Uniform System of Accounts for Electricity Tariff Setting.

Transcription

1 Uniform System of Accounts for Electricity Tariff Setting. submitted to by Dr. William Gboney (Electricity Consultant) March 11,

2 Definitions Audited Reports of Accounts: Means an account which has been audited by a legally recognized auditor or audit firm and submitted by a licensee to RURA for regulatory purposes; Authority: Means the Rwanda Utilities Regulatory Authority; Capital Works-In-Progress: Means assets which are partly constructed but yet to enter into service or operation, for the production or supply of the regulated product; Financial Statements: Refer to the income statement, the balance sheet and statement of cash flows; Financial Year: Means the financial year from July 1st of current year to June 30 of next year; International Financial Reporting Standards: A set of international accounting standards which indicate how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board. Licensee: Means a person who has been granted a license by the Authority to undertake generation, transmission, distribution and sales business; Operating Expenditure: Means the cost incurred by a power utility to operate its business, and maintain plant and equipment; Regulatory Asset Base: Means the value of investment in fixed assets by the power utility to provide the regulated service. It is determined as the value of the gross fixed asset less the accumulated depreciation; Revenue Requirements: Means the allowable cost components by the Authority, for determining the overall revenue for calculating the tariff for licensees; Shared Costs: Refer to costs which cannot be directly assigned or allocated to a particular business activity in the power sector, and are therefore partially or fully shared by the generation, transmission, distribution and sale segments; Working Capital: Refers to operating expenses which are paid in advance of revenue receipts, and consist of resources which are required to operate the business. In accounting terms, it is calculated as current assets minus current liabilities; 1

3 Abbreviations ATAM CAPEX CWIP EC EDC EE EUCL IFRS IPP OPEX PPA RAB REG ROR RURA WACC Automatic Tariff Adjustment Mechanism Capital Expenditure Construction Work-In-Progress Energy Conservation Electricity Development Company Limited Energy Efficiency Electricity Utilities Company Limited International Financial Reporting Standard Independent Power Producer Operating Expenditure Power Purchase Agreement Regulatory Asset Base Rwanda Energy Group Rate of Return Rwanda Utilities Regulatory Authority Weighted Average Cost of Capital 2

4 1. OBJECTIVES OF DOCUMENT The aim of this document is to address the key issues relating to accounting for regulation, by setting out the framework for collection and recording a licensee s financial information, and reporting of that information to RURA. The Uniform System of Reporting will therefore achieve the following objectives: Ensure harmonization of reporting of accounting and financial information to the Authority, and also reduce the degree of information asymmetry between RURA and the licensees; Ensure that RURA receives information and data in an accurate, timely and consistent manner, which is useful and relevant for review and regulation of electricity tariffs; Ensure that proper analysis can be made of actual financial performance of the licensees; Ensure better performance measurement and accountability of licensees; Give effect to the objectives of RURA as stated in the Electricity Law (2011) and RURA Law (2013). 1.1 Scope of the Document This document will apply to the following licensees: a. REG and its subsidiaries namely, EDCL and EUCL; b. Isolated and off-grid licensees; 2. BASIC REGULATORY ACCOUNTING PRINCIPLES TO BE ADOPTED 2.1 Financial Year and Accounting Principles i. To ensure harmonization of practice by the licensees and also promote transparency and accountability, RURA will require that all the licensees adopt the same regulatory Financial Year; ii. The Financial Year shall refer to the period 1 st July of current year, to 30 th June of the following year; ii. All licensees shall submit Audited Reports of Accounts to RURA within four (4) calendar months from the end of the regulatory Financial Year; 3

5 iii. The Accounting Principles adopted by licensees for use in the regulatory accounting system shall conform to International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board; 3. COMPONENTS OF REVENUE REQUIREMENTS The Uniform System of Accounts which will guide the determination of the various components of the revenue requirements are as follows: 3.1 Operating and Maintenance Expenditure i. Since licensees incur costs to operate their plant and equipment, they shall be allowed to include such expenditures in their Audited Report of accounts. ii. To assess the reasonableness of operating and maintenance expenditure (opex), RURA shall adopt the Reasonable and Prudent cost, and Used and Useful criteria. The regulator would therefore be required to review the licensee s costs for reasonableness, while the utility company would be required to demonstrate the reasonableness of the cost. iii. Any opex which is unrelated to the regulated activity shall not be included in the price submission. The qualifying criteria for including opex in the price submission are as follows: Only expenses incurred in the normal operations of the regulated product shall be included; The expenses must meet the Reasonable and Prudent cost, and Used and Useful tests; The Used and Useful test implies that the asset must be used or is useful for the production of the regulated product; A Useful or useable asset means the asset should be in such a condition that it can be added to the generation capacity mix or should be able to supply power within 3 months; Expenses must be incurred at arm s length with third parties. In that regard, the utility may be required to demonstrate to RURA that it has strictly followed the procurement process; Expenses on research and development and advertising may only be included in part or in whole, if such expenses are useful for the production or supply of the regulated product, and have been approved by RURA. 4

