Office of Utilities Regulation

DETERMINATION NOTICE

National Water Commission AnnualPrice Adj.ustment Mechanism and X-

Factor Application

2017 DECEMBER 11

OFFICE OF UTILITIES REGULATION3rd Floor

PCJ Resource Centre36 Trafalgar Road

Kingston 10Jamaica

West Indies

DOCUMHNT TITLE AND APPROVAL PAGEl

1. DOcuMENT NUMBER: 2Oi7AVAs/002mET.Ooi

2. DOCUMENT TITLE: National Water Commission Annual Price AdjustmentMechanism and X-Factor Application

3. PURPOSH OF DOCUMENT

This document sets out the Office's decision on the applicable Annual Price AdjustmentMechanism percentage to be applied to the NWC's base rates and miscellaneous charges. Thedocument 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.001 Determination Notice - National Water 2016 December 5Commission Mid-Tariff Review 2016

2014/WAS/004RCN.001 Reconsideration of the Office's Decision: 2014 July 24Determination Notice (Document No.2013/WAS/004/DET.003) on "NationalWater Commission Review of Rates"

2013/WAS/004DET.003 National Water Commission Review of 2013 October 1Rates - Determination Notice

5. Approval

This document is approved by the Office of Utilities Regulation and the decisions thereinbecome effective as of 2018 January 1 .

On behalf of the Office:AnsordE.Hewitt

Director-General

2017 December 11

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ContentsAbbreviations, Acronyms and Definition

Executive Summary

Introduction

Legal Framework

OuR's Analysis

Annual Price Adjustment Mechanism (ANPAM)

X- Factor

Rates and Charges

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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

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Executive Summary

On 2017 November 7, the National Water Commission (NWC) submitted a request to the OURseeking an Annual Price Adjustment Mechanism (ANPAM) of 5.73% to be applied to its baserates and miscellaneous charges effective 2017, December 1. However, by way of a revisedsubmission received on 2017 November 21 the NWC requested instead that the ANPAMadjustment 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 forthe 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. TheNWC took the position that the methodology now employed, which it claims is based on thepercentage volumetric difference between sales and production, is a poor technical indicator forestimating 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 theNWC's base rate and miscellaneous charges. The application of the ANPAM becomes effective2018, January 1. Consequently, the new base variables for the PAM are as shown in Table 1 below.

Table I: New Base Variables

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With respect to the X-Factor adjustment, the OUR conducted an analysis based on a comparisonof the `12-month average' NRW over a two (2) year periodt. This analysis indicated that thedifferential between the average monthly NRW for the two years was 0.7 percentage points. As aresult 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 NWCwill be required to provide a formal and detailed proposal on its methodological perspective tofacilitate a comprehensive regulatory analysis of this matter.

1 That is 2015 0ct -2016 Sept and 2016 0ct -Sep 2017.

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Introduction

The Office of Utilities Regulation (OUR) made a provision in the National Water CommissionReview of Rates -Determination Notice (Document No. 2013/WAS/004/DET.003) (hereinaftercalled the Tariff Determination Notice) for the approval of the Price Adjustment Mechanism(PAM) to capture the effects in the monthly movement of selected input cost over which theNational Water Commission (NWC/Commission) has no control. The PAM corrects formovement in Consumer Price Index (CPI), Jamaican dollar exchange rate relative to the UnitedStates Dollar (FE) and Electricity Prices (Kwh). The PAM is applied to NWC's customers' billson a monthly basis. The Office had also determined that on the anniversary date of the PAM thebase values for the three (3) components in the mechanism would be reset. This annual reset isreferred to as the ANPAM.

Additionally, in Determination Notice -National Water Commission Mid-Tariff Review 2016(Document No. 2016/WAS/003DET.001) (hereinafter called the Mid-Tariff DeterminationNotice), the Office took the decision to retain the X-Factor percentage at 5.5% which existed atthat point. However, for the remainder of the tariff period, which ends in 2018, it was decided thatthe X-Factor would be governed by the following conditions:

Using 68.50/o as a reference point for non-revenue water (NRW) losses, for everyone (1) percentage point reduction in a given year, the X-factor will be reduced byone (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 Determination Notice reference was made toa "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 adjustmentof 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 ANPAMadjustment of 6.27% to be applied to its base rates and miscellaneous charges effective 2018January.

