Schedule 3
(Regulation 7)
TRIENNIAL TARIFF ADJUSTMENT
The triennial tariff adjustment procedure comprises three steps:
1. Defining the service licensee's reasonable cost of service
2. Determining the allowed real revenue for each year
3. Setting the tariff rates.
1. Defining the reasonable cost of service
For each year in the tariff review period, the reasonable cost of service is measured by applying the following formula:
C = (RAV x RoR) + Dep + Opex
Where:
C = Reasonable Cost of Service
RAV = Regulatory Asset Value (1.1)
RoR = Allowable Rate of Return (1.2)
Dep = Depreciation (1.3)
Opex = Operating and Maintenance Expenditure based on Current Prices (1.4)
1.1 Determining the Regulatory Asset Value
The Regulatory Asset Value is to be determined using the following formula:
*Regulatory Asset Value = Opening Assets + Forecast Capital Expenditure – Forecast Depreciation – Forecast Customer and Government Contributions
Where:
| Opening Assets | = | Regulatory Asset Value at the start of the Tariff Review Period as determined below |
| Forecast Capital Expenditure | = | New assets forecast to be created annually, after the start of the Tariff Review Period, including rehabilitation and maintenance of existing assets and new infrastructure |
| Forecast Depreciation | = | Annual amount for depreciation forecast from the start of the Tariff Review Period |
| Forecast Customer and Government Contributions | = | Assets forecast to be paid for by the customers or by Government over the tariff review period
(e.g. connection assets) |
*All assets that are used in providing the service to customers are to be considered service licensee's assets. Assets are to be valued on a historic cost basis.
Opening Asset Value
For the first triennial tariff review application, opening assets will refer to a historic cost-based value of the assets of the service licensee in the year of the tariff review application. This value will be determined by a financial advisor, approved by the Commission, engaged by the utility.
In subsequent tariff reviews, the Opening Asset value is to be calculated according to the following formula:
Opening Asset = OAt-3
t = Year of the Triennial Tariff Review
t-3 = Final year in the previous Tariff Review Period
OAt-3 = Opening Assets in the previous Tariff Review Period.
= Actual new assets created, including rehabilitation Actual Capital Expenditure and maintenance of existing assets and new infrastructure over the past 3 years, adjusted under regulation 11;
= Actual annual amount for depreciation recorded Actual Depreciation over the past 3 years
= Actual assets paid for by the customers and Actual Customer and Government by Contributions over the Government Contributions past 3 years (e.g. connection assets).
1.2 Allowable Rate of Return
The service licensee's allowable rate of return must be calculated according to the following formula:
RoR = Bank Rate + Q
Where:
RoR = Pre-tax Rate of Return
Bank Rate = Average twelve months deposit rate paid by commercial banks in Saint Lucia
Q = Additional return required by investors for an investment with similar risk characteristics, calculated as described below.
Calculating Q
Q is to be calculated at every third triennial tariff review in the following way:
1. In year one, a financial advisor, approved by the Commission, advises on the full post-tax equity return on investment in businesses with commensurate risk levels to the service licensee, an applicable gearing or leverage ratio, and an estimated debt risk premium.
At future triennial tariff reviews, the Commission shall review the estimated debt risk premium if there is sufficient evidence that existing levels are inadequate or excessive.
2. The Commission shall calculate Q according to the following formula:
Where:
g = Gearing or leverage ratio defined in step one
d = Debt risk premium defined in step one + the Bank Rate
e = Post-tax equity return defined in step one
t = Saint Lucia's corporate tax rate
Bank Rate = Average twelve months deposit rate paid by commercial banks in Saint Lucia.
1.3 Depreciation
Assets are to be depreciated on a straight line basis, according to a depreciation schedule.
Depreciation must be in accordance with generally accepted accounting principles and practices as used by the service licensee for accounting purposes, or as otherwise specified by the Commission.
1.4 Allowable Operating and Maintenance Expenditure
Allowable Operating and Maintenance Expenditure will include all operation and maintenance costs that are reasonably incurred by the service licensee in providing services to consumers.
Expenses incurred in building customer awareness about aspects of service provision, including billing and tariff information, information on customer obligations and liabilities, complaints processes and customer rights will be included in operations and maintenance expenditure if reasonable and justified.
Goodwill costs, brand building, sponsorships, and any expenses that are incurred in activities other than providing services to Saint Lucian customers will be excluded from the allowable Operating and Maintenance Expenditure.
2. Determining the Allowed Real Revenue*
The Commission shall set the service licensee's Allowed Real Revenue for the next three years in order that: NPV (C) = NPV (R)
Where:
NPV means Net Present Value
C = Reasonable Cost of Service for the Tariff Review Period
R = Total revenue earned by the service licensee from supplying services over the Tariff Review Period
Tariff increases are smoothed by applying a K Factor.
NPV (C) will be calculated according to the following formula:
Where:
t = year
Ct = Reasonable Cost of Service in year t
r = Rate of Return (calculated as specified in section 1.2) Tariffs in year t (in current prices)
NPV (R) will be calculated according to this formula:
Where:
t = year
RTt = Tariffs in year t (in current prices)
Qt = Forecast demand in year t.
K Factor
The K Factor to be applied to each of the three years of the tariff review period, is to be determined as follows:
l. The service licensee's total revenue for each year in the triennial period must be set so that it equals the reasonable cost of service for the same year.
2. The tariff is then to be calculated by dividing the total revenue, by the forecast demand for each year.
3. If the resulting tariff fluctuates significantly from year-to-year, the changes are to be smoothed out so that NPV(C) is still equal to NPV(R) over the triennial period.
4. The smoothed change in tariffs over the triennial period is the K factor for each year of the tariff review period.
* Ensuring the service licensee's ability to finance investment in setting the allowed revenue, and smoothing changes in tariffs over the triennial period, the Commission shall ensure that given reasonable costs and financing requirements, the service licensee is able to meet reasonable debt covenants, including interest and debt service coverage ratios.
3. Setting the tariff rates
The service licensee's tariff review application must include proposed tariffs for the Commission's approval. The Commission shall review the proposed tariffs taking the following into account: the service licensee's allowed real revenue, the principles as stated in Part 3, Division 5 of the Act and Part 3 of the Water and Sewerage (Tariff) Regulations.
(Substituted by S.I. 156/2020)