6 3.2 Regulatory Asset Base The Regulatory Asset Base (RAB) is the value of assets which is used by the regulated utility to produce, transmit and distribute electricity. In order to ensure harmonization of the asset valuation methodology, RURA shall prescribe the asset valuation approach which shall be adopted by each licensee. This is to prevent licensees from continuously changing the asset valuation methods in an attempt to increase their RAB, and hence earn a higher return on investment. The conditions which must be met before a licensee can include an asset in the RAB are as follows: i. The asset must meet the Used and useful rule, implying that: a. The fixed asset must be long-term in nature, and is being used or is useable, and therefore useful for producing and supplying the regulated product; b. The fixed asset is in a condition which makes it possible to supply electricity within 3 months; ii. Generally, the asset revaluation method for the RAB can be classified as follows: a. Economic Value or Market Based Approach; b. Historic Cost Valuation Approach; a. Replacement Cost Approach: Current Cost Valuation 1 (CCV), Depreciated Optimised Replacement Cost 2 (DORC) and Reference Utility Approach 3 (RUA) iii. The Regulatory Asset Base shall be valued using the Current Cost Valuation approach, which adjusts or rolls forward the historic cost, to reflect average inflation rates and depreciation as follows: RWF Gross Historic Value Less: Accumulated Depreciation Net Fixed Assets Add: Asset Additions X Y X - Y A = (X Y) + A 1 Adjusts the historic purchase price for inflation and depreciation 2 Adjusts the replacement cost for technical change and past investment decisions. 3 Requires the construction of a hypothetical company which is assumed to provide exactly the same service as an efficient utility company. The RUA is a bottom-up engineering approach and very flexible to accommodate expansions in the asset base over time. 5

7 Less: Asset Deletions R Regulatory Asset Base (RAB) (X Y) + (A R) Adjust RAB by Inflation: [(X Y) + (A R)] (1 + Inflation Adjuster)] 3.3 Impaired Assets i. Assets which are impaired and are not providing the service for which they were intended, shall not be included in the RAB, and will not therefore earn a return; ii. If such assets are being maintained with a definite plan for future use, then the maintenance expenses shall be allowed as part of the revenue requirements; iii. Values for customer funded assets shall be deducted from the RAB and shall therefore not earn a return. 3.4 Working Capital Allowance i. Allowance for Working Capital is usually taken into account by regulators when computing the revenue requirements. It is allowed as part of the rate base because it consists of funds that could earn a rate of return if invested in some other venture; ii. In determining the Regulatory Asset Base (RAB), the licensee shall include the Working Capital, for the purposes of calculating the return on assets. In that regard, the RAB shall be computed as follows: RAB = Net Fixed Assets + Working Capital, while the return on investment shall be determined as follows: Return on Investment = RAB Cost of Capital. iii. The Authority may, however impose a ceiling on the Working Capital allowed as part of the RAB, based on good industry practice. iv. To avoid over-stating of working capital allowance, the following Guiding Principles shall be used to benchmark the working capital allowance: a. The cost must relate only to the cost of financing an operating expenditure; b. The calculation must relate to only relevant revenue and expenses; c. The calculation should take account of benchmark assumptions about timing of cash flows to prevent compensating the utility for imprudent costs and inefficient activities; 6

