Philippine Electricity Market

Corporation: Draft Market Fee

Setting Rules from 2010
22 December 2009
Table of Contents
Introduction .............................................................................................. 2
Preliminaries ............................................................................................ 3
Cross references ........................................................................................ 3
Definitions................................................................................................... 3
Status of the Market Fee Setting Rules (MFSRs) ....................................... 6

Objective of the Market Fee Setting Rules............................................. 6

Control of market fees ............................................................................. 6
Form of control ........................................................................................... 6
Scope of control.......................................................................................... 7
Control period ............................................................................................. 7
Output specification and WESM Work Plan ................................................ 7
Performance indicators ............................................................................... 8

Derivation of revenue cap and market fee rates ................................... 8

Regulatory years ........................................................................................ 8
Revenue control model ............................................................................... 8
Annual Revenue Requirement .................................................................... 9
Calculation of the Smoothed Maximum Allowable Revenue (SMAR) .......... 9
Maximum Allowed Revenue ..................................................................... 11
Estimation of cost “building blocks” for ARR estimate ............................... 13
Arrangements for recovering establishment costs .................................... 15
Prudency and efficiency of Revenue Proposal .......................................... 15
Structure of market fees ........................................................................... 16
Setting market fees ................................................................................... 16

Process and timelines for Revenue Proposals ................................... 17

Process and timelines for Revenue Proposal............................................ 17
Timeline and process for annual MAR verification .................................... 19

Reopening Revenue Control Determination ........................................ 20

Process for amending MFSRs .............................................................. 20

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Introduction
1. This document sets out the draft Market Fee Setting Rules (MFSRs). The
MFSRs, once finalised, will prescribe the arrangements under which
Wholesale Electricity Market Spot Market (WESM) fees are to be set.
Under the WESM rules the PEMC or the Market Operator (broadly, the
‘Authorized Entity’) submits a Revenue Proposal to the Energy
Regulatory Commission (ERC). These draft MFSRs includes the
procedures for developing Revenue Proposals, the specific method for setting
the Maximum Allowed Revenues (MAR) and the method for calculating the
Market Fee Rates.
2. These draft MFSRs were prepared by an ad hoc Technical Working Group
(TWG) within PEMC. The draft MFSRs form part of PEMC’s proposal to
the ERC for an output-based ‘building-block’ methodology for estimating
MAR. An accompanying discussion paper dated October 2009 considers
alternative options and explains the basis for these proposed MFSRs.
3. The discussion paper and these draft MFSRs were developed in response to
the ERC’s decision on March 16, 2009.1 The ERC approved further study
and development of an output based methodology; the detailed draft rules
and guidelines which would result from the study were to be submitted to the
ERC for review, prior to the next fee setting process. Together with the
TWG, a consultant, Kieran Murray of LECG, was hired by PEMC to assist in
the formulation.
4. The draft MFSRs provide detailed rules for preparing Revenue Proposals, but
do not in themselves constitute a Revenue Proposal.
5. These draft MFSRs set out:
• Preliminaries
• Fee setting methodology
• Structure of market fees
• Fee setting process
• Transitory and savings provisions

1
ERC Case No 2008 – 050 RC

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Preliminaries

Cross references
6. The Authorized Entity must apply the MFSRs in developing the structure and
level of market fees in accordance with sections 2.10 and 2.11 of the WESM
Rules.
7. When approving the structure and level of Market Fees, the PEMC Board
and the ERC will consider whether the MFSRs were correctly applied. This
consideration is in addition to ensuring that the proposed structure and level
of Market Fees comply with all other relevant provisions of the EPIRA and
WESM Rules.
8. Section 2.10.2 of the WESM Rules should be amended to say:
“… the Market Operator will develop the structure and level of market fees
in consultation with WESM participants and in compliance with applicable
Market Fee Setting Rules.”

Definitions
Annual Disclosure An annual statement produced by the Authorized Entity
Statement which includes the MAR for the forthcoming Regulatory
Year, any Verification Adjustment value and re-estimates
Market Fees for the forthcoming Regulatory Year.
ARR Annual Revenue Requirement before smoothing. This is
calculated using the cost building blocks.
Capital charge A cost building block component calculated by multiplying
the Regulated Asset Base plus Working Capital by WACC or
an alternative estimate of the cost of capital, expressed as a
percentage
Control The mechanism by which the Market Fee Rate(s) are
monitored by the Energy Regulatory Commission via a
Revenue Control Determination
Controlled outputs Outputs whose prices are subject to control under these Rules,
as distinct from other potential outputs that could be delivered
by the Authorized Entity but which are not subject to the
MFSRs
Control Period The period, measured in years, for which the revenue of the
Authorized Entity is set by the ERC on application by the
Authorized Entity.
Cost building blocks Operating cost, tax, depreciation and cost of capital
Cost of capital The cost of capital represents the opportunity cost of
investment in the Regulated Asset Base and in working
capital. It is commonly measured as a weighted average,

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 expressed as a percentage. This is called the weighted
average cost of capital or WACC. See ‘capital charge’.
CPI actual Philippine Consumer Price Index series, as reported by the
National Statistics Office of the Philippines
CPI forecast Consumer price index forecast series in the Philippines, as
forecast by the Development Budget Coordinating Committee
(DBCC) and reported by the Bangko Sentral ng Pilipinas,
National Economic Development Authority, and the National
Statistical Coordination Board
Depreciation The return of capital as an asset is invested, which accounts
for the gradual obsolescence or depletion of that asset.
EPIRA Republic Act No. 9136, otherwise known as the Electric
Power Industry Reform Act of 2001
ERC Energy Regulatory Commission
Form of Regulation The application of control to revenue, price or a combination
Initial Capital Base The opening value of the Regulatory Asset Base (RAB)
Input A factor required for the production of an output produced by
the Authorized Entity
Input parameter Refers to a variable used to estimate MAR and/or SMAR
MAR Maximum Allowable Revenue
Market Fees Fees charged by the Authorized Entity to Market Participants
in accordance with these Market Fee Setting Rules and
sections 2.10 and 2.11 of the WESM Rules
Market Fee Class A type or class of market fee, for example the Market
Transaction Fee or Market Registration Fee
Market Fee Rate The unit price of a market fee
MFSR Market Fee Setting Rules
Market Information A website maintained by the Authorized Entity where
Website information can be accessed by Market Participants
MAR Model A spreadsheet model containing the calculations of Market
Fees in compliance with the MFSRs
MAR Recovery A model for calculation of conversion of the MAR for each
Model Regulatory Year into a Fee for each Market Fee Class
Market Participant A WESM market participant, as defined in the WESM Rules
MTF Market Transaction Fee, a fee which is levied on transactions
in the WESM or other markets
Market transaction Market turnover, projected or actual, based on a measurable
volume unit such as MWh traded
MRF Market Registration Fee, a fee which is levied on new or
renewed registrations by Market Participants
Nominal Pesos Philippine Pesos of the day - not inflation adjusted
Non-controlled Any services or outputs provided by the Authorized Entity
outputs but not subject to Control under these Rules
Operating costs Forecast annual operating expenditure before depreciation,

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 amortisation and all financing charges (i.e. interest and
principal repayment). Also known as ‘opex’.
Output A description of the goods and services delivered by the
Authorized Entity to WESM participants
PEMC Board The Board of Directors of PEMC
PEMC Philippine Electricity Market Corporation
Performance A measure of quality, timeliness etc
indicator
Php Philippine Pesos (unit of currency)
RAB Regulated Asset Base
RAB Roll-forward The calculation whereby the value of the RAB for Regulatory
Year t1, t2, t3 etc. is adjusted in accordance with a Roll-
forward model to be included in the MAR Model
Real Philippine Peso Philippine Peso adjusted for inflation
Regulated Asset A valuation of the Authorized Entity’s assets.
Base
Authorized Entity The entity that imposes any form of market fees on one or
more groups of Market Participant, which makes it subject to
the MFSRs. The entity imposing market fees may change
from time to time, for example, following separation of an
Independent Market Operator
Regulatory Year An annual period within the Control Period
Revenue cap The MAR which is set for a given year of the control period
Revenue Control A decision by the ERC setting an approved ARR, SMAR and
Determination MAR .
Revenue Proposal The market fee proposal submitted to the ERC according to
2.10 and 2.11 of the WESM Rules
Scope of control The extent of control, as defined in these Rules
SMAR Smoothed Maximum Allowable Revenue.
Transition period The period over which specified WESM establishment costs
may be recovered from Market Fees
Verification An amount in Peso to adjust SMAR t for over or under
Adjustment recovery between actual and allowable revenue in the
previous Regulatory Year.
WACC Weighted Average Cost of Capital
WESM Wholesale Electricity Spot Market
WESM Rules The detailed rules that govern the administration and
operation of the WESM. Distinct from the Market Fee
Setting Rules (MFSRs).
Working Capital A component of the capital charge which accounts for the
Authorized Entity’s Current Assets and Current Liabilities.

