Statutory Provisions for Automatic Adjustment Mechanisms
Relating To Fuel Price and Currency Exchange Fluctuations
Philippine Electric Utilities
James A. Nichols, III
Navigant Consulting, Inc.
August 1998
The authority to determine, fix and prescribe the rates being charged to electricity customers of private distribution utilities, electric cooperatives, and the National Power Corporation (NPC) is held by the Energy Regulatory Board (ERB). The ERB practices a “just and reasonable” standard[1] as used widely in public utility law in the United States as well as a “return on rate base” objective. In fact, the ERB recognizes U.S. utility precedents in formulating its orders and opinions, often quoting directly from the U.S. Decision in support of its actions.
NPC is the primary generation and transmission utility in the Country and the primary supplier to all distribution utilities. A relatively minor amount of distribution utility power supply is sourced from Independent Power Producers (IPPs) selling directly to the distributor or from customer-owned generation agreements. However, almost one-half of NPC’s power supply is sourced from IPPs[2] (most of which have provisions for passing foreign currency exchange risk on to NPC in the monthly pricing of energy) with the remaining resources being its own generating assets.
NPC has implemented a number of fuel and other adjustment mechanisms over the years. Its current Fuel and Purchase Power Adjustment Clause (FPCA) was set by an ERB Decision in 1994[3]. NPC has also implemented a Foreign Exchange Adjustment Clause (known as FOREX I and FOREX II) that was approved by the ERB in 1994[4]. FOREX I addresses foreign exchange impacts on debt service (principal repayment only, excluding interest) and FOREX II addresses impacts on foreign exchange related Operating Expenses.
It its decisions on both the FPCA and FOREX adjustments for NPC, the ERB used the following criteria (as quoted from the decision) in determining whether the requested adjustments clauses should be approved:
Automatic
adjustment clauses have been adopted for recovery of certain utility costs only
under the following limited and well-recognized circumstances:
(1) when such costs are extremely volatile, changing
rapidly over short periods of time,
(2) when such volatile costs changes represent a
significant portion of total utility operating expenses, and
(3) when such volatile cost changes are beyond
the ability of the utility to control.
Quote from ERB Decisions
In Case Nos. 93-108 and 93-13
At this time, at least three utilities in the Country have currency exchange rate adjustment mechanisms approved for implementation – NPC, Manila Electric Company (MERALCO), and CEPALCO. Neither MERALCO nor CEPALCO, however, are currently exercising any type of currency exchange pass-through in their retail rates although it is understood that CEPALCO is planning to implement a currency exchange rate mechanism in the third quarter of 1998.
The NPC electric tariffs are statutorily required to be set individually by grid. There are currently five intraconnected grids used for pricing, in addition to the so-called “small island group.” These are Luzon, Leyte-Samar, Negros-Panay-Cebu, Bohol, and Mindanao. For purposes of calculating the FPCA, therefore, the adjustments are set individually by grid. That is, fuel price adjustments in Luzon, which is dominated by oil and coal-fired generation, will behave differently than those in Mindanao which has a higher proportion of hydroelectric power.
The fuel component of the FPCA is based on a “heat rate” method in which only changes in fuel prices are captured by using a heat rate set in the last full rate proceeding. The fuel cost impacts of degradations (or improvements) in heat rates are not passed on automatically to NPC customers without a hearing. Average heat rates are set by grid by thermal unit types. The types utilized are Bunker, Diesel, and Coal. IPP Purchases and Geothermal Steam supply are treated directly on a cost per kWh basis.
The formula is for the FPCA is:
ĺ
( P1 – P0 )
FPCA =
------------------- * Gf * AHR É ( S1 – S0 ) * Gs É ( PP1 – PP0 ) * Gpp
1,000,000
Where:
|
P1 |
= |
Actual price per
million BTU of fuel oil, diesel, coal and other types of fuel used by NPC to
generate electricity in the grid during the billing period. |
|
P0 |
= |
The base price per
million BTU of fuel oil, diesel, coal and other types of fuel used by NPC in
the design of the basic rate per grid. |
|
AHR |
= |
The
average heat rate of the plants in the grid using fuel oil, diesel, coal and other
types of fuel in BTU per kWh established during the last rate review adjusted
to account for transmission losses and company use pegged at 6% |
|
Gf |
= |
Share
in the total kWh input to the grid of fuel oil, diesel, coal and other types
of fuel used by NPC during the billing period. |
|
S1
– S0 |
= |
The
change in cost of steam actually billed to NPC by independent power
producers/generators in P/kWh during the billing period. |
|
Gs |
= |
Share
in the total kWh input to the grid of purchased steam during the billing
period. |
|
PP1
– PP0 |
= |
The
change in cost of purchased power actually billed to NPC by independent power
producers or private generators in P/kWh less cost of fuel supplied/delivered
by NPC during the billing period. |
|
Gpp |
= |
Share
in the total kWh input to the grid of purchased power/energy during the
billing period. |
The formula is essentially applied individually to all fuel types (fuel oil, diesel, coal, and other types) including the share of each source of fuel type to the total generation mix.
