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REGULATORY ASSET BASE VALUATION USING ODRC Meralco Experience

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Presentation on theme: "REGULATORY ASSET BASE VALUATION USING ODRC Meralco Experience"— Presentation transcript:

1 REGULATORY ASSET BASE VALUATION USING ODRC Meralco Experience
Good afternoon! Having heard all those introductions and input sessions from ERC and PB Associates, let me now share with you Meralco’s own experience with regards to the valuation of our RAB under the PBR.

2 Presentation Outline ODRC Background Asset Accounting
Replacement Costs Optimization Depreciation Results of Meralco’s ODRC Valuation Let me start by stating the outline of my presentation --- first a discussion on the ODRC background, followed by Asset Accounting … (name all 6) Some parts of my presentation contain ODRC concepts and theories already discussed this morning, so I will just go over them very quickly without further explanations. Instead, I will focus more on the problems encountered by Meralco with the PBR, and the learnings we got from this exercise.

3 Conceptual Framework Optimized Depreciated Replacement Cost (ODRC) is calculated based on the gross current replacement cost of assets that are adjusted for over-design, over-capacity and/or redundancy, less an allowance for depreciation. Now, very quickly, just to reiterate the concept we learned earlier, the ODRC is an approach normally applied to specialized assets such as electricity transmission & distribution networks. It is also a methodology considered consistent with the building block approach used for rate setting purposes, and it is the method specified under the RDWR. (Read the slide) This concept is consistent with the principles of fairness & equity required in assessing access charges in that users (consumers) only pay for those assets that are required in a commercial context and therefore are not required to pay for any excess capacity or over-engineering embodied in the existing assets. The ODRC is a valuation approach used to assess the value of assets where: (1) the base value of the assets can be based on historical asset costs, indexed replacement costs or on a modern equivalent asset base (MEA); and (2) an optimization component is introduced to ensure that assets are constructed in the most efficient manner possible while maintaining required service standards.

4 Typical Entries in the ODRC Register
Now let me show how an ODRC register looks like. Actually, the entries in the ODRC register (asset description, installed date, age, historic cost, replacement cost, optimization adjustment, and Optimized Depreciated Replacement Cost) are prepared by both Meralco and PB Associates. The information on the first 9 columns (category, asset code, historic cost, etc.) are inputted by Meralco, while the other remaining 4 columns are established and inputted by PB Associates (RC, optimization adjustment, ORC, ODRC).

5 Asset Accounting

6 Asset Accounting Tools
Fixed Asset Register (FAR) Automated Mapping/Facilities Management (AM/FM) Field Verification/Sampling As part of the initial steps toward asset valuation, PBA made use of these asset accounting tools: The Fixed Asset Register, more commonly known in Meralco as the Asset Tracker (AT) is a very large database of a stand alone information system that is manually updated for movements in Fixed Assets. It has the functionality of providing the historical cost information, count, asset description, installation date and location of the assets. Meralco also maintains an AM/FM system that is linked to a Geographic Information System (GIS). The AM/FM system contains detailed information for network (or system) assets including physical location, category and sub-category. However, the system does not hold the installed date for the majority of the assets. Note that the AT has information for all fixed assets of Meralco, whereas the AM/FM contains information only on the network assets. Field surveys were done by PB Associates to verify the existence of assets in the AT and AM/FM System in the field.

7 Challenges Encountered by Meralco
Asset information was stored in several databases so asset tracker counts and other sources such as Mapguide & AM/FM, Meter Device Management System (MDMS), Transformer Inventory (TRINV), OTMS, CMS and SCADA have discrepancies. Asset Tracker provided the historic costs, count, age AM/FM system provided the physical location for verification ERC used the Asset Tracker after comparison and verification with other asset database The biggest challenge for Meralco was this: Asset information was available in different databases. PB Associates said that our Asset Tracker (AT) only contains historic costs, count, and asset age data of repetitive assets (poles, wires, DTs). It needs to verify the assets in the asset tracker in the field, but the asset tracker has not enough information on the location of assets. So, PBA relied on the AM/FM System to verify the location of the repetitive assets. Though there are discrepancies between the AT and the AM/FM system, PBA said that they are immaterial (only 5% discrepancy) so the AT was used as the main basis for the development of the ODRC register. Nonetheless, in any case, optimization of these assets has reduced the quantity of assets deemed to have excessive counts (e.g. meters).

