Step 10: Describe how tariffs are revised and investments approved

Tariff revision process: under a COS approach, the basic procedural methodology typically involves the utility and the regulator formally interacting, in accordance with defined protocols and schedules, to specify prices. In these proceedings, the utility’s primary responsibility is to provide data and supporting materials, in formats to be specified by the regulator. The regulator’s responsibilities are to: (i) define the format for reporting information; (ii) review the quality and accuracy of the data and, as necessary, request additional information; and (iii) compute tariffs in accordance with defined and documented methods. In addition, interested stakeholders (e.g., large customers, representatives of residential customers, economists, etc.) should be provided an opportunity to present testimony during the proceedings.

The utility submits a tariff proposal, with supporting documentation, to the regulator

Presentations to the regulator, with stakeholder representatives allowed to observe

Stakeholder requests for information and clarification are submitted to the regulator for review

Public hearings where the utility and other stakeholders present

The utility submits responses to the regulator

Regulator identifies questions and additional information required from the utility

The regulator issues a decision

The utility publishes the tariff

The tariff takes effect

illustrative schedule for the tariff review process

Treatment of future capital expenditures: a key issue faced in certain regions, particularly in growing economies, is how to support continuing investment in energy infrastructure. In particular, the issue centers on how to provide the relevant incentives for ensuring sufficient investments today and in the future to prevent shortages in service provision, while discouraging unnecessary and inefficient spending. This conflict is often resolved by the utility detailing their long-term capital expenditure plans, which are then subject to review by the regulator (and potentially, at the regulator’s discretion, independent experts). These reviews typically occur ex-ante, with approved capital expenditures incorporated in rates for the forthcoming regulatory period. There is also an ex-post review of performance related to capital expenditures from the previous period, with compensation to customers and a reduction in the total revenue requirement if capital expenditures for the previous period is not spent. Furthermore, to ensure competition in investment procurement processes in monopoly-related areas, such as transmission, this mechanism for approval of future capital expenditures is often combined with a request for proposal (“RFP”) process for new builds.

Copyright © 2022 Asian Development Bank. All rights reserved.
arrow-uparrow-downarrow-leftarrow-right linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram