THE REGULATORY

FRAMEWORK
On the Privatization of METRO MANILA
WATERWORKS and SEWERAGE SYSTEM

EDUARDO C. SANTOS
CHIEF REGULATOR
MWSS REGULATORY OFFICE
 The Privatization of MWSS
z RA 6234 - An act creating the Metropolitan Waterworks and
Sewerage System (MWSS) and the dissolution of the
National Waterworks and Sewerage Authority (NAWASA).
The area of jurisdiction was limited to Metro Manila, Rizal
Province and portions of Cavite.

z RA 8041 - The Water Crisis Act of 1995

1995, recognizing the need to
address the water problem of Metro Manila.

z EO 286 - Implemented the Water Crisis Act of 1995. It mandated

the
h reorganization off MWSS and
d the
h Locall Water Utilities
l
Administration (LWUA).

z EO 311 - Mandated MWSS to enter into arrangement that will

result in the involvement or participation of the private
sector in any or all of the segments, operations and or
facilities of MWSS.
Notes:
z RA - Republic Act, a law of the Republic of the Philippines
z EO - Executive Order issued by the President
Private Sector Participation

z MWSS as Owner – retains ownership of all facilities and

the facilities to be installed by the concessionaire at
the end of the concession.
z Concessionaire as Operator acts as a contractor to
perform certain functions and as agent for the
exercise of certain rights and powers under the
Ch t the
Charter, th solel right
i ht to
t manage, operate,t repair,
i
decommission and refurbish the facilities including
g to bill and collect for water and sewerage
right g
services.
z Two Concession Areas – to promote competition and
benchmarking the MWSS Service Area was divided
benchmarking,
into two: EAST ZONE under MWCI and WEST ZONE
under MWSI.
Contractual Arrangement

z Concession Agreement
g
The Concession Agreement (CA) defines the general
obligations and functions of MWSS and the
Concessionaires Maynilad Water Services,
Concessionaires, Services Inc.
Inc
(MWSI) and Manila Water Company, Inc. (MWCI).
It also sets the service target obligations, defines
the water rate adjustments, Early Termination
Procedures, dispute resolution and the creation of
the Regulatory Office (RO).
 MWSS Regulatory Office
Creation
The MWSS Regulatory Office (RO) was organized by virtue of the
Concession Agreement between the MWSS representing the Philippine
Government and the two concessionaires, Manila Water Company Inc.
((MWCI)) and Maynilad
y Water Services Inc. ((MWSI).
) The RO was established
under the jurisdiction of the MWSS Board of Trustees pursuant to MWSS
charter and applicable laws and legislation.

As mandated by the Concession Agreement, the Regulatory Office

is headed by a Senior Deputy Administrator (SDA) acting as Chief
Regulator, and four Deputy Administrators (DA).

The Regulatory Office has 4 Regulation Areas namely: The

Technical Regulation, Customer Service Regulation, Financial Regulation
and Administration and Legal Affairs.
Affairs
 Organizational Structure

Office of the
Chief Regulator
Public Information
Department

Technical Regulation Financial Regulation Customer Service Reg Admin. & Legal Affairs

Metering & Billing

Operations Monitoring Financial Audit & Legal
Efficiency
Department
p Asset Monitoringg Department
p
Department

Tariff Control & Complaints Services

Water Quality Control Administrative
Monitoring Monitoring
Department Department
Department Department
 Role of Regulation

Provide
P id incentives
i ti
Protect consumers to firms to invest, be
from high prices & efficient & earn
poor services profit

Regulation
F
Functions
ti off th
the
Regulatory Office
 Monitoring Functions
9 Compliance with drinking water and waste water quality
standards
9 Water supply, sewerage and sanitation development,
programs and projects visvis--à-vis required population
coverage and required year to attain targets
9 Repair and Maintenance of Assets Water Sampling

9 Non--revenue Water Reduction Targets

Non
9 Collection Efficiency Target
9 Customer Service Standards
9 Operational Cost Efficiency
Leak Repair

Pipe Laying
(infrastructure dev’t proper)
 Determining Functions

9 Extraordinary Price Adjustment (EPA)

9 Rate Rebasing Rate Rebasing

9 Early termination Amounts

9 Assessments
ssess e ts oof Penalties
e a t es

Public Consultation
 Objectives of Privatization

The MWSS was privatized in August 1997 to attain

the following objectives:

z Improve water service in terms of availability,

pressure and quality.
z E
Expandd water,
t sewerage and d sanitation
it ti coverage.
z Promote customer satisfaction.
z Eliminate fiscal burden on government
government.
THE REGULATORY
FRAMEWORK
SERVICE OBLIGATIONS TARGET
MONITORING

The Concessionaire has set the targets for

meeting their service obligations on water
water,
sewerage and sanitation services.
Water Services Obligations
Ö Water Supply and New Connections
The concessionaire shall offer water supply services
to existing connections and make at least sufficient
connections to meet the coverage target
percentages of the population in the designated
municipality.

