PERFORMANCE

BASE RATE
(PBR)
Reporter:

CHRISBELLE ANGELITUD
MA. DANICA TRISTE
Topics C o v e r e d

[Link] is the Performance-

based Methodology (PBR)?

The Legal Basis of the

II.

PBR Methodology

III. Benefits of the PBR

Methodology

IV. Conclusion
I. W h a t is the
P e r f o r m a n c e - based
Methodology (PBR)?
 P e r f o r m a n c e - based Rate
Methodology (PBR)
It is an internationally-accepted methodology
w h i c h uses projections of operating and
capital expenditures to enable the regulator to
evaluate investment in facilities to meet
customer requirements and prescribed
s e r v i c e levels
 It also h a s a p e r f o r m a n c e incentive s c h e m e b y
w h i c h the r e g u l a t o r p r o v i d e s incentives a n d
penalties to the utility to c o m p e l it to be m o r e efficient
a n d reliable, w h i l e maintaining r e a s o n a b l e r a t e s a n d
i m p r o v i n g the quality of s e r v i c e to a c h i e v e p r e -
d e t e r m i n e d t a r g e t levels.

In the Philippines:
• A r e v e n u e - c a p regulation f o r the T r a n s m i s s i o n Utility since 2 0 0 3
•A p r i c e - c a p regulation f o r the Distribution Utilities p a s s e d in 2 0 0 6
to r e p l a c e R e t u r n on Rate Base (RORB) M e t h o d o l o g y Applies to 19
i n v e s t o r - o w n e d DUs
II. The Legal Basis of the PBR
Methodology
 The determination of the appropriate methodology is c o v e r e d b y the
r a t e - setting function of the ERC under the EPIRA.

“In the public interest, establish and enforce a methodology for

setting transmission and distribution wheeling r a t e s and retail
r a t e s f o r the captive m a r k e t of a distribution utility, taking into
account all relevant considerations, including the
efficiency o r inefficiency of the regulated entities. The
r a t e s must be such as to allow the r e c o v e r y of just
and reasonable costs and a reasonable
r e t u r n on rate base (RORB) to enable the
entity to operate viably. The ERC may
adopt alternative f o r m s of internationally-
accepted r a t e - setting methodology as it m a y d e e m
appropriate. The ratesetting methodology so adopted and
applied must ensure a reasonable price of electricity. The rates
prescribed shall be nondiscriminatory.” [Section 43(f) of the EPIRA]
 Regulatory F r a m e w o r k in the
Rate-Setting Function of the ERC

“The retail r a t e s c h a r g e d b y distribution utilities f o r

the supply of electricity in their captive m a r k e t
shall be subject to regulation b y the ERC based on
the principle of full r e c o v e r y of prudent and
reasonable economic costs incurred, o r such
other principles that will p r o m o t e efficiency as
m a y be determined b y the ERC.” [Section 2 5 of the
EPIRA]
Exercise of Reasonable Discretion in the RateSetting Function
of the Government

“There is a legal presumption that the fixed rates

are reasonable, and it must be conceded that the
fixing of rates by the Government, through its
authorized agents, involves the exercise of
reasonable discretion and unless there is an abuse
of that discretion, the courts will not interfere.”
[NASECORE v. MERALCO,
10 October 2016]
 Timeline: Shift f r o m the RORB Methodology to the PBR
Methodology

Old Regime: The Rate on Return Base (RORB)

Methodology

Under the RORB Methodology, rat es a r e set to

r e c o v e r the cost of s e r v i c e incurred b y the
distribution utility plus a reasonable r a t e of return,
w h e r e b y historical costs a r e used to determine
the revenue requirement. [NASECORE v.
MERALCO, 10 October 2016]
 Exercise of Reasonable Discretion in the RateSetting Function of the
Government

The ERC subsequently issued the following:

[Link] Resolution No. 12-02, Series of 2 0 0 4
w h i c h promulgated the Distribution Wheeling Rate
Guidelines (DWRG) w h i c h w o u l d g o v e r n the setting of
distribution rates of privately- o w n e d distribution utilities
that will enter into the n e w PBR System.

[Link] Resolution No. 39, Series of 2 0 0 6 w h i c h

promulgated the Rules f o r Setting Distribution Wheeling
Rates (RDWR) f o r privately o w n e d distribution utilities
entering the PBR System
 Factors considered b y the ERC in shifting to the PBR
Methodology

A. C o n c e r n s a n d Issues on the RORB M e t h o d o l o g y

•Since the a p p r o a c h is b a c k w a r d - looking, electricity prices set do
not reflect actual costs at the time the electricity is provided.

