the Authorized Entity, for re-consideration in any event or series of events that have resulted in, or are likely to result in, a revenue shortfall or excess revenue due to:
a) Unforeseen capital expenditure requirements at levels materially above or below the forecast used to inform the Revenue Control Determination; or
b) A change in regulatory mandate; or
c) A significant change in market structure or design, including IMO separation.
Provided that such shortfalls or excesses are outside of the Authorized Entity’s control and if it had been known at the time of the Revenue Control Determination the building blocks used to set the parameters would have been different.
97. If a Revenue Control Determination is reopened, all of the building blocks or other key parameters constituting the existing Revenue Control Determination may be subject to review.
98. The reopening process will be initiated by way of a formal letter to the PEMC Board from the ERC, or by a formal proposal to the ERC from the PEMC Board, or from the Authorized Entity with the prior approval of the PEMC Board. Such letters or proposals must set out the reasons for the reopening, consistent with section 96.
99. The PEMC Board and/or Authorized Entity shall set out the timeline and process for reopening in its proposal to the ERC, which, once accepted will be binding.
100. Pending ERC’s decision, the existing Revenue Control Determination will apply.
Process for amending MFSRs
101. These MFSRs may be amended or modified from time to time, subject to the ERC Rules of Practice and Procedure.
21
102. A rule adopted by resolution of the ERC cannot be the subject of a motion for reconsideration. Any person adversely affected by the rule may petition the Commission to initiate rule-making under the ERC Rules.