8 3.5 New Capital Additions Fixed assets which are put into operation during a Financial Year shall be included in the RAB at half the value of the asset, and at its full value in the subsequent year. 3.6 Capital Work-In-Progress (CWIP) i. With CWIP, the Used and Useful test will be applied by the Authority; ii. Its application will prevent the inclusion of an asset in the RAB, until the asset has been put into operation; iii. Interest during construction (IDC) shall however be capitalized; iv. Capital Work-In-Progress shall not be allowed in the RAB, until after the construction is completed, and the plant or equipment is in use, and contributing to the process of providing the regulated product; v. By not including the CWIP in the RAB, this will prevent the licensee from earning a return on its CWIP investment. The licensee however shall be permitted to recover interest during construction. 3.7 Regulatory Depreciation and Asset Lives i. Deprecation shall be calculated using the straight-line methodology. For each asset category, the appropriate asset lives to be used are shown in Appendix 1; ii. RURA shall therefore prescribe the asset lives which shall be adopted by the licensees in calculating the depreciation charge or depreciation allowance, in the revenue requirements; ii. Depreciation charge shall be calculated based on the replacement value of asset, where the replacement value is determined using the Current Cost Valuation methodology; iii. The total accumulated depreciation shall be deducted from the replacement value of the gross asset to obtain the net regulatory asset base; v. RURA would require licensees to utilize depreciation rates by type of asset, that reflect the remaining useful life of the plant or equipment; 7

9 vi. The Authority shall periodically review the useful lives in Appendix 1 in consultation with licensees. Any changes approved by the Authority shall be reflected in the current and subsequent periods; vii. The adoption of useful asset lives as shown in Appendix 1, is to ensure consistency in tariff submission by licensees; viii. All licensees shall therefore adopt the asset lives as shown in Appendix Rate of Return i. The return on investment shall be computed as the product of Regulatory Asset Base and Cost of Capital (ROR = RAB Cost of Capital); ii. The Cost of Capital shall be calculated using the Weighted Average Cost of Capital (WACC); iii. The WACC shall be calculated using the REAL RATE OF RETURN. The REAL PRE-TAX RATE OF RETURN is calculated by deflating the nominal pre tax rate as follows. The Nominal Pre-Tax WACC = Ke (E/V) + Kd (D/V), where: Ke = Cost of equity Capital Kd = Cost of debt Capital E = Market value of equity D = Market value of debt V = Total market value of firm (E+D) 4. TRANSFER PRICING AND ACCOUNTING SEPARATION i. To ensure transparency and protect against cross subsidization from one segment of the industry (i.e. for example from transmission) to another segment (i.e. generation), all activities for each segment shall be clearly ring-fenced. ii. Ring-fencing will also lead to proper accounting separation of each segment s activities; 8

10 iii. In line with the Authority s philosophy to unbundle the end-user tariff and ensure that the tariff for each segment is cost reflective, REG would be required to submit separate tariff applications on behalf of its subsidiaries, for the generation, transmission and distribution/sale segments to the Authority; iii. To eliminate the problem of transfer pricing and cross subsidization, tariffs shall therefore be unbundled and determined separately for each segment of the electricity industry; iv. Cost associated with activities which are not part of the core regulated activities, shall not be included in the revenue requirements of the licensee; v. Costs associated with services provided by a separate but affiliated company, which are non- core and do not contribute to making the regulated service available, shall not be included in the revenue requirements; vi. Cost separation and tariff determination for each segment of the industry will ensure robust performance benchmarking with other utilities from other comparable jurisdictions. 5. RECOVERY OF ENERGY EFFICIENCY AND ENERGY CONSERVATION EXPENDITURE i. Licensees would be allowed to recover expenditure on energy efficiency ( EE) and energy conservation (EC) activities, based on a project plan submitted to the Authority; ii. In determining the revenue requirements, any funding received from donors would be subtracted from the licensee s total licensees revenue requirements. 6. TREATMENT OF COST OF POWER PURCHASES AND FUEL COST i. The Authority shall take account of cost of power purchases and fuel cost when setting the tariffs during a major tariff review; ii. The Authority shall only consider efficient purchases from IPPs as full pass-through costs; iii. A Tariff Adjustment Mechanism or a Correction Mechanism, shall form part of the tariffsetting process, and would be used to adjust for any variances between the allowed power purchase cost or fuel cost, and the actual cost. v. The variance in power purchase cost determined from the Correction Mechanism would be taken into account in the next period s tariff adjustment. 9

