Office of Utilities Regulation

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1 Office of Utilities Regulation DETERMINATION NOTICE National Water Commission Annual Price Adj.ustment Mechanism and X- Factor Application 2017 DECEMBER 11 OFFICE OF UTILITIES REGULATION 3rd Floor PCJ Resource Centre 36 Trafalgar Road Kingston 10 Jamaica West Indies

2 DOCUMHNT TITLE AND APPROVAL PAGEl 1. DOcuMENT NUMBER: 2Oi7AVAs/002mET.Ooi 2. DOCUMENT TITLE: National Water Commission Annual Price Adjustment Mechanism and X-Factor Application 3. PURPOSH OF DOCUMENT This document sets out the Office's decision on the applicable Annual Price Adjustment Mechanism percentage to be applied to the NWC's base rates and miscellaneous charges. The document also specifies the applicable X-Factor percentage to be applied by the NWC. 4. ANTECHDENT PUBLICATIONS Publication Number Publication Title Publication Date 2016IVAS/003/DET National Water 2016 December 5 Commission Mid-Tariff Review /WAS/004RCN.001 Reconsideration of the Office's Decision: 2014 July 24 (Document No. 2013/WAS/004/DET.003) on "National Water Commission Review of Rates" 2013/WAS/004DET.003 National Water Commission Review of 2013 October 1 Rates - 5. Approval This document is approved by the Office of Utilities Regulation and the decisions therein become effective as of 2018 January 1. On behalf of the Office:AnsordE.Hewitt Director-General 2017 December 11 2fjr]/wA:s rym. r>ii.fyoi

3 Contents Abbreviations, Acronyms and Definition Executive Summary Introduction Legal Framework OuR's Analysis Annual Price Adjustment Mechanism (ANPAM) X- Factor Rates and Charges 2f)T]/wA:s/cyo2/r>II.ryoi

4 Abbreviations, Acronyms and Definition ANPAM Commission - CPI FE KSA kwh NRW NWC NWC Act OUR/Office - OUR Act PAM Annual reset for Price Adjustment Mechanism National Water Commission Consumer Price Index Foreign Exchange Kingston and St. Andrew Area Kilowatt Hour Non-Revenue Water National Water Commission National Water Commission Act Office of Utilities Regulation Office of Utilities Regulation Act Price Adj ustment Mechanism 2f)T]/wA:s Orn/r>II.col

5 Executive Summary On 2017 November 7, the National Water Commission (NWC) submitted a request to the OUR seeking an Annual Price Adjustment Mechanism (ANPAM) of 5.73% to be applied to its base rates and miscellaneous charges effective 2017, December 1. However, by way of a revised submission received on 2017 November 21 the NWC requested instead that the ANPAM adjustment be set at 6.27% with an effective date of 2018 January 1. Further, in a letter dated 2017 November 9, the NWC proposed that the X-Factor adjustment for the next year be treated in one of two ways: the x-factor be held at 5.5% for the remainder of the tariff period; or the adjustment to the X-Factor should be based on the twelve (12) month average perfomance of non-revenue water (NRW) rather than a point to point comparison of two (2) data points over twelve (12) months. In addition, NWC requested a review of the current methodology used to determine NRW. The NWC took the position that the methodology now employed, which it claims is based on the percentage volumetric difference between sales and production, is a poor technical indicator for estimating NRW. Analysis The OUR has verified the information presented by the NWC in support of its ANPAM request. Further, the Office has decided that an ANPAM adjustment of 6.27% should be applied to the NWC's base rate and miscellaneous charges. The application of the ANPAM becomes effective 2018, January 1. Consequently, the new base variables for the PAM are as shown in Table 1 below. Table I: New Base Variables 2!rIT]/wA:s/ryo2jr]rl.froi

6 With respect to the X-Factor adjustment, the OUR conducted an analysis based on a comparison of the `12-month average' NRW over a two (2) year periodt. This analysis indicated that the differential between the average monthly NRW for the two years was 0.7 percentage points. As a result the Office has determined that the X-Factor should move from 5.5% to 6.2%. On the matter of the request for a review of the methodology used to determine NRW, the NWC will be required to provide a formal and detailed proposal on its methodological perspective to facilitate a comprehensive regulatory analysis of this matter. 1 That is ct Sept and ct -Sep !fIT]/wA:s/orn r>fi.col

