PERFORMANCE BASED REGULATIONS

Performance-based regulations are typically subject to periodic review and

adjustment to ensure that they remain effective and relevant. This allows regulators
to incorporate new technologies, market developments, or changing societal values
into the regulatory framework.
Performance-based regulation offers several potential advantages over traditional
prescriptive regulation:
Flexibility and Innovation: By allowing regulated entities to determine how best to
achieve desired outcomes, PBR encourages innovation and the adoption of new
technologies.
Cost-effectiveness: PBR can lead to more cost-effective regulatory compliance
since companies have the freedom to choose the most efficient methods.
Adaptability: PBR frameworks can adapt more easily to changing circumstances,
such as technological advancements or shifts in market conditions.
Focus on Outcomes: PBR keeps the focus on achieving specific outcomes rather
than simply complying with rules, potentially leading to better overall results
Customer involvement in PBR rate-setting
refers to the engagement of consumers or ratepayers in the process of determining
utility rates based on the performance of the utility company.
Customer involvement typically takes various forms, including public hearings,
surveys, stakeholder consultations, and participation in regulatory proceedings. By
actively engaging customers, regulators ensure that their preferences and concerns
are taken into account when designing PBR mechanisms, thus promoting
transparency, accountability, and fair outcomes for all parties involved.
The determination of the appropriate methodology is covered by the
rate-setting function of the ERC under the EPIRA.
The ERC is responsible for establishing the frameworks and guidelines used to
calculate utility rates, ensuring they are fair, transparent, and reflective of the costs
and performance of electricity providers. This includes developing methodologies
that align with the objectives of promoting competition, efficiency, and consumer
welfare within the power sector.
Regulatory Framework in the Rate-Setting Function of the ERC
The Regulatory Framework in the Rate-Setting Function of the ERC refers to the
structure and guidelines established by the (ERC) for determining electricity rates
in accordance with the Electric Power Industry Reform Act (EPIRA). This
framework outlines the processes, methodologies, and criteria used to calculate
rates charged by electricity providers, ensuring fairness, transparency, and
efficiency in the pricing of electricity services. The ERC's regulatory framework
aims to balance the interests of consumers, investors, and the industry while
promoting competition, reliability, and sustainability within the power sector.
Exercise of Reasonable Discretion in the RateSetting Function of the
Government
The government's rate-setting function uses reasonable discretion to determine
prices for goods and services, considering factors like cost, efficiency, consumer
interests, and industry viability. This balance ensures affordable services for
consumers and adequate returns for service providers.
Timeline: Shift from the RORB Methodology to the PBR Methodology
RORB traditionally relied on a fixed rate of return for utilities based on their
invested capital, which could incentivize overinvestment and inefficiency. In
contrast, PBR ties revenue to performance metrics such as service quality,
efficiency, and innovation, encouraging utilities to improve operations to earn
higher returns.

This shift aims to promote efficiency, innovation, and consumer welfare by

incentivizing utilities to deliver better services while ensuring a fair return on
investment. PBR aligns more closely with modern regulatory objectives, fostering
a dynamic and competitive utility sector.
The PBR Methodology: As an accepted International rate-setting
methodology
Performance-Based Regulation (PBR) is a globally recognized method for setting
utility rates, promoting efficiency, service quality, and innovation, and is
increasingly adopted globally for its adaptability and competitiveness. PBR is
increasingly adopted worldwide as a modern and adaptable regulatory framework
for ensuring efficient and sustainable utility services.
PBR is pro consumer
Performance-Based Regulation (PBR) aligns utility incentives with consumer
interests, rewarding efficiency, service quality, and innovation. This promotes
transparency, accountability, and fair outcomes, ensuring consumers receive high-
quality services at reasonable prices.
The PBR Methodology is consistent with the ERC’s policy against retroactive
rate-making
The Performance-Based Regulation (PBR) methodology aligns with ERC's policy
against retroactive rate-making, focusing on future performance metrics and
promoting transparency, fairness, and efficiency without penalizing consumers for
historical expenses.
The policy against retroactive rate-making is consistent with the prospective
nature of legislation
The policy avoids retroactive rate-making, ensuring utility rates are based on future
performance, promoting transparency, fairness, and predictability, ensuring a stable
environment for both utilities and consumers.
The validity and reasonability of the PBR Methodology have been previously
affirmed by no less than the Supreme Court.
The policy avoids retroactive rate-making, ensuring utility rates are based on future
performance, promoting transparency, fairness, and predictability, ensuring a stable
environment for both utilities and consumers.
Rate of Return vs. Profits
Rate of return measures a company's profitability based on its invested capital,
while profits are the financial gains after deducting expenses from revenues,
reflecting the company's overall financial performance.
Benefits of PBR Methodology
Performance-Based Regulation (PBR) encourages utilities to enhance efficiency,
service quality, and innovation by linking revenue to performance metrics,
promoting competition, transparency, and accountability. This fosters competition,
transparency, and accountability, ultimately leading to better value for consumers.
Performance Incentive Scheme (PIS)
A Performance Incentive Scheme is a program that motivates and rewards
individuals or organizations for achieving specific performance goals, aiming to
boost productivity, efficiency, and innovation.
System-wide Performance Incentive Scheme (S-factor)
The S-factor is a utility sector program that rewards improvements in system
performance, promoting collaboration and innovation, ultimately improving
service quality and value for consumers.
Customer-specific Performance Incentive Scheme (GSL Factor)
The GSL Factor is a utility program that incentivizes utilities to enhance service
quality for individual customers. It rewards them for meeting or exceeding specific
customer needs, thereby prioritizing their needs and preferences.
Determination of Annual Revenue Requirement (ARR)
The Determination of Annual Revenue Requirement (ARR) is a process used by
regulatory bodies to determine the revenue required by a utility to cover operating
expenses, investments, and investors. It considers costs like maintenance,
infrastructure upgrades, and administration, and is crucial for setting utility rates.
The Annual Revenue Requirement is made up of building blocks
The Annual Revenue Requirement (ARR) is a set of financial requirements for a
utility, including operating expenses, capital expenditures, depreciation, taxes, and
a reasonable return on investment, ensuring the utility can cover its costs while
maintaining financial stability.
Distribution rates accounts for one-sixth of the average electric bill
• 2018 Meralco share of bill components
In 2018, Meralco's distribution rates accounted for approximately one-sixth of the
average electric bill. This portion reflects the charges associated with delivering
electricity from the transmission grid to consumers' homes or businesses through
Meralco's distribution network. The distribution rates cover expenses such as
maintenance, operations, and investments in the distribution infrastructure,
ensuring reliable electricity supply to customers in its service area
Courts already ruled on the nature of the bill deposits collected by DUs
Court rulings on bill deposits collected by Distribution Utilities (DUs) clarify that
these deposits are security deposits held in trust for customers, not income for the
utility company. They ensure payment of bills and cover outstanding charges in
case of default. Courts have established that these deposits must be returned upon
service agreement fulfillment or termination.

MERALCO funds its CAPEX through its distribution rates and not customer
bill deposits
Meralco funds its capital expenditures (CAPEX) through distribution rates, which
cover infrastructure investments, maintenance, and operational costs for reliable
electricity supply. Bill deposits, which are security deposits held in trust for
customers, are not used to finance these capital expenditures.
Interest on Bill Deposits must be REASONABLE and NOT
CONFISCATORY
The appropriate interest rate on bill deposits should be reasonable and not
confiscatory, reflecting market conditions and adequately compensating customers.
It should not be excessively high, preventing unfair burdening or financial hardship
for the utility. A balance between fairness to consumers and financial sustainability
is crucial in determining the appropriate rate.