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Status of the Market Fee Setting Rules (MFSRs)
9. These draft MFSRs form part of a proposal to the ERC.
10. Once approved by the ERC, the MFSRs will constitute a rule by the ERC.

Objective of the Market Fee Setting Rules

11. The primary objective of the MFSRs is to prescribe arrangements for setting
and approving the Market Fees payable by registered WESM Market
Participants under 2.10 and 2.11 of the WESM Rules.
12. The Market Fees set under these MFSRs must:
a. Comply with EPIRA.
b. Comply with PEMC Articles and By-laws.
c. Be consistent with WESM objectives (Rule 1.2.5) ‘...to establish a
competitive, efficient, transparent and reliable market for electricity
where:
i. A level playing field exists among WESM Participants;
ii. Trading of electricity is facilitated among WESM Participants
within the spot market;
iii. Third parties are granted access to the power system in accordance
with the Act;
iv. Prices are governed as far as practicable by commercial and market
forces; and
v. Efficiency is encouraged.

Control of market fees

Form of control
13. The Authorized Entity shall collect Market Fees fromMarket Participants .
Market Fees must be set in accordance with the MFSRs and are charged for
delivering outputs within the Scope of Control.
14. Total revenues from Market Fees are controlled under these MFSRs and the
amended WESM Rules.
15. The control takes the form of a Maximum Allowable Revenue (MAR) cap,
with annual verification of tariffs.
16. Before the beginning of a Control Period, the ERC will determine the level
of Smoothed Allowable Revenue (SMAR) for each Regulatory Year of the

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 Control Period. The SMAR is used to set the parameters which determine
how revenue is ‘rolled-forward’ to determine the Maximum Allowable
Revenue (MAR) that the Authorized Entity may charge Market Participants
in any year.
17. The Authorized Entity’s revenues will be subject to an Annual Verification,
following which, adjustments to the level of MAR for the upcoming
Regulatory Year may be made in accordance with paragraphs 88 to 95.
18. The Authorized Entity may recover MAR from any class of Market Fee,
provided the Fee Structure is approved in accordance with paragraphs 64 to
69 of these Rules.
19. Market Fees may be applied to all outputs within the Scope of Control or
may be sub-divided to correspond to particular output classes.

Scope of control
20. The MFSRs apply to outputs produced or procured by the Authorized Entity
that are recovered using any class of Market Fee.
21. In the event that the Authorized Entity produces other outputs that are not
recovered using Market Fees, and are thus not subject to the MFSRs, these
outputs are ‘non-controlled’.
22. While the same personnel may be involved in producing both controlled and
non-controlled outputs, the Authorized Entity must put in place policies and
procedures to ensure financial separation between controlled and non-
controlled outputs. The Authorized Entity should disclose the existence and
broad nature of non-controlled outputs, and a description of separation
policies and procedures, in its Revenue Control Proposal and in its Annual
Disclosure Statement.

Control period
23. The Control Period may have duration of between two and five Regulatory
Years.
24. In its Revenue Proposal, the Authorized Entity must set out the proposed
duration of the Control Period. This period of duration may be expressed in
calendar years or other annual periods as determined by the PEMC Board.

Output specification and WESM Work Plan

25. In preparing its Revenue Proposal, the Authorized Entity must provide a
specification of the major outputs or services provided to WESM Participants
within the Scope of Control (an Output Specification).

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 26. The Authorized Entity must ensure that the Output Specification is
quantifiable and verifiable. For the Output Specification to be quantifiable
and verifiable, it is not necessary for the Revenue Proposal to quantify inputs,
provided the principles for allocating costs between outputs are stated.
27. The Output Specification and estimation of efficient Annual Revenue
Requirements (ARR) must be consistent with achieving the WESM
objectives as set out in clause 1.2.5 of the WESM Rules.

Performance indicators
28. Nothing in these MFSRs affects paragraph 1.3.3.3 of the WESM Rules which
requires the Market Operator to publish performance indicators annually.

Derivation of revenue cap and market fee

rates

Regulatory years
29. When a calculation is required under these MFSRs:
a) Regulatory Year “t” or calendar year “t” is the Regulatory Year or
calendar year (as the case may be) in respect of which the calculation is
being made;
b) Regulatory Year “t-1” or calendar year “t-1” is the Regulatory Year or
calendar year (as the case may be) immediately preceding Regulatory
Year “t” or calendar year “t”;
c) Regulatory Year 1 is the first Regulatory Year of the Control Period;
d) Regulatory Year 0 is the year prior to the first Regulatory Year of the
Control Period.