7 Introduction The Office of Utilities Regulation (OUR) made a provision in the National Water Commission Review of Rates - (Document No. 2013/WAS/004/DET.003) (hereinafter called the Tariff ) for the approval of the Price Adjustment Mechanism (PAM) to capture the effects in the monthly movement of selected input cost over which the National Water Commission (NWC/Commission) has no control. The PAM corrects for movement in Consumer Price Index (CPI), Jamaican dollar exchange rate relative to the United States Dollar (FE) and Electricity Prices (Kwh). The PAM is applied to NWC's customers' bills on a monthly basis. The Office had also determined that on the anniversary date of the PAM the base values for the three (3) components in the mechanism would be reset. This annual reset is referred to as the ANPAM. Additionally, in -National Water Commission Mid-Tariff Review 2016 (Document No. 2016/WAS/003DET.001) (hereinafter called the Mid-Tariff Determination Notice), the Office took the decision to retain the X-Factor percentage at 5.5% which existed at that point. However, for the remainder of the tariff period, which ends in 2018, it was decided that the X-Factor would be governed by the following conditions: Using 68.50/o as a reference point for non-revenue water (NRW) losses, for every one (1) percentage point reduction in a given year, the X-factor will be reduced by one (1) percentage point in the following year; Altematively using 68.5% as the reference point for NRW, for every one (1) percentage point increase in a given year, the X-factor will be increased by one (1 ) percentage point in the following year. It should be noted that even though in the Mid-Tariff reference was made to a "1 % reduction" and a " 1 % increase" in NRW, this should actually be interpreted to mean a "one ( 1 ) percentage point reduction" and a "one (1 ) percentage point increase" as restated above. NWC Procosal On 2017 November 7, the NWC submitted a request to the OUR seeking an ANPAM adjustment of 5.73% to be applied to its base rates and miscellaneous charges effective 2017, December 1. This request was further revised by submission on 2017 November 21 which sought an ANPAM adjustment of 6.27% to be applied to its base rates and miscellaneous charges effective 2018 January. Further in a letter dated 2017 November 9, the NWC proposed that the X-Factor adjustment for the next year be treated in one of two ways: 2!fIT] wa:s Orn rjll.col 2016/WAS/cO3/DFT.col 7

8 the x-factor be held at 5.5% for the remainder of the tariff period; or the adjustment to the X-Factor should be based on the twelve (12) month average performance of NRW rather than a point to point comparison of two (2) data points over twelve (12) months. In addition, NWC requested a review of the current methodology2 used to determine NRW. The NWC took the position that the methodology now employed, which it claims is based on the percentage volumetric difference between sales and production, is a poor technical indicator for estimating NRW. The NWC went on to highlight that the current work that is being done on the Kingston and St. Andrew Non-Revenue Water Reduction Project has begun to address the water supply issue within the KSA water supply network. The NWC is adanant that the current use of percentage NRW as an indicator of NRW performance is flawed and favours utilities with high consumption, intermittent supply and low pressure. It also stated that such a measure of NRW lumps together both physical and commercial loss. As a result of this, the NWC stated that it is prudent to develop other indicators of losses. The NWC stated that these indicators will be included in its 2018 tariff submission for assessment. This, provides an analysis of NWC's ANPAM and X-Factor submission and outlines the levels at which these parameters should be set for the remainder of the tariff review period ending in Percentage of water loss as a percentage of system inputs. 2!or] wa:s orii rjll.rroi