8 Challenges Encountered by Meralco
For Substation Assets Asset accounting was done using 100% field survey of all Meralco substations (79 major substations and 44 minor substations) Installation date was captured during site inspections from name plate ratings Count of equipment was determined using single line diagrams Extensive photographic records were taken For substation assets, PBA said that the Asset Tracker cannot be sorted and cleansed to allow the development of ODRC register data. For one, the AT description for substation assets is difficult to be classified according to RDWR asset categories. This is because under the Old FERC category – substation is only one line account item New RDWR category – station equipment is further classified into 6 sub-categories: power transformer switch gear protective equipment metering & control equipment communication equipment other station equipment So, PBA implemented a superior method of 100% field inspection in accounting for Meralco’s substation assets. (read the slide)

9 Sample Meralco Substations Survey Schedule
Major Substations: From March 15 – April 7, 2006 Minor Substations: From June 1 – June 8, 2006 D The survey of all the Meralco substations took almost a month. The survey started on March 15, 2006 and ended in June 8. PB Associates assigned 5 teams of appraisers inspecting 5 different substations per day. Each team was accompanied by Meralco personnel from Substation, Power System Protection, SCADA, and Electric System Planning offices. (Groups A, B, C, D , E represent the 5 teams of PB Associates and AACI who conducted the field verification.)

10 Actual Field Verification
Pre-survey Meeting Here is a picture of the pre-survey meeting last March 15, In this meeting, the objectives and procedure to be followed in conducting the 100% inventory of all substation assets were agreed upon.

11 Verification of Single-line diagrams
Actual Field Verification (I’m not an engineer, so allow me to look at my notes to describe the pictures, because I might be saying the wrong description for each picture.) The picture at the left shows the appraisers verifying the substation equipment count and ratings with what were installed in the field. In the picture at the right, the appraisers inspect the nameplate ratings of the circuit breaker to estimate its installed date. Verification of Single-line diagrams and nameplate ratings

12 Verification of switchgear and control
Actual Field Verification Verification of switchgear and control room equipment These pictures show the inspections of the switchgear (left) and the protection and control panels (right).

13 Learnings on Asset Accounting
There should only be one facility manager per item who tracks the total count & other relevant information (installed, for test, under repair, available in stock, for disposal, monthly usage and if possible forecast requirements). Revive the pole monitoring system. Assign company numbers to all major equipment upon acceptance. For the asset accounting activities, we realized that it was difficult to get asset information from different data sources. Since these different data sources are maintained by different people/different offices, they tend to have discrepancies in terms of asset information. There will always be different versions of the same asset information. Based on this, one of the solutions being considered is that there should be one facility manager per asset item who will keep track of the important asset information and store them in one integrated system. We have actually a task force group called NAM (Network Assets Management) group that looks into this. We also did benchmarking activities with other Asian utilities as to how they effectively manage and account for their network assets. For the poles, we realized that we need to revive our pole monitoring system. And for the major equipment, we need to assign company numbers so that asset information can be monitored, updated and recorded in a timely manner.

14 Replacement Cost (RC)

15 Replacement Cost Replacement Cost can be established by:
Reference to historical costs, adjusted for inflationary increases since construction (indexation) Comparison with recent costs of similar assets (replacement cost method) Reference to technologically advanced assets in use elsewhere (modern equivalent asset) Aside from material and labor costs, RC includes design and engineering costs, transport, freight, duty, local delivery, interest during construction, etc. There are three methods of establishing the replacement cost of assets; these are: indexation, replacement cost analysis and the modern equivalent asset approach. These were already discussed earlier so I won’t go through them in detail anymore. Indexation: This is used for assets where there has been little technological change and relevant costs are included in the valuation. This method is linked to the historic cost of the asset. Replacement cost analysis: This includes the valuation of the asset at their current unit price multiplied by their volumes. Modern Equivalent Asset: This method values relevant costs at the cost of a modern equivalent asset with similar service potential.