Revenue control model

30. The PEMC Board must publish a MAR Model in electronic spreadsheet
form no later than the date at which it publishes its draft Revenue Proposal.
31. The MAR Model must be made available to WESM participants and the
Department of Energy by publication on the Market Information Website.
32. The purpose of the MAR Model is to calculate the Smoothed Maximum
Allowable Revenue under the Revenue Proposal. The MAR Model, together
with the Revenue Proposal, form the basis on which WESM participants and
the ERC assesses a Revenue Proposal and the ERC makes a Revenue Control
Determination.

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 33. The content of the MAR Model will:
a) Summarise operating costs according to outputs;
b) Calculate the SMAR series, in accordance with paragraph 36 of these
Rules;
c) Calculate MAR 1 , in accordance with paragraph 39-43 of these Rules;
d) Include a MAR Recovery Model, in accordance with paragraphs 71 to
75 of these MFSRs.
34. In interpreting the requirements for the MAR Model, the Authorized Entity
and the PEMC Board must apply the Principle of Proportionality. This
principle means that the costs of complying with these MFSRs should not
exceed the benefits, taking into account the nature and scale of the operations
undertaken, and assets managed, by the Authorized Entity.

Annual Revenue Requirement

35. The Authorized Entity will calculate in its Revenue Proposal an Annual
Revenue Requirement (ARR) for each regulatory year of the Control Period.
The ARR for each year of the Control Period (ARR t ) will equal the sum of
the following components:
a) ARR t = sum(O t , T t , D t , C t ) + TA t
Where:
O t = Operating costs, as defined in paragraph 44 of these MFSRs;
T t = Taxation, as defined in paragraph 45 of these MFSRs;
D t = Depreciation, as defined in paragraph 46 of these MFSRs;
C t = Capital charge, as defined in paragraph 47 of these MFSRs;
TA t = A transitional allowance for recovering establishment costs, as
described in paragraphs 59 to 61 of these MFSRs.

Calculation of the Smoothed Maximum Allowable Revenue

(SMAR)
36. It is unlikely that there will be a linear increase in the Annual Revenue
Requirement for each Regulatory Year calculated under paragraph 35. To
reduce the likelihood of price shocks to Market Participants and revenue
shocks to the Authorized Entity, the Authorized Entity will smooth the
allowed Annual Revenue Requirement for each year in the Control Period by
starting at the Maximum Annual Revenue for the last Regulatory Year prior
to the Control Period.

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37. The first step in smoothing the revenue over the Control Period is to calculate
the present value of the unsmoothed revenues for each year in the Control
Period and the revenue for the last Regulatory Year prior to the Control
Period (PV Raw ) as follows:

PV Raw = (MAR 0 - P o ) +
ARR 1 / (1 + WACC) 1 +
ARR 2 / (1 + WACC) 2 +
ARR 3 / (1 + WACC)3+

Where:

MAR 0 = Maximum Allowed Revenue determined for the last Regulatory

Year prior to the Control Period.

P0 = is such amount (expressed in PhP) as represent windfall gains

and windfall losses in revenue resulting from exogenous factors
in MAR 0 which if had occurred in a prior year would have
satisfied the criteria for a Re-opening under paragraph 96; the P 0
adjustment may be a positive or negative value.

ARR 1 = the annual revenue requirement for the first Regulatory Year in
the Control Period calculated under paragraph 35 of these Rules.

ARR 2 = the annual revenue requirement for the second Regulatory Year in
the Control Period calculated under paragraph 35 of these Rules.

ARR 3 = the annual revenue requirement for the third Regulatory Year in the
Control Period calculated under paragraph 35 of these Rules.

WACC = the weighted average cost of capital calculated under paragraph

49 to 51 of these Rules.

38. The second step in calculating the smoothed revenue is to calculate the
Efficiency Factor (X) for the Control Period from the solving the following
equation (where only X is unknown) using the results for PV Raw on the left
hand side of the equation from the output of the calculation in paragraph 37
above:
PV Raw = (MAR 0 - P 0 ) x [1 +
(1 + Inflation 1 - X) / (1 + WACC) +
(1 + Inflation 1 - X) (1 + Inflation t2 - X) / (1 + WACC)2 +
(1 + Inflation 1 - X) (1 + Inflation t2 - X) (1 + Inflation 3 - X) / (1 + WACC)3

Where:

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 Inflation t = the forecast inflation for Regulatory Year t, expressed in
decimal (as opposed to percentage) terms, which is used by the
ERC for the purpose of the Regulatory Reset Process for the
Control Period.

WACC = the weighted average cost of capital calculated under paragraph

49 to 51 of these Rules.

