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
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Connection Assets The definition of connection assets needs to match the following documents –OATS –TWRG –Connection Charging Policy –TRANSCO/PSALM Application.
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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
– 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.
• 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.
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
Connection Assets – Draft Determination
• To use SKM definition as implicitly provided in its spreadsheet on substation assets.
RAB Outcome
• Table 5.8
• Table 5.9
ERC Draft DeterminationRolled Forward Asset Base
2004 2005 2006 2007 2008 2009 2010 RABo Real Peso Millions 110,277 104,934 102,381 100,918 99,412 96,970RegDepnt Real Peso Millions (4,595) (4,530) (4,391) (4,279) (4,155) (4,065)Capext Real Peso Millions 778 2,999 3,715 3,602 2,367 1,105Capex RegDepnt Real Peso Millions 0 (24) (94) (187) (280) (347)Disposalst Real Peso Millions (1,526) (998) (693) (642) (374) (574)RABc Real Peso Millions 110,277 104,934 102,381 100,918 99,412 96,970 93,091
2004 2005 2006 2007 2008 2009 2010 Inflation Index
Index from Inflation assumption 1.00 1.05 1.10 1.15 1.20 1.26 1.31
Return of Capital (Depreciation) - Real Peso Millions 4,595.2 4,554.0 4,485.0 4,465.7 4,434.5 4,411.7Return of Capital (Depreciation) - Nominal Peso Millions 4,811.2 4,996.9 5,157.4 5,371.4 5,568.6 5,772.7
Weighted Average Cost of Capital
David Dawson
ERC Regulatory Expert
WACC (a)
• Follow TWRG
• Recognize differences between TRANSCO Independent Expert and TWRG
• Review values for parameters separately
• Summary follows mid-point analysis
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%
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%
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%
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%
Inflation Rates
• Spread for “long-term” average versus “spot” average is similar
• Spot data better matches bond data which is average spot as well
CPI Measure Average Spot (5 Days) Long –term Average
Philippines CPI 7.10% 4.71%
USA CPI 4.69% 2.40%
Delta (Philippines less USA)
2.41% 2.31%
Table 6.1 : Inflation Differences between the Philippines and the USA (% pa)
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%
CRP (b)
• Statistical on Country Rating = 4.0%Philippines Country Risk Premium
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Q1 20
00
Q3 20
00
Q1 20
01
Q3 20
01
Q1 20
02
Q3 20
02
Q1 20
03
Q3 20
03
Q1 20
04
Q3 20
04
Q1 20
05
Q3 20
05
End of Quarter (Commencing Q1 2000)
CR
P (%
pa)
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%
Beta
• Followed TWRG
• Equity Beta average of 5 transcos and 5 distribution businesses