16 Cost Estimating Methods
Challenges Encountered by Meralco Cost Estimating Methods 1. There were differences between the estimated and actual costs because of the following: Average material costs were used instead of last purchase cost. Overtime and night differential cost not considered as relevant cost. 2. Actual and estimated labor cost do not match perfectly. We now go to the challenges encountered by in the aspect of replacement costs. Meralco submitted its recommended replacement costs of assets based on its existing cost estimation methodology. However, upon careful study and analysis of this of this cost estimation method, it appears that this cost estimating method used average prices instead of last purchase price. Also, this estimating method does not include overtime costs as relevant cost. Therefore, the current Replacement Cost estimating methodology of Meralco in its systems like WOMS, MWMS, OTMS, yield understated costs. WOMS – work order management system MWMS – maintenance work management system OTMS – operating trouble management system As a result, the estimated and actual labor cost are also not that accurate.

17 Learnings on Replacement Cost
Incorporate overtime and night differential pay in the cost estimates. Review manhours requirement per constructive unit. Implementing offices to explain if there are wide discrepancies between estimated and actual costs. To reflect a more accurate replacement cost, Meralco should incorporate overtime costs, differential pay costs, and other relevant costs currently not considered in its estimating methodology. Meralco should also review its required man-hours per constructive unit in its project cost estimating modules because these man-hours were not regularly updated and may be outdated already. Also, to check for replacement cost accuracy, Meralco should also implement some feedback mechanism on actual and estimated costs by the implementing offices.

18 Optimization

19 Optimization In practice, optimization is carried out in accordance with the following principles: Exclude stranded assets. Optimize the configuration of the network – system is reconfigured resulting in a lower value network. Optimize the capacity of elements in the network. Optimize network engineering – components of the network are replaced with components with lower value. Optimize stores and spares. With regards to optimization, the following principles were used by PB Associates to optimize Meralco’s assets: Stranded assets were optimized. System is reconfigured to see if it can be replaced by a lower value network. Over-capacities were optimized. Ratings of equipment were replaced with lower values to see if they can be replaced with lower ratings. Stores and spares were also evaluated to check for excesses.

20 Planning Horizon Network Components Planning Horizon
Subtransmission lines 15 years (2022) Substations (excluding transformers) Primary distribution circuits Points of connection to transmission network Substation transformers 10 years (2017) Distribution Line Transformers Secondary distribution circuits 5 years Low voltage network (2012) Other distribution assets The above table shows the ERC-specified planning horizons for the network components. As the peak load in the Philippines occurs in summer prior to the start of the first regulatory year (July 1, 2007) of the Second Regulatory Period, planning horizon commences from year 2008. Planning horizon refers to the time period during which the asset is allowed to attain its service potential or optimization criteria. If not, the asset will be optimized out. For example, the power transformers have a planning horizon of 10 years and an optimization criteria of 70%. This means that an existing power transformer is allowed to attain 70% utilization throughout the planning horizon without being optimized. Planning horizon is different from an asset’s economic or useful life.

21 Factors Considered in the Optimization
Loading of delivery point power transformers or grid exit points Loading of subtransmission lines Subtransmission System Configuration (number and size of transformers and feeders per substation) Loading of substation power transformers Substation topology (breaker-and-a-half bus configuration against single bus scheme) Substation engineering (AIS or GIS 34.5 kV switchgear, spare GIS breakers, OLTC vs. AVRs) Meralco submitted and explained these data to PB Associates during the valuation process. These data served as reference of PB in conducting the optimization. (Just read the following data to say that Meralco submitted them and PB Associates evaluated accordingly…)

22 Factors Considered in the Optimization
7. Loading of distribution lines 8. Loading of distribution line transformers 9. Circuit breaker interrupting current ratings 10. Power conditioning equipment 11. Low voltage service 12. Spares – meters, DTs, poles and wires 13. Load Forecast … PB Associates also reviewed the load forecasting methodology employed by Electric System Planning and they said that it was robust.

23 SUMMARY OF PROPOSED OPTIMIZATION OF PBA OF MERALCO DISTRIBUTION ASSETS
Asset Sub-Category Description Count Substation I kV GIS cost to AIS cost 30 II. Breakers for future use on GIS Substations a. CBP1A 3 b. Hillcrest 2 c. Legazpi d. Zapote III. Optimisation due to CB Fault level Optimisation * a. 40 kA to 31.5 kA 22 b. 40 kA to 25 kA 44 The above table is a portion of the optimization done by PB Associates with regards to Meralco’s distribution plant assets. (Again, please allow me to read from my notes because the explanations for the optimization are somewhat technical terms for an accountant like myself; for the engineers, I’m sure they will understand.) Thirty (30) of our 34.5 KV Gas-Insulated Switchgears (GIS) were optimized because PB Associates said that Air-Insulated Switchgears (AIS) can be used instead. Ten (10) of our 115 KV GIS circuit breakers were also optimized because PB said that they are not yet being used within the planning horizon. Meralco installed these breakers in advance to avoid compatibility problems later. Sixty-six (66) of our 40 kA breakers were also optimized to 31.5 kA and 25 kA. PB evaluated that the expected fault currents to be experienced by these breakers will be lower than 40 kA. The optimization of circuit breakers was not included in the final valuation report, because the cost is not material as per PB Associates. * Optimization of circuit breakers was not included in the final valuation report but included in the optimization report.

24 Loading Of Distribution Transformers (2012)
SECTOR TOTAL DT CAPACITY IN 2006 ENERGY DELIVERY APRIL, 2012 UTILIZATION (KVA) (KWH) LF=1.0 LF=0.4 ALABANG 899,480.00 161,535,234 24.9% 62.4% BALINTAWAK 735,964.50 116,700,321 22.0% 55.1% DASMARINAS 770,885.50 103,218,433 18.6% 46.5% MANILA 1,551,839.50 248,179,890 22.2% 55.5% PASIG 2,490,373.50 381,887,940 21.3% 53.2% PLARIDEL 654,713.00 103,302,858 21.9% 54.8% RIZAL 642,898.50 118,988,822 25.7% 64.3% SAN PABLO 419,290.50 62,890,315 20.8% 52.1% STA. ROSA 722,460.50 114,500,776 55.0% VALENZUELA 1,322,403.50 196,614,651 20.6% 51.6% TOTAL 10,210,309.00 1,607,819,240 54.7% This is an example of optimization done on distribution transformers. As a general rule, 50% is the acceptable minimum energy utilization for a typical load factor of 0.4. For the DTs, the optimization was only applied in the Dasmariñas Sector because the expected loading of our DTs there was only 46.5% which is less than the 50% optimization criterion.

25 SUMMARY OF PBA’s PROPOSED OPTIMIZATION OF MERALCO DISTRIBUTION ASSETS
 Asset % Optimized 1 Substation 6.72% 2 Line Transformers * 0.16% 3 Meters 40.41% Amount of optimization in final determination: Switchgear – P659,677,151 Meters – P10,561,217,945 Excess meters determined by ERC: Meralco ERC Single phase ,341 (5,104,273 – 4,220,932) LV secondary ,814 (214,673 – 62,860) Total ,035,155  excess meters optimized out * PBA found the optimization of line transformers not significant and thus was not included in the final valuation report.

26 Learnings on Optimization
Review policies on GIS modules and circuit breaker fault ratings. Improve the process of DT monitoring (existence, SIN to DT connectivity, kWH to kW computation). Review policies on DT sizing to increase the loading of the DTs (minimum capacity, initial kVA size). Review asset data on meters. Meralco’s initial GIS modules should be reviewed, since our practice is to build the complete 115 kV module of our GIS substations during the initial construction stage to avoid compatibility problems later, even if some of the 115 kV breakers will remain idle for several years. PBA optimized out these breakers. Our circuit breaker fault current rating of 40 KA should also be reviewed because a number of our circuit breakers were optimized out. PB Associates said that some of the 40 KA breakers can be downgraded to lower ratings because the fault currents will be less than 40 KA. Fault current ratings of breakers should be based on future or expected fault current levels in the planning horizon. (KA is kilo-amperes and kVA means kilovolt-amperes. KA is a fault c current magnitude and KVA is a capacity.) Since some of our DTs were optimized out due to < 50% loading, there should be a review on our DT sizing. Meralco should also review its asset data on meters and continue the cleanup of meter data base, to update the information on the asset tracker .