MAR 0 = Maximum Allowed Revenue in the last Regulatory Year prior to the
Control Period.

P0 = is such amount (expressed in PhP) as represent windfall gains

and windfall losses resulting from exogenous factors in MAR 0,
and determined under paragraph 37 of these Rules.

39. Lastly, calculate the SMAR targets for each of the three years in the
regulatory period, where:
a) The target for year 1 is SMAR 1 as per paragraph 40(a), below.
b) The target for years 2 & 3 are:
SMAR 2 = SMAR 1 x (1+ inflation 2 – X)
SMAR 3 = SMAR 3 x (1+ inflation 3 – X)

Maximum Allowed Revenue

40. The Maximum Allowed Revenue that the Authorized Entity may earn in a
Regulatory Year, will be determined as follows:
(a) Where the relevant Regulatory Year is the first Regulatory Year in the
Control Period, the Maximum Annual Revenue for that Regulatory Year
(MAR t ) shall be set out in the Revenue Proposal and shall be calculated
as follows:

MAR 1 = SMAR 1 = (MAR 0 - P 0 ) x (1+Inflation 1 -X) + VA 0

(b) Where the relevant Regulatory Year is any Regulatory Year in the
Control Period after the first Regulatory Year, the Maximum Annual
Revenue for that Regulatory Year (MARt) shall be set out in the Annual
Disclosure Statement and shall be calculated as follows:

MAR t = MAR t-1 x (1 + Inflation t - X) + VA t

Where:

MAR t = the Maximum Allowed Revenue (expressed in PhP) for a given

Regulatory Year in the Control Period, year t.

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 Inflation t = the percentage change in the Consumer Price Index from the
previous year.
X = Efficiency Factor (X) for the Control Period determined under
paragraph 38; the X factor may be a positive or negative value.
VA t = the Verification Adjustment to adjust for over or under recovery
between actual and allowable revenue in the previous Regulatory
Year, determined in accordance with paragraph 41; the
Verification adjustment may be a positive or negative value.
P0 = is the amount (expressed in PhP) representing gains and losses
resulting from exogenous factors determined in paragraph 37
above.

41. The Verification Adjustment (VA) will be determined as follows:

VA t = (MAR t-1 – MAR t-1a ) + (MAR t-1 - TR t-1 )
Where:
MAR t-1 = Maximum Allowed Revenue that was determined for the
previous Regulatory Year .
MAR t-1a = The Maximum Allowed Revenue that would have been
determined for the previous Regulatory Year, if the inflation
forecast was equal to actual inflation for that period..
TR t-1 = is the amount expressed in Peso billed or expected to be billed by
the Authorized Entity to Market Participants in the previous
Regulatory Year, the fee rates having been approved by the ERC
in accordance with these Market Fee Setting Rules and sections
2.10 and 2.11 of the WESM Rules, that amount being determined
using actual transaction volumes for the year or using the most
up-to-date transaction volume figures available at the time the
calculation is performed, forecast to the end of the year.

42. If VA is negative, then there is a revenue shortfall in the Regulatory Year to

which the Verification Adjustment applies. The Verification Adjustment will
be recovered by adding it to the MAR for the following year as provided for
in paragraph 40.
43. If VA is positive, then the Authorized Entity has billed Market Participants
an amount in excess of the MAR. This excess amount must be returned to
Market Participants by deducting it from the MAR for the following year.
44. For the avoidance of doubt the Authorized Entity will not be compensated or
compensate Market Participants for the time value of money associated with
the Verification Adjustment.

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Estimation of cost “building blocks” for ARR estimate
45. Operating costs are calculated as the sum of the reasonably efficient
personnel costs and non-personnel costs necessary to deliver the controlled
outputs, including an amount for estimated bad debts.
46. Taxation costs represent all national and local taxes incurred on revenue and
on input costs by the Authorized Entity in delivering the controlled outputs.
47. Depreciation costs are calculated as the return of capital invested in fixed or
intangible assets, as per the Regulated Asset Base (RAB), excluding any
land or other assets that do not depreciate. Depreciation shall be in
accordance with a depreciation method to be determined by the Authorized
Entity.
48. The Capital Charge is calculated by multiplying the average value of the
Regulated Asset Base (RAB) for each year of the Control Period plus
Working Capital by the WACC, expressed as a percentage.
Capital charge = (RAB+WC) x WACC (%)
49. The Authorized Entity may elect to calculate WACC using following default
method, which incorporates the Capital Asset Pricing Model (CAPM). The
default method is deemed an acceptable method for estimating WACC for
the purposes of estimating ARR. The default method is as follows:
WACC = (r e * E/V) + (r d *D/V) +K w
Where:
re = the cost of equity (in percent)
rd = the cost of debt (in percent)
E = the amount of equity funding assumed for Control
purposes (in PhP)
D = the amount of debt funding assumed for Control
purposes (in PhP)
V = E+D (in PhP)
Kw = correction factor to compensate for WACC model
and parameter estimation error (in percent)
50. If the Authorized Entity elects not to follow the default method provided
above, the reasons for the decision and the alternative method used must be
stated in the Revenue Proposal.
51. In proposing WACC under the default or any alternative method, the WACC
is to take a post-tax nominal form in order to be consistent with the MAR
formula.