Further in a letter dated 2017 November 9, the NWC proposed that the X-Factor adjustment forthe next year be treated in one of two ways:

7The National Water Commission Annual Price Adjustment Mechanism and X-Factor ApplicationDetermination Notice2!fIT]|wA:s|Orn|rjll.col2016/WAS/cO3/DFT.col

• 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 overtwelve (12) months.

In addition, NWC requested a review of the current methodology2 used to determine NRW. TheNWC took the position that the methodology now employed, which it claims is based on thepercentage volumetric difference between sales and production, is a poor technical indicator forestimating NRW. The NWC went on to highlight that the current work that is being done on theKingston and St. Andrew Non-Revenue Water Reduction Project has begun to address the watersupply issue within the KSA water supply network. The NWC is adanant that the current use ofpercentage NRW as an indicator of NRW performance is flawed and favours utilities with highconsumption, intermittent supply and low pressure. It also stated that such a measure of NRWlumps together both physical and commercial loss. As a result of this, the NWC stated that it isprudent to develop other indicators of losses. The NWC stated that these indicators will be includedin its 2018 tariff submission for assessment.

This Determination Notice, provides an analysis of NWC's ANPAM and X-Factor submission andoutlines the levels at which these parameters should be set for the remainder of the tariff reviewperiod ending in 2018.

2 Percentage of water loss as a percentage of system inputs.

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Legal Framework

The NWC is a body corporate established by virtue of Section 3 of the National Water CommissionAct ("the NWC Act"). Pursuant to Sections 4 (1)(d) & (e) of the NWC Act, among its variousfurmchous, the NWC ±s recTwilled to Ccwithin the limits Of its resources provide and improve watersupply services throughout the Island" and " maintain and operate water supply services provideddy ffee Co""z.ssz.o#". In exercise of these powers the NWC provides both water and sewerageservices throughout the Island of Jamaica.

The OUR is a multi-sector utility regulator established pursuant to the OUR Act, to regulate theprovision of various prescribed utility services in Janaica. The supply and distribution of waterand the provision of sewerage services are identified as prescribed utility services in the FirstSchedule to the OUR Act. Section 4(1)(a) of the OUR Act, indicates that it is a function of theOUR to "regulate the provision of prescribed utility services by licensees or specifiedorganizations". 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 therates 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 ofa prescribed utility service."

It is in exercise of its general powers to regulate the water sector and providers of water supplyand 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. TheOUR 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 Determination Notice,Mid-Tariff Determination Notice, and the Reconsideration of the Office's Decision:Determination Notice (Document No. 2013/WAS/004mET.003) on "National water commissionReview of Rates" (Document No. 2014/WAS/00MicN.001 ).

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OUR's Analysis

The OUR's review and analysis seeks to verify the proposed rates and adjustment applied for bythe 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 inputcosts 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 changefor 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 is6.270/o. Table 2 below shows OUR's calculation of the applicable ANPAM adjustment which isconsistent with the NWC's submission.

The input data for NWC' s ANPAM calculation was verified against STATIN' s CPI statistics, theBankofJamaica'sforeignexchangeratedatabaseandNWCelectricitybillsforthemonthof2017October and found to be correct. Consequently, the new base values for foreign exchange, CPI andelectricity rate are J$128.31 : US$1, 245.80 and $34.45 per kwh respectively (see Table 2).

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Table 2: NWC's ANPAM Adjustment 2017INDEX cur-reiit Current Thl,, Wei8hts3 PAM

;;--,,.-,-\~.

Base ISop2016oF,-a2to?17

IIralll - Base RatTan2018 a:,2i

FE J$127.87 J$128.31 0.340/o 0.24 0.08% J$128.31CPI 234.20 245.8 4.950/o 0.51 2.53% 245.80

KVVH $30.05 34.45 14.640/o 0.25 3.660/o J$34.45ANPAM 6.270/o

Determination 1

The Office has determined that that an ANPAM adjustment of 6.27% be applied to theNWC's base rates and miscellaneous charges. The application of the ANPAM becomeseffective 2018, January 1. The new base variables for the PAM shall be as follows:

• Exchange Rate : J$128.31:US$1

• Consumer price Index: 245.80

• 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 pointestablished in the 2016 Mid-Tariff Review. Given the incentive adjustment methodologystipulated 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 andaccepted that the `point to point methodology' for measuring NRW does not adequately capturefluctuations that occur during the year (see Figure 1 below). While the OUR did not specify, inthe 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 notuureasonable. 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 Determination Notice 2013 doc #2013/WAS/004/DET.003

section 10.7.9 page 91.11

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for practical reasons is seldom linear. Furthemore, a "12-month average" methodology alsoprovides credibility to the X-Factor determination as it reduces the incentive to use short-termNRW 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 at5.5%, since the adjustment mechanism for the X-factor was established to incentivise the companyto do better. Moreover, the company has provided no compelling reason for the proposal tomaintain 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 averageNRW of the preceding period (i.e. October 2015 to September 2016). As shown in Table 3below, the average NRW for the 2015 October to 2016 September period is 69.9% whichwould now serve as the reference point.

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The National Water Commission Annual Price Adjustment Mechanism and X-Factor ApplicationDetermination Notice2fjT]|wA:s|Orl2|T>II.iroi2016/WAS/003/DET.001

Table 3: 12 Month Average NRWPeriod 12 Month AvgLll[|,I

Oct 2015 to Sep 2016 69.9% Restated ReferencePoint

Oct 2016 to Sep 2017 70.6% Actual Performance

Difference 0.70

Source; NWC Quarterly Reports (Jul 2016 -Sep 2017)

Given the movements in NRW over the review period when compared to the restated referencepoint, the X-Factor will be increased by 0.70 percentage point in keeping with the Mid-Tariffdeterinination. 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 overthe twelve (12) month period 2016 October - 2017 September, the Office hasdetermined that the X-Factor shall be increased from 5.5% to 6.2% for the remainderofthetariffperiod.

Rates and Charges

Table 4 shows NWC' s new Rate Schedule for service charges, volumetric charges andmiscellaneous rates which will become effective 2018 January 1.

Table 4: NWC Rates and ChargesNWC's New Rates and Charges Effective 2018 January 1

Rates and ChargesService Charge Service ChargesWhere the size of the meter does not exceed5/8 inch/15mm $830

3/4 inch/20mm $1,700

1 inch/25mm $2,2201]/4 inch/30mm $4,180

1 1/2 inch/40mm $4,180

2 inch/50mm $5,920

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3 inch/75mm $10,750

4 inch/100mm $17,370

6 inch/150mm $26,460

Vo]umetric Rates WATER SEWERAGEDomestic Consumers (Imperial Metered)-

For up to 3,000 gallons at a rate of $471.49 $427.91

For the next 3,000 gallons at a rate of $831.21 $754.39

For the next 3,000 gallons at a rate of $897.49 $814.53

For the next 3,000 gallons at a rate of $1,145.53 $1039.64

For the next 8,000 gallons at a rate of $1,426.67 $1,294.80

Over 20,000 gallons at a rate of $1,836.41 $1,666.65

Domestic Consumers (Metric MeteredLFor up to 14,000 litres at a rate of $103.67 $94.09For the next 13,000 litres at a rate of $182.80 $165.90

For the next 14,000. litres at a rate of $197.38 $179.13

For the next 14,000 litres at a rate of $251.93 $228.64

For the next 36,000 litres at a rate of $313.71 $284.71

Over 91,000 litres at a rate of $403.83 $366.51

Commercial and Industrial Consumers-Imperial metered $1,768.00 $1,604.58

Metric metered $388.75 $352.81

Condominiums-Imperial metered $877.04 $795.96Metric metered $192.83 $174.99

Primary Schools-Imperial metered $707.25 $641.87

Metric metered $155.53 $141.15

MISCELLANEOUS FEHSDisconnection and Reconnection Fee-

Domestic Unmetered Services (Locked) $935.00Removal and Replacement of Service $4,000

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(Urmetered)

Domestic Metered Service (Locked) $935.00

Domestic Metered Service Removed $8,300and Replaced 5/8 inch 15mm and3/4 inch /20mm

Domestic Metered Service Removed and $12,500Replaced 1 inch/25mm and over

Commercial Metered Service (Locked) $935.00

Commercial Metered Service Removed $12,500and Replaced

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