9 Legal Framework The NWC is a body corporate established by virtue of Section 3 of the National Water Commission Act ("the NWC Act"). Pursuant to Sections 4 (1)(d) & (e) of the NWC Act, among its various furmchous, the NWC ±s rectwilled to Ccwithin the limits Of its resources provide and improve water supply services throughout the Island" and " maintain and operate water supply services provided dy ffee Co""z.ssz.o#". In exercise of these powers the NWC provides both water and sewerage services throughout the Island of Jamaica. The OUR is a multi-sector utility regulator established pursuant to the OUR Act, to regulate the provision of various prescribed utility services in Janaica. The supply and distribution of water and the provision of sewerage services are identified as prescribed utility services in the First Schedule to the OUR Act. Section 4(1)(a) of the OUR Act, indicates that it is a function of the OUR to "regulate the provision of prescribed utility services by licensees or specified organizations". The NWC is a specified organization under the OUR Act. Section 4(4) of the OUR Act expressly provides for the authority of the OUR to determine the rates charged for the provision of a prescribed service. The section reads: " (4) The of f ice shall have power to determine, in accordance with the provisions Of this Act, the rates or f;ares which may be charged in respect Of the provisions of a prescribed utility service." It is in exercise of its general powers to regulate the water sector and providers of water supply and sewerage services, and its specific power to determine the rates charged for these services, that the OUR regulates and approves the rates to be charged by the NWC to its customers. The OUR established the rates and charges for NWC's services for the five year period 2013 to 2018, including the mechanisms for adjustments during that period, in its Tariff, Mid-Tariff, and the Reconsideration of the Office's Decision: (Document No. 2013/WAS/004mET.003) on "National water commission Review of Rates" (Document No. 2014/WAS/00MicN.001 ). 2fIT]/wA:s/cyff2. rjfi.fyoi

10 OUR's Analysis The OUR's review and analysis seeks to verify the proposed rates and adjustment applied for by the NWC. Details of the analysis is outlined below. Annual Price Adjustment Mechanism (ANPAM) The PAM seeks to preserve NWC' s rates in real terms against the monthly fluctuations in its input costs attributable to inflation, foreign exchange rate movements and changes in electricity rates. The equation on which the mechanism is based may be expressed as: PAM=[w_fe*AFE+w_cpi*ACPI+w_ec*Akwh]*100 Where; AFE is the monthly percentage change in the JS/USS exchange rate; ACPJ is the monthly percentage change in the Consumer Price Index; Akwh is the percentage change in the kilowatt hour charge for electricity; w/e is the weight associated with JS/USS exchange rate; wcp{ is the weight associated with the Consumer Price Index; and wec is the weight associated with the kilowatt hour charge for electricity. In resetting the Base Rates in keeping with the ANPAM, the weighted average percentage change for the PAM, which is determined two (2) months earlier, is applied to the current base rates. Mathematically, the new base rates may be expressed as follows New Base Rate = Current Base Rate *(1 + ANPAM). According to the NWC submission, the ANPAM calculation as at the end of 2017 October is 6.270/o. Table 2 below shows OUR's calculation of the applicable ANPAM adjustment which is consistent with the NWC's submission. The input data for NWC' s ANPAM calculation was verified against STATIN' s CPI statistics, the BankofJamaica'sforeignexchangeratedatabaseandNWCelectricitybillsforthemonthof2017 October and found to be correct. Consequently, the new base values for foreign exchange, CPI and electricity rate are J$ : US$1, and $34.45 per kwh respectively (see Table 2). 2!fIT]/wAis/om./r}FI.col 10

11 Table 2: NWC's ANPAM Adjustment 2017 Thl,, INDEX cur-reiit Current Wei8hts3 PAM Base ISop2016 IIralll - of,-a2to?17 ;;--,,.-,-\~. Base RatTan2018 a:,2i FE J$ J$ /o % J$ CPI /o % KVVH $ /o /o J$34.45 ANPAM 6.270/o Determination 1 The Office has determined that that an ANPAM adjustment of 6.27% be applied to the NWC's base rates and miscellaneous charges. The application of the ANPAM becomes effective 2018, January 1. The new base variables for the PAM shall be as follows: Exchange Rate : J$128.31:US$1 Consumer price Index: Electricity Rate: J$34.45kwh X- Factor The NWC indicated in its submission that its NRW percentage in 2017 September was 71.0% which represents a change of 2.5 percentage points increase from the 68.5% reference point established in the 2016 Mid-Tariff Review. Given the incentive adjustment methodology stipulated in the Mid-Tariff Review, the X-factor ought to be increased by 2.5 percentage points. This means that the X-Factor should be increased to 8.0%. However, arising from discussions with members of the NWC technical tean, it was argued and accepted that the `point to point methodology' for measuring NRW does not adequately capture fluctuations that occur during the year (see Figure 1 below). While the OUR did not specify, in the Mid-Tariff Review Determination, whether the "point to point' or the "12-month average' methodology would be employed in the X-Factor adjustment exercise, the NWC's argument is not uureasonable. Any sustained reduction in NRW is invariably the outcome of sustained effort which 3 The weights are derived in the NWC's Review of Rates 2013 doc #2013/WAS/004/DET.003 section page 91. 2IIT] wa:s/om./r>fi.col 11