11 7. CAPITALIZATION POLICY The Authority shall adopt a consistent capitalization policy to ensure harmonization and application of accounting policies by licensees. i. Equipment for production, transmission and distribution of electricity shall be capitalized based on the Used and Useful rule. The capitalization shall occur when the fixed asset, enters into service and is contributing to the production or delivery of the regulated product; ii. iii. Cost incurred by licensees on way leaves or right of way across land, shall be capitalized when the transmission or distribution systems are commissioned; The depreciation expense associated with a way leave shall be computed according to the useful economic life of the way leave or the asset to which the right relates; 8. ASSET RENEWAL EXPENDITURE i. When the renewal expenditure improves the performance of a fixed asset and also increases the value above the original value, this shall be treated as capital improvement expenditure and recorded as Capital Addition Expenditure; ii. To treat renewal expenditure as Capital Addition Expenditure, the licensee would have to demonstrate to RURA that the performance improvement from the renewal, will lead to enhancement in expected future revenue stream from the asset; iii. If the renewal expenditure only restores the performance of the fixed asset to its original level with no enhancement in expected revenue stream, the renewal expenditure shall be treated as repairs and accounted for as an operating expenditure. 9. CUSTOMER CONTRIBUTIONS AND ASSETS FUNDED FROM GRANTS i. Assets contributed by customers are to be excluded from the RAB. This is to ensure that licensees do not earn a rate of return on such customer funded assets; ii. Depreciation charges on customer funded assets shall however be permitted as part of the revenue requirements, since the licensee is required to replace these assets at the end of their useful economic lives; 10

12 ii. Assets funded by grants shall be excluded from the RAB. This is to prevent the licensees from earning a return on such investments; iii. Depreciation charges shall however be allowed on assets funded from grants since such assets would have to be replaced at the end of their economic lives by the licensee. iv. The tariff information requirements would require the utility companies to provide information on assets funded from customer contributions and grants. In the absence of such information, RURA shall be make the necessary adjustments to the RAB to protect customers from being overcharged by the licensees. 11

13 ANNEX 1. FIXED ASSETS AND USEFUL LIVES Appendix A. Hydro Power Plants Fixed Asset Useful Life (Years) 1.1.Civil Works: Dams (Earth/Rock) 30 Dams (Concrete) 30 Weirs 30 Dikes/Embankments 30 Bottom outlet/spillway (Concrete) 1.2 Water Conveyance System: 30 In take Structure 40 Concrete Headrace Tunnel 40 Concrete Headrace Canal 40 Paved Headrace Canal 40 Concrete Headrace Pipeline 40 Surge tank (Concrete) 40 Penstock Valve Chamber 40 Penstock (Steel /concrete) 40 Penstock Fiberglass 40 Pressure Shaft Power House and Other Buildings: Power House 30 Technical Buildings 30 Office Buildings 20 12

14 Appendix B. Equipment Fixed Asset Useful Life (Years) 2. Mechanical Equipment: 2.1 Gate, Valves, Trash Racks: Gate 30 Valves 30 Trash Racks 25 Cranes and hoists Turbines and Power House Cranes: Turbines 30 Cranes Auxiliary Equipment: Pumps 10 Compressors Electrical Equipment: 3.1 Generators and Auxiliaries Transformer Stations Service Supply Control, Protection, Measuring HV Switchgear 25 Fixed Asset Useful Life (Years) 4.Diesel Power Plant: 4.1 Civil Works: Power House 30 Workshop/Office Buildings Electrical Equipment: Diesel Generator Set 10 Protection and Control 15 Transformer 25 13

15 Switchgear and Auxiliaries Mechanical Equipment: Fuel Supply System 20 Water Cooling System 15 Cranes and hoists 15 Appendix D. Transmission Lines and Substation Fixed Asset Useful Life (Years) 1.Transmission Lines: Overhead line (Steel lattice, tubular and Concrete towers) Substation: 2.1 Civil Work: Control and Switchgear building Electrical Equipment: HV Switchgear, outdoor 25 MV Switchgear, indoor 25 Transformers 25 Protection and Control 20 Communication 15 14

16 Appendix E. Distribution System Fixed Asset Useful Life (Years) 1. Electrical Equipment: 1.1 Distribution Lines: Wooden Poles 15 Steel Poles 25 Concrete Poles 25 Underground Cables 25 Distribution Transformers 20 Meters 25 Appendix F. Other Fixed Assets Fixed Asset Useful Life (Years) Motor Vehicles 5 Office furniture and equipment 10 Computer equipment 5 15