Economic Regulation of Philippine Water Utilities

1. Economic Regulation of Philippine Water Utilities A Presentation by the National Water Resources Board May 25, 2009

2. PD 424 creating the NWRC (1974) PD 424 creating the NWRC (1974) Policy Formulation and Coordination EO 124-A converted NWRC to NWRB (1987); transferred BRS to DPWH PD 1067 The Water Code of the Philippines (1976) PD 1067 The Water Code of the Philippines (1976) Resource Regulation EO 123 reconstituted the NWRB Board; transferring NWRB to DENR and transferring regulatory functions of LWUA to NWRB (2002) EO 123 reconstituted the NWRB Board; transferring NWRB to DENR and transferring regulatory functions of LWUA to NWRB (2002) The National Water Resources Board The National Water Resources Board PD 1206 assigned the residual functions of the Board of Waterworks and the defunct Public Service Commission to NWRB PD 1206 assigned the residual functions of the Board of Waterworks and the defunct Public Service Commission to NWRB Economic Regulation

3. Water for Food Water for Domestic Water Supply and Sanitation Water for Environment Water for Economic Development Our Vision Water for All

4. Our Mission • To ensure access to safe, adequate water supply and sanitation at acceptable rates and levels of service; • To allocate sufficient water that will ensure food security and spur economic development of the country; and • To protect the water environment in order to preserve flow regimes, biodiversity and cultural heritage as well as the mitigation of water related hazards.

5. Resource Regulation WATER FOR LIVELIHOOD WATER AS A RESOURCE Water and sanitation for PEOPLE, Rainfall and irrigation water for FOOD Water for INDUSTRY … while … Maintaining the RESOURCE BASE, both surface and groundwater - and biodiversity.

6. Viability of Utility Consumers Economic Regulation • The protection of consumers and the economic viability of water utilities by determining service standards and targets, tariff levels and schemes, monitoring and measuring company performance, enforcing compliance, and imposing sanctions Water Districts LGU-Run RWSA/BWSA Cooperatives Private Enterprises Property Developers Homeowners Assoc. Water Peddlers

7. Economic Regulation • Granting of Certificate of Public Convenience (CPC) • Tariff setting • Business Plan Review • Conduct of Performance Audit of CPC grantees • Adjudication and Resolution of Cases • Testing and Calibration of water meter • Monitoring of Compliance

8. Economic Regulatory Instruments • 5- Year Tariff Methodology • Economic Regulatory Guidelines • WSPs Responsibilities • Use of Key Performance Indicators • (Technical and Financial) • Customer Service Manual • Benchmarking of WSPs

9. 5 – Year Tariff Methodology • In 2005, the NWRB adopted the 5-Year Tariff Methodology (Res. 001-0105 dtd Jan. 14, 2005) • Objective: Help WSP’s plan their business and attain full cost recovery.

10. Main Features: • Tariff is computed based on agreed levels of service • Requires the submission of a 5-Year Business Plan with detailed proposed OPEX and CAPEX • Use of Excel-based tariff model • Computation of average ROI to reduce price shocks. • Mechanism for disallowances and upward adjustment in succeeding tariff proposal.

11. Setting Tariff Goals • Levels of tariff should be established in consultation with customers or representatives. • Hours of service • Water quality • Non-revenue water • Service coverage and pressure

12. Water Supply Planning Levels of Service intended to be implemented • Projections of demand and supply levels • Projected new connections, volume sold and population to be served. • Determine production capacity, NRW, water supply shortage/surplus • Determine required investments • Determine operating expenses to be incurred.

14. Full Cost Recovery • Revenue requirement to cover the cost of delivering service Revenue Requirements = OPEX + Dep + Max Net Income • Required tariff derived by dividing revenue requirement by volume sold.

15. Personnel Power Bulk Water Purchases Bad Debts Supervision & Regulation Fee Depreciation Operating Expenses include: • Management Fees • Chemicals • Repairs & Maintenance • Annual Water Charge • General & Administrative • Taxes

16. Loans and Interest Expense • Interest Expense is not allowed as part of OPEX. • Proceeds of loans are capitalized and are entitled to return.

17. Depreciation: Straight Line Method Depreciation = Acquisition Cost / Estimated Life Depreciation Reserve Fund to cover maintenance, rehabilitation, replacement of assets. May also be used for improvements, new constructions and extensions.

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

19. NBV of Property Plant and Equipment Cost of PEER at the beginning of the year+ New investments entitled to return= Total PEER, at cost- Accumulated depreciation of the above assets

21. Affordability Criteria

22. Notice thru publication and posting Hearing on the tariff application has due process Approved tariff must be posted within 7 days PROCESSING PERIOD Filing of application Approval Process: 6 months

23. Extra-Ordinary Price Adjustments Utility may request for tariff increase before the end of the 5 year period due to extra-ordinary events, such as: • Extra-ordinary price increase • Legislated wage increase • Service Area Extension • Etc.

24. WSP’s Review and Audit • Agreed service level targets that were used in tariff determination were translated to: • Level of Service Standards • KPIs and KFIs Targets. • Failure to meet agreed standards and targets will result to adjustments in revenue requirements for next tariff proposal.

25. Service Standards Or Levels Of Service • Water Quality - in accordance with Philippine National Standard for Drinking Water (PNSDW)

26. Service Standards Or Levels Of Service • Pressure Adequacy - not less than 5 psi (municipal) - not less than 25 psi (industrial zones) • Continuity of Supply - at least 8 hrs/day • Consumption Per Capita - 100 lpcd (municipal) - > 100 lpcd (industrial zones)

27. F I N A N C I A L V I A B I L I T Y Key Result Areas Collection Performance LIQUIDITY Production Efficiency PROFITABILITY Personnel Management COST CONTROL Others SUSTAINABILITY OPERATIONAL PERFORMANCE INDICATORS FINANCIAL RATIOS Key Performance Indicators

28. NWRB Plans, Program and On-going Activities • Finalization of NWRB guidelines on light handed regulation for small-scale water service providers and water cooperatives • Study on the Tariff-setting methodology adjusted for small-scale water service providers • Proposed capacity building program for water service providers under the Philippine Water Supply Roadmap

29. Philippine Water Supply Sector Roadmap

30. NWRB Plans, Program and On-going Activities • Finalization of Registration system and procedure for Non-pipe Water Service Providers (WSPs) • Proposed project for Small Water Supply Improvement and Financing (Phase 2) – Registration of Water Utilities for Regulation

31. Thank You!