Ö Continuity of Supply
The Concessionaire shall ensure the availabilityy of an
uninterrupted 24 hour supply of water. At all times,
water shall be supplied at a level of positive
pressure sufficient to secure the system against the
ingress of untreated water or contaminants.
Ö Obligation
Obli ti to t Make
M k Connections
C ti
The concessionaire shall make a connection as
reasonably practicable to a water main located less
than 25 meters from the connection point. The
customer shall pay a connection fee of P 3,000.00
subject
bj t to
t CConsumer Price
P i Index
I d adjustment
dj t t every
year after 1997.

Ö Drinking Water Quality Standards

The concessionaire shall ensure at all times that
water supplied to consumers complies with the
Philippine National Standards for Drinking Water.
Ö Water for Public Purposes
The concessionaire shall make available adequate
supply of water for fire
fire--fighting and other public
purposes as maybe requested by the
municipalities.
i i li i No
N charges
h shall
h ll be
b assessed
d for
f
fire--fighting but may charge for all other water
fire
used for p public purposes.
p p

Ö Water Other Than Through Water Main

In case of water interruption of more than 24hours
and contamination of water mains, alternative supply
of water shall be made available to customers. In
circumstances
i t where
h no connection
ti to
t a water
t main i
exists, the concessionaire may make supply of water
available to customers other than throughg a water
main at a fee equal to the costs reasonably and
efficiently incurred to supply such water.
Sewerage/Sanitation Services Obligations
Ö Sewerage Service and New Connections
The Concessionaire shall service existing sewerage
connections for domestic sewage and industrial
effluents compatible with available treatment
processes. The concessionaire shall meet the
coverage target percentages of the population in the
designated municipality.

Ö Connections to a Public Sewer

A sewer connection
ti shall
h ll be
b made
d by
b the
th
concessionaire upon request from the consumer. A
connection fee shall be assessed in the amount of P
3,000.00 for connection less than 25 meters. The
fee shall be adjusted yearly based on CPI.
Ö Wastewater Standards
The concessionaire shall comply to all national and
local environmental laws and standards relating to
treated wastewater.

Ö Septic and Sanitation Cleaning

The concessionaire shall offer septic and sanitation
cleaning services and shall meet the coverage target
percentages of the population in the designated
municipality.
i i lit
 Customer Service Standards

The concessionaires shall provide the highest quality

services to its customers by:
Ö giving prompt responses to inquiries and complaints;
Ö giving notices at least 48 hours in advance of any planned
interruptions;
Ö providing alternative water supplies for planned
interruptions;
Ö effecting urgent restoration of water supplies for any
unplanned interruptions;
Ö taking measures to prevent sewerage flooding;
Ö providing invoices. Identifying clearly services, charges,
period covered, forms of payment and penalties.
WATER RATE ADJUSTMENTS
 Concession Agreement (as amended)
Provisions for Water Rates
Adjustment

ÖC - Consumer Price Index (CPI) based on

NSO official figures
g (annual)
( )
ÖE - Extraordinary Price Adjustment (EPA)
based on 11 grounds for EPA
ÖR – Rate
ate Rebasing
ebas g (e
(every
e y 5 yea
years)
s)
 11 Grounds for EPA
1. Amendment to the Service Obligation
2
2. Change in law,
law government regulation,
regulation rule or order
3. Breach of Concession Agreement (CA)
4. Receipt
p of a Grant / Below Market Financing g
5. Increase in Consumer Price Index (CPI) > 12%
6. Devaluation of Peso vs. Dollar > 2%* Replaced by Foreign Currency
Differential Adjustment (FCDA)
per Amendment of the Contract
7. Unpaid penalty amount
8. Bid assumptions proven to be incorrect in a material way
9. Increase
I i Concession
in C i Fee
F dued tot the
th Umiray-
Umiray
U i -Angat A t
Tunnel Project (UATP) delay
10. Financial Performance affected by UATP beyond 1999
target completion
11. Force Majeure
 Extra--ordinary Price Adjustments
Extra
(EPA)
Ö Based on 11 grounds

Ö Prudent and efficient expenditures incurred are recovered

Ö Effectivityy – next charging

g g year
y after RO
evaluation/determination
Net Present Value of Incurred Expenditures
Ö EPA Adjustment (%) =
Net Present Value of Expected Receipts

Ö EPA p
percentage
g – applied
pp to the current tariff to determine
adjustment
 Rate Rebasing

Under the Concession Agreement as Amended

Ö Mandates the parties to re

re--set or rebase
water rates every five (5) years.

Ö Allows the Concessionaires to undertake

new investments and expand water
infrastructure
 What is Rate Rebasing?
Rate Rebasing involves a general rate revision
revision.. The bases for the
original
o g a b bids
ds o
of the
t e co
concessionaires
cess o a es suc
such as Cap
Capital
ta Expenditures,
pe d tu es,
Revenues and Operating Expenses are, revisited, examined and
revalidated in order to determine whether the tariff rates being
charged
g are still sufficient to earn a reasonable rate of return.

