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Connection Assets

Connection Assets. The definition of connection assets needs to match the following documents OATS TWRG Connection Charging Policy TRANSCO/PSALM Application Draft Determination The ERC has a significant concern that the provisions under these documents shall be consistent

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Connection Assets

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  1. Connection Assets • The definition of connection assets needs to match the following documents • OATS • TWRG • Connection Charging Policy • TRANSCO/PSALM Application • Draft Determination • The ERC has a significant concern that the provisions under these documents shall be consistent • As defined in the following slides

  2. Connection Assets: TWRG • Regulated Transmission Services… • (d) until the commencement of the Second Regulatory Period, Transmission Connection Services; • Transmission Connection Services • (a) the provision of capability at a Connection Point to deliver electricity to or take electricity from the Connection Point; • (b) the conveyance of electricity: • (i) from the User System or Equipment of a Customer to the Connection Point; or • (ii) from the Connection Point to the User System or Equipment of a Customer; • Transmission Connection Assets • The components of the Grid used to provide Transmission Connection Services • Connection Point • The point of connection of a User System or Equipment to the Grid. • User System • User System as defined in the Grid Code. (from TWRG) • Refers to a System owned and operated by a User of the Grid or Distribution System (from Grid Code)

  3. Connection Assets: OATS Rules • Connected Transmission Customer • Any Transmission Customer with Facilities directly connected to the Grid at one or more Points of Connection. For the avoidance of doubt, this includes Generation Customers and Load Customers. • Connection Definition Method • The method used by the Transmission Provider to distinguish Connection Assets from Grid Assets. • Connection Facilities • The Transmission Provider’s Connection Facilities and the Connected Transmission Customer’s Connection Facilities. • Connection Point • See Point of Connection. • Grid • As defined in the Grid Code. • Point of Connection • A point where Electricity may flow into or out of the Grid. • Also known as Connection Point. • Point of Delivery • A Point of Connection on the Grid where Electricity may flow out of the Grid. • Point of Receipt • A Point of Connection on the Grid where Electricity may flow into the Grid.

  4. Connection Assets:Connection Charging Policy (Aug 2005) • Connection Assets are those assets that are put in place for the primary purpose of connecting a customer. These assets may be bypassed or removed from the network without affecting any customer except those that are directly connected to it. Even though transmission power flows on portions of these assets, that is just the consequence of connecting the customer to the Grid. • TransCo will also consider the inclusion of those assets defined as Subtransmission Assets by the ERC in its Order of 17 October 2003. To the extent possible, TransCo shall treat all Subtransmission Assets covered by the ERC Order as Connection Assets until such time that the assets are sold.

  5. Connection Assets:TRANSCO/PSALM Application • TRANSCO/PSALM – claims that it is consistent with its proposed Connection Charging Policy dated August 2005 • TRANSCO/PSALM claim that these assets either directly benefit a particular user or “a specified group of users” • SKM et al – appears to have implemented “shallow connection” and “unshared” assets following its classification in the RAB

  6. Connection Assets – Draft Determination • To use SKM definition as implicitly provided in its spreadsheet on substation assets.

  7. RAB Outcome • Table 5.8 • Table 5.9

  8. Weighted Average Cost of Capital David Dawson ERC Regulatory Expert

  9. WACC (a) • Follow TWRG • Recognize differences between TRANSCO Independent Expert and TWRG • Review values for parameters separately • Summary follows mid-point analysis

  10. WACC (vanilla) • WACC = Re x E / V + Rd x D / V • WACC = Re x E / (D + E) + Rd x D / (D + E) • WACC = 0.1832 x 0.5 + 0. 1256 x 0.5 • WACC = 0.1544 of 15.4%

  11. Return on Equity & Debt • Re = Rf + Be x MRP • Re = 0.1131 + 1.17 x 0.0600 • Re = 0.1832 or 18.3% • Rd = Rf + DM • Rd = 0.1131 + 0.0125 • Rd = 0.1256 or 12.6%