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52. In its MAR Model and Revenue Proposal, the Authorized Entity must
publish the calculation of the WACC which will apply for the Control Period.
The Authorized Entity shall disclose values for the following parameters:
a) nominal risk free rate;
b) forecast inflation rate;
c) debt risk premium;
d) market risk premium;
e) gamma (in the event tax is payable and imputation or franking credits
are relevant);
f) proportion of debt funding;
g) equity beta
h) The value attributed to the correction factor (K w ) to compensate for
WACC model and parameter estimation error.
53. RAB is a regulatory valuation of the Authorized Entity’s assets, insofar as
those assets are used, directly or indirectly, in producing controlled outputs.
54. In its revenue proposal for the first Control Period under which the MFSRs
apply, the Authorized Entity must set out the level of its estimated Initial
Capital Base (ICB) or “opening RAB”. The ICB will be estimated from the
accounting value of the Authorized Entity’s asset base, subject to any
adjustments deemed necessary and justifiable to ensure future Controlled
revenues are set at efficient levels.
55. The basis for adjustments made under paragraph 54 must be clearly and
transparently set out in the Revenue Proposal and MAR Model, including
provision of reconciliation between the ICB and financial statements.
56. The estimated ICB and subsequent capital base will include an allowance for
Working Capital. The Working Capital allowance represents an estimate of
the Authorized Entity’s working capital requirements at a point in time. .
57. The Revenue Proposal and MAR Model must specify the method for
estimating the Working Capital allowance. This method will recognise the
variations in current assets and current liabilities from month to month and
hence peak working capital requirements, using a weighted average.
58. In its MAR Model and Revenue Proposal, the Authorized Entity must
prepare and publish in the Market Information Website a Roll-Forward
Model for determining the Roll-Forward of the RAB during the Control
Period, calculated as follows:
Average RAB for Regulatory Year t = Sum (RAB ta , RAB tb ) /2
Where:
RAB ta = the value of the RAB on the first day of the Regulatory Year t

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 RAB tb = the value of the RAB on the last day of the Regulatory Year t
RAB tb is derived from RAB t1 as follows;
RAB tb = Sum (RABta, C) - (D, A)

Where:
C = Capital expenditure
D = Depreciation
A = Sale or other disposal of an asset, the disposal being recorded at the
asset’s depreciated historical cost.

59. In its revenue proposal for the second and subsequent Control Periods under
which the MFSRs apply, the Authorized Entity may propose an alternative
method for valuing its “opening RAB”, where an alternative method can be
justified to ensure future Controlled revenues are set at efficient levels.

Arrangements for recovering establishment costs

60. The MAR incorporates a separate building block item for the recovery of
establishment costs, the Transitional Allowance (TA).
61. Establishment costs may only be recovered using Market Fees if recovering
the costs through Market Fees does not result in duplicate recovery. The
establishment costs shall include the remaining annual repayments of the
TransCo loan , inclusive of interest repayments at the agreed rate of interest,
and the annual amortisation of the Market Management System (MMS)
asset.
62. Recovery of establishment costs is limited to a Transition Period. In its first
Revenue Proposal, the PEMC Board may set out proposals on the remaining
duration of the Transition Period. The PEMC Board must also disclose the
calculation of establishment costs on the Market Information Website.
Accordingly, the MAR Model must include a sheet that details the
calculation of the proposed recovery of establishment costs.

Prudency and efficiency of Revenue Proposal

63. In developing its Revenue Proposal, the Authorized Entity must consider:
a) The efficiency and prudency of each of the cost building blocks; and
b) The quantity and quality of outputs produced by the Authorized Entity.