•T h e r e is no incentive f o r the utilities to be m o r e efficient in planning their

expenditure. Since the RORB Methodology uses historical costs, there is no
incentive to undertake capital expenditures since investments to upgrade
the s y s t e m and i m p r o v e s e r v i c e w e r e not considered until the next r a t e
application.

•The prolonged reset p ro ce ss w h i c h must be done periodically

causes delay in the updating of prices and can be v e r y costly to
undertake fo r utilities.
 Factors considered b y the ERC in shifting to the PBR
Methodology

B. Considerations f o r the shift to the PBR M e t h o d o l o g y

• It is relevant in the restructuring of the electric p o w e r industry.
•It follows the r a t e - setting methodology adopted and being implemented
in other jurisdictions.
•The PBR methodology uses projections of operating and capital
expenditures to meet projected demand, t h e r e b y enabling the regulated
entities to invest in facilities to meet c u s t o m e r requirements and prescribed
s e r v i c e levels.
•The PBR methodology has p e r f o r m a n c e incentive scheme w h i c h
provides incentives and penalties to the utility to compel it to be m o r e
efficient and reliable, while maintaining reasonable r a t e s and improving the
quality of s e r v i c e to achieve p r e - determined target levels.
 Reason f o r the shift to the PBR
Methodology
In its O r d e r dated 12 July 2010 in ERC Case No. 2 0 0 5 - 041 RC, the
ERC further explained the reason f o r adopting the PBR:

“The ERC adopted the PBR methodology since it has strong

efficiency incentives f o r the utility embedded in its f r a m e w o r k to
motivate the regulated entity to r e d u c e its cost, thus, become
more efficient while maintaining its service delivery
performance.”
 Reason f o r the shift to the PBR
Methodology
“In the light of economic efficiency, R.A. 9136 requires that the
r a t e - setting methodology to be adopted is one w h i c h will
p r o m o t e efficiency. The PBR methodology has other
characteristics w h i c h support the implementation of an
internationally-accepted r a t e - setting methodology, such as
strong incentives to r e d u c e the costs of s e r v i c e delivery and
maintain s e r v i c e quality and p e r f o r m a n c e w h i c h a r e taking
to price- c a p and r e v e n u e regulation o r variants of
incentive- based regulation seen overseas. The
‘Rate-of-Return Regulation’ has gradually given w a y to
‘Price-Cap Regulation’ as the p r e f e r r e d method of regulating
public utilities.”
PBR is
Efficiency and
pro-consumer reliability
would eventually
PBR better serves the interest result in lower
electricity
of the consumers. PBR cost. PBR serves
the interest of
encourages CAPEX to improve consumers since
it enables DUs
efficiency and reliability of to meet customer
requirements and
service: pre-determined
• Less unexpected price service levels.
spikes
•Efficiency and reliability a r e incentivized
• Reduced regulatory
while inefficiency and unreliability a r e penalized
uncertainty
• Upgraded and i m p r o v e d
 T h e v a l i d i t y a n d r eas onabi l i t y of the PBR M e t h o d o l o g y h a v e
been p r e v i o u s l y a f f i r m e d b y no less than the S u p r e m e Court.

NASECORE v. MERALCO [ 10 October 2016]

•Petitioners therein alleged that the PBR Methodology

is inconsistent w i t h and c o n t r a r y to the provisions of
the EPIRA (i.e., it does not ensure affordable and
reasonable rates, c o n t r a r y to the EPIRA mandate to
protect interest of consumers, allows MERALCO to r e a p
unreasonably high profits, etc.)

•These a r e the v e r y s a m e issues raised to question

the PBR in the M S K case
 NASECORE v. M E R A L C O [G.R. No. 191150, 10 O c t o b e r 2016

The S u p r e m e Court denied the Petition and stated that:

“The rule is settled that ‘[a]dministrative regulations enacted b y

administrative agencies to implement and interpret the l a w w h i c h
they a r e entrusted to enforce h a v e the f o r c e of l a w x x x and enjoy
the presumption of constitutionality and legality x x x ”

“It must be stressed that since r a t e - fixing calls f o r a technical

examination and a specialized r e v i e w of specific details w h i c h the
courts a r e ill-equipped to enter, such m a t t e r s a r e primarily
entrusted to the administrative o r regulating authority.” “It should be
highlighted that no discernible objection w a s raised b y petitioners
during the public consultations conducted b y the ERC relative to its
shift to the PBR methodology.”
 NASECORE v. MERALCO [G.R. No. 191150, 10 October 2016

The Supreme Court also clarified the claim of the Petitioners that ERC’s
approval of the rates therein allowed MERALCO to amass excess profits which is
above the 12% return on investment generally allowed for public utilities pursuant
to MERALCO v. Lualhati [G.R. No. 166769, 6 December 2006], by stating that:
• The basis of the 12% pertains to the approval of MERALCO rates under the
former RORB methodology;
•The shift to the PBR methodology entailed a shift in the premises and
assumptions which are conceptually different from those followed under the
RORB Methodology; and
•The shift to the PBR methodology should be considered as a supervening
circumstance that rendered inconsequential the 12% return on investment allowed
under a previous decision of the Supreme Court. This issue was declared to be
MOOT.
 Rate of R e t u r n vs. Profits
•
EPIRA requires the ERC to regulate the r e t u r n of Transmission
C o m p a n y and DUs.