27 Depreciation

28 Depreciation Straight line depreciation is adopted.
Factors to consider: Effective lives – estimated life, assuming continued use in its present function as part of a continuing business. Age of equipment PB Associates used the straight line method of depreciation using the effective and standard lives and equipment age.

29 Factors in assessing effective lives
Manufacturers’ recommendations Maintenance levels and life extension policies Environment in which the assets reside External factors such as supply/demand characteristics Physical, technological, functional and economic obsolescence Survivor data – failure rates PB Associates considered these factors in assessing the standard lives of Meralco’s assets: Frequent maintenance extends asset life. High weather temperature shortens asset life. Extreme operating conditions like high loading levels shorten asset life. Rapid technological changes (e.g. for computers) shorten asset life. PB Associates also considered failure rates of equipment to estimate asset lives. (Failure rate is no. of failures per year per equipment or per asset category)

30 Challenges Encountered by Meralco
Insufficient validated failure rate records and asset life of equipment - Power Transformers, Breakers, Distribution Transformers, Meters, Poles and Wires - Not all asset data were available or easy to gather Aside from depreciation, this data is used to justify spare units Because we cannot provide our own asset failure data, PB Associates used their expert and professional judgment in estimating the standard effective lives of our assets. In the RORB methodology, there was no incentive for utilities to get record and study failure rate data. However, in the PBR, asset failure data affect the standard life of assets. Even CEPALCO and DECORP cannot provide robust asset failure data.

31 Learnings on Asset Lives
Finalize failure rates for power transformers, distribution transformers and meters. PBA used a 10% annual DT failure rate (of the total DT population) Due to the importance of failure rate data of equipment, Meralco must have failure rates of its equipment especially for power transformers, distribution transformers and meters.

32 Results of Meralco’s ODRC Valuation

33 Results of Valuation In the Distribution plant category, Asset Category A2 (structures and improvements – distribution) was optimized by 1%. Asset Category A3b (the optimized circuit breakers) was optimized by 7% (P633,306,589 in the final determination; P659,677,151 in the optimization report).

34 Results of Valuation The last item optimized for distribution plant was the asset category A16 (meters), which was optimized by 40% (P10,561M). For the total Distribution Plant, the optimization was 8% and the ODRC is 55% of the Replacement Cost. The Distribution Plant Asset Category comprises 79% of Meralco’s Regulatory Asset Base (RAB). Excess meters determined by ERC: Meralco ERC Single phase ,341 (5,104,273 – 4,220,932) LV secondary ,814 (214,673 – 62,860) Total ,035,155  excess meters optimized out

35 Results of Valuation For General Plant, asset category B1 (land and land rights – non- network) was optimized by 13% (P2,241M). For category B2 (structures and improvements), the optimization was 8% (P371M). For the entire General plant category, the optimization was 9%. General Plant comprises 21% of Meralco’s RAB.

36 Results of Valuation As of June 30, 2006
In summary , the optimization done for Meralco’s assets was 8.2% and the total ODRC value was 57% of the Replacement Cost. Based on ERC’s final determination released last Aug. 31, 2007, the final initial value of Meralco’s RAB as of June 30, 2006 was P96,375M which is about P285M lower than the initial valuation figure of P96,640M. The difference can be due to Meralco’s voluntary submission of removing from the RAB those properties which are intended to be used for commercial and office spaces (strip mall & BPO). Since these spaces will no longer be required for electricity distribution purposes, a reduction in RAB was deemed appropriate by Meralco. Added info: MFC (Jollye) was optimized out 100%, but a portion of CWC (formerly JFCH) or 67.83% was restored back to RAB after Meralco pointed out that % of CWC’s OPEX was approved (this is the proportion of total OPEX related to distribution network employees).

37 THANK YOU!


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