  12. Risk Free Rate (a) • Two measures explored: • Internal measure using Philippine Treasury Bonds • External measure using US Treasury Bonds • Internal: • Use Philippines 10y Treasury Bond for August 2005 • Rf = 0.1173 or 11.7%

  13. Risk Free Rate (b) • External: • Use average 6 USA ~ 10y Treasury Bond for August 2005 • Rf = (1+RfUSA) x (1+iUSA) / (1+iPhil) x (1+CRP) – 1 • Rf = (1+0.0461) x (1+0.0710) / (1+0.0469) x (1+0.04) • Rf = 0.1131 or 11.3% • Both measures close, but took 11.3%

  14. Inflation Rates • Spread for “long-term” average versus “spot” average is similar • Spot data better matches bond data which is average spot as well

  15. CRP (a) • Two measures explored: • Philippine vs USA US$ bond yields • CRP statistical method using Country Ratings • US$ Bond yields, ~ 20 year bonds • CRP = 8.2% - 4.8% = 3.4%

  16. CRP (b) • Statistical on Country Rating = 4.0%

  17. Return on Equity & Debt • Re = Rf + Be x MRP • Re = 0.1131 + 1.17 x 0.0600 • Re = 0.1832 or 18.3% • Rd = Rf + DM • Rd = 0.1131 + 0.0125 • Rd = 0.1256 or 12.6%

  18. Beta • Followed TWRG • Equity Beta average of 5 transcos and 5 distribution businesses • Ba = Be / [1+(1-Te) x D/E] for Market • Ba = 0.58 • Be = Ba x (1+D/E) for TRANSCO • Be = 1.17

  19. Return on Equity & Debt • Re = Rf + Be x MRP • Re = 0.1131 + 1.17 x 0.0600 • Re = 0.1832 or 18.3% • Rd = Rf + DM • Rd = 0.1131 + 0.0125 • Rd = 0.1256 or 12.6%

  20. WACC (vanilla) • WACC = Re x E / V + Rd x D / V • WACC = Re x E / (D + E) + Rd x D / (D + E) • WACC = 0.1832 x 0.5 + 0.1256 x 0.5 • WACC = 0.1544 of 15.4%

  21. Return on & of Capital • Table 7.2

  22. Performance Incentive Scheme Lawrence Luczon Engineer II

  23. Proposed Performance Indices

  24. TransCo Proposed Weightings

  25. ERC Proposed Weightings Note: Weightings by Grid - based on proportional average performance from 2000-2004 with higher proportion given to a bad performing grid

  26. TransCo Proposed Bandwidth

  27. ERC Proposed Bandwidth

  28. ERC’s Approach: 1st Step – Set the Target based on “whichever is better between the mean (i.e. from 2000 to 2004) and the last year’s (i.e. 2004) measure of the PI”; 2nd Step – Set the Deadband to minus one-half (-1/2) STDEV and plus two (+2) STDEV; 3rd Step – Change the Target to mean value (or last year’s measure) if Cap value is falling beyond the Maximum Measure; 4th Step – Reduce the +2 STDEV to a lower STDEV (i.e. +1½, +1 or +1/2) until such time that Cap will not fall beyond the maximum measure; Adjustment on the Reward

  29. (ERC’s Approach)On the Proposed Targets

  30. (ERC’s Approach) Cap +3% Deadband ½ σ 2 σ 1 σ 1 σ 0% Bonus / Penalty Target -3% Collar Performance On the Deadband

  31. ERC’s Proposed Standard Deviation:

  32. Cap +3% Deadband 1/2 σ 1 σ 1/2 σ Bonus / Penalty 0% <1 σ Target -3% Collar Max. Measure Performance (ERC’s Approach)Adjustment on the Reward X% a b X% = 3% a b

  33. Cap +3% Deadband ½ σ <½ σ 1 σ Bonus / Penalty 0% No reward Target -3% Collar Max. Measure Performance (ERC’s Approach)Adjustment on the Reward

  34. END OF PRESENTATION

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