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

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

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

4.  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. Our Mission

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

6. 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 Viability of Utility Consumers Water Districts LGU-Run RWSA/BWSA Cooperatives Private Enterprises Property Developers Homeowners Assoc. Water Peddlers Economic Regulation

7. 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 Economic Regulation

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

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.

13. SUPPLY AND DEMAND PROJECTIONS 200720082009201020112012 Actual Projected SUPPLY Installed Production Capacity, lps 15.00 Production Capacity (m3/year) 473,040 % Non-Revenue Water52%42%37%32%27%25% Production Requirement (m3/year) 414,334 322,821 301,200 282,759 266,844 263,088 Bulk Water Purchases (m3/year) - - - - - - Total Own Production and Water Purchases (m3.yr) 473,040 Water Surplus / (Shortage) (m3/year) 58,706150,219171,840190,281206,196209,952 Water Surplus / (Shortage) (lps) 1.86 4.76 5.45 6.03 6.54 6.66 DEMAND New Connections 15 3 10 Total Connections 740 743 753 763 773 783 Average Persons per Household 6 6 6 6 6 6 Population Served 4,440 4,458 4,518 4,578 4,638 4,698 Population in Service Area 4,878 % Population Served91% 93%94%95%96% Ave. Consumption/Conn./Month (m3) 22.63 21.00 Volume Sold (m3/year) 200,952 187,236 189,756 192,276 194,796 197,316

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 = Acquisition Cost / Estimated Life Depreciation: Straight Line Method 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 return x 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. Quantity Block (m3)Public TapResidential/ InstitutionalCommercial/ Industrial First 10 m3228.32 11-2024.00 21-3026.00 31-4029.00 41-5033.00 Over 5038.00 First 25 m3 1150.00 26-1000 57.00 Over 1000 75.00 AFFORDABILITY CRITERIA Household Income of Low-Income Household 9,257 Ceiling, 5% of such Income 463 Monthly Revenue from Minimum Charge 230 RESULT ACCEPTABLE 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.  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) Service Standards Or Levels Of Service

27. FINANCIALTECHNICAL CUSTOMER SERVICE Operational Performance Key Financial & Performance Indicators Service Level

28. Summary Table of KPIs and Formula KPIFormula A. Operational Performance Collection Performance 1Collection Efficiency Total Year-to-Date Collection Total Year-to-Date Billings 2Collection Period Total Account Receivables (Total Annual Billings/12 months)

29. KPIFormula Production Efficiency 3 Non-Revenue Water (%) Water Produced – Water Billed Water Produced x 100 4% Metered No. of Metered Service Connections Total Service Connections x 100 Personnel Management 5 Staff/1,000 Connection Ratio No. of Staff (Total Active Connections/1000) Summary Table of KPIs and Formula

30. KPIFormula B. Financial Ratios Cost Control 6Operating Ratio Operating Expenses Operating Revenues Liquidity 7Current Ratio Current Assets Current Liabilities Summary Table of KPIs and Formula

31. KPIFormula Profitability 8Net Income Ratio Net Income Operating Revenues Sustainability 9 Debt to Equity Ratio Total Liabilities Total Stockholder’s Equity 10 Debt Service Ratio Net Income before Tax Total Debt Service Summary Table of KPIs and Formula

32. FINANCIALVIABILITYFINANCIALVIABILITY Production Efficiency Personnel Management Others LIQUIDITY PROFITABILITY COST CONTROL SUSTAINABILITY Key Result Areas OPERATIONAL PERFORMANCE INDICATORS FINANCIAL RATIOS Key Performance Indicators Collection Performance

33. 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

34. Philippine Water Supply Sector Roadmap

35. 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