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Structure of market fees
64. The Authorized Entity may impose more than one type of Market Fee, using
different Fee Classes.
65. The Authorized Entity must submit, in the Revenue Proposal, a Fee
Structure Proposal that determines the Fee Classes for Market Fees.
66. Fee Classes may include, but are not limited to the following:
a) A Market Transaction Fee (MTF) for every kWh of electricity traded
through the WESM (both Metered Energy and Scheduled Reserve as
defined in the WESM Rules);
b) A Market Registration Fee (MRF) relating to the cost of registration;
and
c) One or more fees for New Market Services (NMS) that may be
introduced by the Authorized Entity.
67. The Fee Structure Proposal must include proposals about how costs will be
allocated to each Fee Class, and how each Fee Class will be charged to
different categories of Market Participants.The Authorized Entity may
propose to apply different rates to different categories of Market Participant
in a given Fee Class, provided that every participant is charged the same fee
rate as others in the same category.
68. In the event that the governance and operational functions undertaken by the
Authorized Entity are separated, the Authorized Entity should submit a new
Fee Structure Proposal which reflects these changes.
69. In developing the Fee Structure Proposal, the Authorized Entity must take
into account whether the fee structure:
a) Is reasonable given the relative involvement of each category of Market
Participant in the output(s) provided;
b) Favours or discriminates against a category or categories of Market
Participant; and
c) Prevents duplication of recovery of costs.

Setting market fees

70. In developing its Revenue Proposal and MAR Model, the Authorized Entity
must convert the MAR for each Regulatory Year into a Market Fee Rate or
set of Market Fee Rates, denominated in nominal Philippine Pesos, for each
Fee Class and for each category of Market Participant.
71. The MAR Model must incorporate a MAR Recovery Model, which converts
MAR t to Market Fee Rate(s). The MAR Recovery Model must stipulate the
volume assumptions used to convert revenues into Market Fee Rates for each
Fee Class and for each year of the Regulatory Control Period.

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 72. The Authorized Entity must specify annual target recovery amounts for each
fee class in the Revenue Proposal and the MAR Recovery Model.
73. The formula for setting the MTF Rate is:
Annual target recovery amount for Market Transaction Fees /
[Forecast Total Generation Metered Quantity for the Year (kWh) + Forecast
Total Reserve Scheduled for the Year (kWh)]
Where:
Annual target recovery amount for Market Transaction Fees = MAR t less the
sum of annual target recovery amounts from all other Fee Classes.
74. The MAR Recovery model must apply the following formula to convert the
MTF rate to the fixed fee rate for each regulatory year:
Monthly MTF charge (PhP/kWh) for each category ofMarket Participant =
[MTF Rate * (Total Generation Metered Quantity for the Month (kWh) +
Total Reserve Scheduled for the Month (kWh)).
75. Market Transaction Fees will be recovered from Market Participants on a
monthly basis. The Authorized Entity must issue invoices and the MTFs will
be payable by Market Participants within the periods specified under the
WESM Rules.

Process and timelines for Revenue Proposals

Process and timelines for Revenue Proposal

76. The Revenue Proposal process must begin no less than six (6) months before
expiry of the existing Control Period.
77. To initiate the process, the Authorized Entity must issue notices on the
Market Information Website that a Revenue Control is due to expire and that
a new Revenue Proposal is being prepared.
78. The Authorized Entity will then prepare the following consultation
documents and post them on the Market Information Website:
a) A brief paper summarising the package of documents;
b) A draft output specification for the duration of the following Control
Period, including proposed changes to the specification of outputs in
line with the current Work Program, performance indicators and
including details of the cost allocation methodology used to share costs
between different outputs;
c) A draft Revenue Proposal for the duration of the following Control
Period, including changes in the outlook for the major cost building
blocks and designated input parameters;

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 d) A draft MAR Model and MAR Recovery Model in spreadsheet form;
and
e) A proposal regarding the timing of the Verification Adjustment.
79. The Authorized Entity is required to publish its forecast and actual operating
expenditures in accordance with WESM Rule 2.11. For the avoidance of
doubt, these should be published in ‘output’ form.
PEMC Board to facilitate consultation
80. All WESM Market Participants and the Department of Energy may furnish
submissions to the PEMC Board on any matter contained in the consultation
documents.
81. In setting the due date for submissions, the Authorized Entity should provide
Market Participants and the Department of Energy no less than one month to
prepare submissions.
82. The Authorized Entity is required to publish all submissions received
(provided they are received on or before the due date) on the Market
Information Website.
83. The PEMC Board may choose to hold a hearing or hearings to enable an
interactive discussion of any issues arising in relation to the consultation
materials or submissions received.
Final Revenue Proposal for ERC Control Decision
84. The Authorized Entity must consider matters identified in submissions
received by the due date and prepare a final Revenue Proposal to the PEMC
Board not less than four (4) months before expiry of the existing Control
Period. In this respect, the Authorized Entity must identify and address all
material matters reasonably raised by Market Participants.
85. The ERC will consider the final Revenue Proposal submitted by the
Authorized Entity against the criteria set out in paragraph 12. If the final
Revenue Proposal reasonably meets the criteria set out in paragraph 12 the
ERC will approve the Revenue Proposal. If the ERC considers that the
criteria in paragraph 12 have not been met, the ERC, after consulting with the
Authorized Entity, will approve a Revenue Proposal with such modifications
as it considers are necessary for those criteria to be met. The approved
Revenue Proposal is referred to under these rules as the Revenue Control
Determination.
PEMC response to Revenue Control Determination
86. The Authorized Entity must publish the entire Revenue Control
Determination in the Market Information Website immediately upon official
receipt of the Revenue Control Determination.
87. Within one calendar month from publication of the Revenue Control
Determination, the Authorized Entity must inform Market Participants how it
intends to implement the Revenue Control Determination and whether the

