1) HOW ARE ELECTRICITY TARIFF DETERMINED, FROM HE INITIAL PURCHASE OF

RAW MATERIALS TO THE PRICE CHARGED TO THE END CONSUMER?

 Electricity tariff in the Philippines is determined through a rate setting methodology

known as Performance Based Regulation (PBR), a price-cap regulation for the
Distribution Utilities that was passed in 2006. Currently, the rates are still set to recover
the cost of service incurred by the distribution utility plus a reasonable rate of return,
whereby historical costs are used to determine the revenue requirement.

 Resolution No. 4, Series of 2003 dated 29 May 2003 signaled shift from the RORB
Methodology to the PBR Methodology in fixing the wheeling rates of regulated entities. It
began with the promulgation of the Transmission Wheeling, Rate Guidelines to apply to
Transmission Company and Set DUs’ average price that includes distribution, supply
and metering charges. As of February 2021, DSM comprises 26% of the electric bill.


 It sets a cap on the maximum average rates for providing distribution wheeling services.
This price cap is set for each Regulated Entity to allow them to recover efficient
expenditure only and provide an appropriate return to investors in the Regulated
Distribution Systems. In addition, built-in incentives exist to further improve the efficiency
of operating and capital expenditures, as well as network and service performance
levels.
 In May 2003, for the transmission utility, thru the Transmission Wheeling Rates
Guidelines (TWRG), wherein rates are controlled thru a maximum annual revenue
(MAR) cap, later amended as Rules for Setting Transmission Wheeling Rates (RTWR)
in September 2009.
 In May 2007, after the ERC conducted a series of expository hearings for all ECs in
Luzon, Visayas and Mindanao on the proposed "Benchmarking Methodology" for ECs,
the General Managers of all the on-grid Electric Cooperatives (ECs) in the Philippines
adopted Resolution No. 1, Series of 2009, entitled "A Resolution Imploring Upon the
Energy Regulatory Commission to Implement a New Rate-Setting Methodology for
Setting the Electric Cooperatives' Wheeling Rates (RSEC-WR) in on April 4, 2009.

 RSEC-WR applies only to grid-connected ECs, however, there are several ECs that are
not grid-connected that filed with the ERC their applications for revised distribution,
supply and metering charges. It was observed that the rates of ECs were then no longer
responsive since the costs of providing electric service to the consumers increased
significantly from the time their rates were determined by the Commission based on
2000 test year.

2) IF POWER DISTRIBUTING COMPANIES END UP MAKING LOSSES BECAUSE THE

ELECTRICITY TARIFF IS INSUFFICIENT TO COVER THEIR COSTS, WHAT IS THE
ARRANGEMENT IN PLACE TO ENSURE THAT PRIVATE OPERATORS IN CHARGE
OF ELECTRICITY DISTRIBUTION REMAIN PROFITABLE.

The retail rates charged by distribution utilities for the supply of electricity in their captive
market shall be subject to regulation by the ERC based on the principle of full recovery
of prudent and reasonable economic costs incurred, or such other principles that will
promote efficiency as may be determined by the ERC.” [Section 25 of the EPIRA]

ERC Resolution No. 16 Series of 2009 as amended by Resolution No. 11, Series of
2010 establishes the procedure for the automatic recovery of refund of pass through
costs and conformation process that would govern the automatic cost adjustment and
true-up mechanisms approved by ERC with the objective of ensuring appropriate
recovery of the pass through costs in an efficient manner and put in place a fair and
transparent process for the confirmation of the automatic cost adjustment implemented
by DUs and the true up adjustments implemented by DUs and the true-up pf other pass-
through charges, involving Generation rates, Transmission rate, system loss rate and
lifeline rate recovery, as the case may be.

The Energy Fees, Variable O&M Charges were verified to be a pass-through cost
representing the charges that the IPPAs are required to pay to Suppliers under the IPPA
Agreements.

The Fuel Cost was, likewise, found to be a passthrough charge, subject to the
guaranteed heat rates as provided under respective Agreements.