12 for practical reasons is seldom linear. Furthemore, a "12-month average" methodology also provides credibility to the X-Factor determination as it reduces the incentive to use short-term NRW reduction measures at the point of tariff setting. On the other hand, the OUR rejects NWC's proposal that the X-Factor should be maintained at 5.5%, since the adjustment mechanism for the X-factor was established to incentivise the company to do better. Moreover, the company has provided no compelling reason for the proposal to maintain the previously determined X-Factor. Figure 1 : NRW percentage for the period October 2015 to September 2017 In light of this, the OUR has decided to restate the reference point using the 12 month average NRW of the preceding period (i.e. October 2015 to September 2016). As shown in Table 3 below, the average NRW for the 2015 October to 2016 September period is 69.9% which would now serve as the reference point. 2fjT] wa:s Orl2 T>II.iroi 12

13 Period Table 3: 12 Month Average NRW 12 Month AvgLll[,I Oct 2015 to Sep % Restated ReferencePoint Oct 2016 to Sep % Actual Performance Difference 0.70 Source; NWC Quarterly Reports (Jul Sep 2017) Given the movements in NRW over the review period when compared to the restated reference point, the X-Factor will be increased by 0.70 percentage point in keeping with the Mid-Tariff deterinination. For the avoidance of doubt the X-Factor is now set at 6.2% Determination 2 Given that average monthly NRW statistic has increased by 0.7 percentage point over the twelve (12) month period 2016 October September, the Office has determined that the X-Factor shall be increased from 5.5% to 6.2% for the remainder ofthetariffperiod. Rates and Charges Table 4 shows NWC' s new Rate Schedule for service charges, volumetric charges and miscellaneous rates which will become effective 2018 January 1. Table 4: NWC Rates and Charges NWC's New Rates and Charges Effective 2018 January 1 Rates and Charges Service Charge Where the size of the meter does not exceed 5/8 inch/15mm $830 3/4 inch/20mm $1,700 1 inch/25mm $2,220 1]/4 inch/30mm $4, /2 inch/40mm $4,180 2 inch/50mm $5,920 Service Charges 2fIT]/wA:s/Ou2/r>FI.col

14 3 inch/75mm $10,750 4 inch/100mm $17,370 6 inch/150mm $26,460 Vo]umetric Rates WATER SEWERAGE Domestic Consumers (Imperial Metered)- For up to 3,000 gallons at a rate of $ $ For the next 3,000 gallons at a rate of $ $ For the next 3,000 gallons at a rate of $ $ For the next 3,000 gallons at a rate of $1, $ For the next 8,000 gallons at a rate of $1, $1, Over 20,000 gallons at a rate of $1, $1, Domestic Consumers (Metric MeteredL For up to 14,000 litres at a rate of $ $94.09 For the next 13,000 litres at a rate of $ $ For the next 14,000. litres at a rate of $ $ For the next 14,000 litres at a rate of $ $ For the next 36,000 litres at a rate of $ $ Over 91,000 litres at a rate of $ $ Commercial and Industrial Consumers- Imperial metered $1, $1, Metric metered $ $ Condominiums- Imperial metered $ $ Metric metered $ $ Primary Schools- Imperial metered $ $ Metric metered $ $ MISCELLANEOUS FEHS Disconnection and Reconnection Fee- Domestic Unmetered Services (Locked) $ Removal and Replacement of Service $4, fIT]/wA:s orj2/r}ei.rv)1

15 (Urmetered) Domestic Metered Service (Locked) $ Domestic Metered Service Removed $8,300 and Replaced 5/8 inch 15mm and 3/4 inch /20mm Domestic Metered Service Removed and $12,500 Replaced 1 inch/25mm and over Commercial Metered Service (Locked) $ Commercial Metered Service Removed $12,500 and Replaced 2IIT]/wA!s/orn r)fi.fyoi 2fjTf>/wA:s/orj3/rjFI.ool 15