The total monthly costs of purchase power agreements are included in the FPCA. All Power Sales Contracts which NCI has reviewed (most of the major contracts) shift the currency exchange risk onto NPC. This is typically accomplished by having a US dollar denominated component to the monthly pricing mechanisms which is convertible into pesos at the current rate of exchange. Therefore, monthly currency fluctuations impact the monthly payments NPC makes for IPP capacity. This currency related fluctuation is recovered in the following month from NPC customers through the FPCA along with all fluctuations in fuel prices.
The NPC currency exchange rate mechanisms are calculated for the company as a whole and applied in-kind to all NPC customers. There are two separate calculations. FOREX I applies to debt service (principal only) and FOREX II applies to foreign currency related operations expense (excluding those already recovered through the FPCA).
The formula is:
(A1 –
B1) * C + (A2 – B2) * D
FOREX I = --------------------------------------------
S
Where:
|
A1 |
= |
Simple average of
actual peso to US dollar exchange rate of BSP[5]
for the billing period. |
|
A2 |
= |
Simple average of actual
peso to Japanese Yen exchange rate of BSP for the billing period. |
|
B1 |
= |
Base
Peso to US dollar exchange rate of P27.40/US$1 - equivalent exchange rate considered in NPC’s latest rate
application. |
|
B2 |
= |
Base
Peso to Japanese Yen exchange rate of P0.2329/JY1 - equivalent exchange rate considered in NPC’s latest rate
application. |
|
C |
= |
Estimated
Debt Service Payments (Principal Only) for the period in US dollar. [This includes debt repayment in all
currencies other than the Japanese Yen, with all non-US dollar currencies
indexed to the dollar.] |
|
D |
= |
Estimated Debt Service
Payments (Principal Only) for the period in Japanese Yen |
|
S |
= |
Estimated
Energy Sales for the year, kWh, divided by 12 |
The formula for FOREX II is:
(A1 – B1) * E +
(A2 – B2) * F
FOREX II =
--------------------------------------------
S
Where:
|
A1 |
= |
Simple average of actual
peso to US dollar exchange rate of BSP for the billing period. |
|
A2 |
= |
Simple average of
actual peso to Japanese Yen exchange rate of BSP for the billing period. |
|
B1 |
= |
Base
Peso to US dollar exchange rate of P27.40/US$1 - equivalent exchange rate considered in NPC’s latest rate
application. |
|
B2 |
= |
Base
Peso to Japanese Yen exchange rate of P0.2329/JY1 - equivalent exchange rate considered in NPC’s latest rate
application. |
|
E |
= |
Estimated
Foreign Related Operating Expenses excluding those already recovered through
the FPCA for the period in US dollar |
|
F |
= |
Estimated
Foreign Related Operating Expenses excluding those already recovered through
the FPCA for the period in Japanese Yen |
|
S |
= |
Estimated
Energy Sales for the year, kWh, divided by 12 |
Each semester, NPC submits to the ERB a report showing over or under collection of FOREX and a schedule for amortizing such over the succeeding semester.
[1] “The Commission
shall approve only those [rates] which are just and reasonable and not any that are
unjustly discriminatory or unduly preferential, …”. Commonwealth
Act 146 which was reinstated by Executive Order 172.
[2] These are primarily fuel conversion contracts in which
the IPP finances, owns and operates the asset but NPC provides all the fuel at
its own cost.
[3] Case Nos. 93-13 and 92-213, ERB Decision Order
initially issued on October 28, 1993 and modified by Order issued March 3,
1994.
[4] Case No. 93-108 by ERB Decision Ordered August 18, 1994.
[5] Bangko Sentral ng Pilipinas – the Central Bank