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 Revenue Control Determination affects the proposed Output Specification or
Market Fee Rates. The Authorized Entity may inform Market Participants by
publishing a notice on the Market Information Website.

Timeline and process for annual MAR verification

88. Annual MAR Verification is to occur no later than two months before the end
of each Regulatory Year, on a date which is to be specified in the Revenue
Proposal (the verification date).
89. If no verification date is specified in the Revenue Proposal, the annual
verification date will be 30 November.
90. The purpose of Annual MAR Verification is to:
a) Determine the Verification Adjustment, if any, to adjust for over or
under recovery between actual and allowable revenue.
b) Verify the MAR for the forthcoming Regulatory Year, which
incorporates the most recent available forecast of CPI for the
forthcoming Regulatory Year.
91. In its Annual MAR Verification, the Authorized Entity will calculate and
present to the ERC for verification the Maximum Allowed Revenue the
Authorized Entity may charge Market Participants in the forthcoming
Regulatory Year by applying the revenue control formula set out in
paragraph 0 and the Verification Adjustment set out in paragraph 41
92. The Authorized Entity will also calculate and present to the ERC for
verification the Market Transaction Fees that will be charged to each class of
Market Participant, using the most recent available forecasts of market
volumes for the forthcoming Regulatory Year.
93. The Adjustment Value and re-estimates of Fee Rates are to be presented to
the ERC in an Annual Disclosure Statement within ten working days
following the verification date.
94. If the ERC does not object to the Verification Adjustment value, the MAR,
and Market Transaction Fees, by the end of the Regulatory Year, or within
two (2) months of the verification date, then the Authorized Entity may make
the change to the MAR for the following Regulatory Year and recalculate the
Fee Rates for the following Regulatory Year.
95. The Authorized Entity must publish the Annual Disclosure Statement and
modified Fee Rates on the Market Information Website no later than 10
business days from the start of the new Regulatory Year. It may then invoice
Market Participants in accordance with the monthly billing cycle.

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Reopening Revenue Control Determination
96. The ERC may reopen a Revenue Control Determination, on application by
the Authorized Entity, for re-consideration in any event or series of events
that have resulted in, or are likely to result in, a revenue shortfall or excess
revenue due to:

a) Unforeseen capital expenditure requirements at levels materially above

or below the forecast used to inform the Revenue Control
Determination; or

b) A change in regulatory mandate; or

c) A significant change in market structure or design, including IMO

separation.

Provided that such shortfalls or excesses are outside of the Authorized

Entity’s control and if it had been known at the time of the Revenue Control
Determination the building blocks used to set the parameters would have
been different.

97. If a Revenue Control Determination is reopened, all of the building blocks or

other key parameters constituting the existing Revenue Control
Determination may be subject to review.

98. The reopening process will be initiated by way of a formal letter to the
PEMC Board from the ERC, or by a formal proposal to the ERC from the
PEMC Board, or from the Authorized Entity with the prior approval of the
PEMC Board. Such letters or proposals must set out the reasons for the
reopening, consistent with section 96.

99. The PEMC Board and/or Authorized Entity shall set out the timeline and
process for reopening in its proposal to the ERC, which, once accepted will
be binding.

100. Pending ERC’s decision, the existing Revenue Control Determination will
apply.

Process for amending MFSRs

101. These MFSRs may be amended or modified from time to time, subject to the
ERC Rules of Practice and Procedure.

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102. A rule adopted by resolution of the ERC cannot be the subject of a motion for
reconsideration. Any person adversely affected by the rule may petition the
Commission to initiate rule-making under the ERC Rules.

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