• Rate of Return is NOT s y nony m ous to Profits.

• Rate of Return under the PBR is a r e t u r n on investment

equivalent to the W A C C a p p r o v e d b y the ERC.

• Profit is actual r e v e n u e s less actual expenses of a DU.

• T h e r e is NO law, regulation o r SC Decision that provides

o r mandates the regulator to regulate the profit of
Transmission C o m p a n y o r DUs. o u r topic o r idea
Thus, a n y question as to the pr opr i et y of the
PBR Methodology, particularly on the m a t t e r s
w h i c h h a v e been settled b y the S upreme
Court, is m e r e l y a r e - litigation of issues
a l r e a d y settled b y the S u p r e m e Court w h i c h
had long become final.
III. Benefits of
PBR
Methodology
Benefits of PBR M e t h o d o l o g y

The PBR Methodology is consistent with the State

Policies of ensuring Quality, Reliability, Security and
Affordability of the supply of electric p o w e r .
[Section 2 of the EPIRA]
 Benefits of PBR Methodology
The PBR Methodology is intended to bridge the
gap b e t w e e n s e r v i c e quality and distribution
cost. B y allowing DUs to r e c o v e r rat es based
on projected operating and capital
expenditures, DUs a r e able to m a k e the
n e c e s s a r y investments to i m p r o v e efficiency
and s e r v i c e quality.

In the long run, these facilities will result in

m o r e efficient and i m p r o v e d quality of
s e r v i c e which, in turn, will l o w e r e l e c t r i c i t y
cost.
 Benefits of PBR Methodology

The PBR Methodology addresses o v e r and

under r e c o v e r i e s b y providing f o r mechanism
to c o r r e c t the rat es e v e r y reset.

It also provides f o r an audit of cost and

expenses every reset to check the
reasonableness of the forecasts and ensure
just and reasonable rates, while encouraging
efficiency.
IV. CONCLUSION
CONCLUSION:

The determination of the use of the PBR

Methodology is legal and reasonable.
M o r e importantly, it is consistent w i t h the p r o m o t i o n of
public i n t e r e s t as it provides substantial economic and
reliability benefits to electricity consumers, ensures
continued, sustainable operation of the transmission and
distribution utilities, and encourages stability in the m a r k e t
CONCLUSION:

The benefits of PBR will be achieved only if

it is implemented on time and prospectively
• PBR is f o r w a r d - looking. It is n e i t h e r f a i r n o r r e a s o n a b l e
to both the Utility a n d the c o n s u m e r s to a p p l y PBR
r e t r o a c t i v e l y a n d adjust the c u r r e n t r a t e s b y using actual
cost/data.
• The policy against r e t r o a c t i v e r a t e - making has
been affirmed both in the Philippines and in
international jurisdictions.
CONCLUSION:
Repealing o r modifying the PBR w o u l d only result in:

• Regulatory uncertainty
•Inability to k e e p u p w i t h g r o w i n g c u s t o m e r r e q u i r e m e n t s
a n d s e r v i c e levels, resulting in a less reliable a n d inefficient
service
•L a c k of inc ent iv es f o r DUs to d e l i v e r b e t t e r s e r v i c e a n d l a c k
of penalties to DUs f o r f ai lure to m e e t s e r v i c e levels
•Inability to s u p p o r t m a j o r g o v e r n m e n t p r o j e c t s a n d
total electrification d u e to l a c k of m o t i v a t i o n to continue
investing in m a j o r Capital e x p e n d i t u r e s
CONCLUSION:
• Imposition of Bill Deposits is legal and n e c e s s a r y to protect the
DU similar to the case of other utilities .

• The interest r a t e on Bill Deposits equivalent to the Land

Bank interest r a t e on savings deposit is fair and reasonable.

• The Bill Deposits a r e not p a r t of the DUs’ RAB and therefore

cannot e a r n interest equivalent to W A C C .

• The interest r a t e on Bill Deposits c o m m e n s u r a t e the

ex pect ed earnings of c o n s u m e r s f o r the s a m e amount of
m o n e y w h e n placed in bank deposits.
T h a n k you!