Ö OPEX
ÖReview
Ö CAPEX
ÖExamination Ö Revenues

ÖRevalidation Ö ADR
Ö Service Obligations
 Key Elements

Ö Examination of all cash flow elements in

the cash position
Ö Evaluation of future capital and operating
expenditures
Ö Determination
D t i ti off appropriate
i t di
discountt
rates (commencement date and rate
rebasing
b i date)
d t )
Ö Evaluation of past and future service
obligations targets
 Rate Rebasing Framework

NPV of OCP = NPV of Future Cash Flows

Where:

NPV is Net Present Value (Value of money at 2003 Prices)

OCP is Opening Cash Position (Historical
(Historical Revenues and
Expenditures prudently and efficiently incurred)
Future Cash Flows = Future Revenues – Future Expenditure
 How is Water Rate Adjusted?

RAL = C + E + R

where:
RAL = Rate
R t Adjustment
Adj t t Limit
Li it
C = Consumer Price Index
E = Extraordinary Price Adjustment
R = Rate Re-
Re-basing
Di
Dispute
t RResolution
l ti
Mechanism
DISPUTE RESOLUTION MECHANISM
Disputes or disagreements, concerning the
interpretation
p or implementation
p of the
Concession Agreement, including all the
decisions of the RO may be resolved through:

Ö Mutual Consultation and Negotiation – use

reasonable efforts
Ö Arbitration
z Creation of Appeals Panel
z Proceedings
g in accordance with the arbitration
rules of the United Nations Commission on
International Trade Law (UNCITRAL)
 Composition of the Appeals Panel

To be appointed not less than 30 days prior to the

commencement of each Rate Rebasing period
(before 01 December 2002/2007/ 2012/2017)

For Major Disputes:

MWSS RO and Concessionaire, each appoint a Member;
International Chamber of Commerce (ICC) Chairman
designates a third member as Appeals Panel Chairman

For Minor Disputes:

MWSS RO and Concessionaire, each appoint a Member;
Th 2 appointed
The i t d Members
M b designate
d i t a third
thi d member
b as
Appeals Panel Chairman
Major Disputes
Ö Rebasing
g Dispute
p
Ö EPA Determination
Ö Termination Amount Calculation
Ö Amount & Price of the cross-
cross-boundary flows
Ö Delegation of responsibilities in the Joint Venture
Ö Notice
N ti off T
Termination
i ti
Ö Removal from office of a Regulator

Minor Disputes
Ö All Disputes other than Major Disputes
 Qualifications

Ö Each Member of the Appeals Panel (other than

the Appeals Chairman) shall be a resident (but
need not be a citizen) of the Philippines

Ö Must be individuals of good business reputation

who
h have
h no prior
i business
b i connection
i with
i h any
of the parties to the Agreement or with the Other
Operator
p

Ö Any member may be reappointed for more than

one Rate Rebasing period
 Procedures
Ö Proceedings shall be in English and shall be held in
M il
Manila
Ö Written Notice served to the Chairman, setting out
in reasonable detail the circumstances of such
dispute
Ö Appeals Panel shall make a decision within 90 days
from receipt of Dispute Notice
Ö Decision
ec s o must
ust have
a e tthe
e written
tte co
concurrence
cu e ce oof at
least two of the three members of the Appeals
Panel
Ö Any decision
d off the
h Appeals
l Panell shall
h ll be
b final
f l
and binding
 Appeals Panel Costs
Ö Out-of
Out- of--pocket expenses incurred shall be
apportioned
ti d as the
th Panel
P l shall
h ll direct;
di t
concessionaire’s share of the costs shall be treated
as an Expenditure
Ö Appeals Chairman shall be entitled to a per diem
compensation
ti recommendedd d by
b the
th ICC3;
ICC3 other
th
Members shall each be entitled to a per diem
compensation equal to P2,500
P2 500 (automatically
adjusted by the CPI, 2003 = P 3,539 ≈ US$ 67)
Ö S
Secretarial
t i l and
d administrative
d i i t ti supportt services
i to
t
be provided by the RO free of charge
Public Auditing and
Regulation
 Public Auditing and Regulation
Ö Regulatory Office is a creation of the Concession Agreement
and not thru legislation
g
Ö Regulatory powers limited to those set forth in the Concession
Agreement
Ö The System of Public Audit / Regulation
Ö Contract overseer / administrator
Ö MWSS Water Rate determination / recommendation
Ö Board of Trustees retains p
power to approve
pp water rates
Ö Disallowances of expenditures are done after facts or during rate
rebasing exercise w/c is every 5 years

Ö S ti 6
Section 6.5.3
5 3 off th
the CA
CA. “technical
“t h i l audit
dit off the
th accuracy and
d
completeness of any asset condition report and /or the
Concessionaires’ compliance with its obligations
Ö S ti 13
Section 13.2
2 off th
the CA
CA, Audit
A dit off Concessionaire
C i i books
b k and d
records
The Stakeholders
Ö The Owner
Ö The Concessionaires
Ö The Public
Ö The Regulatory Office

Th Appeals
The A l Experience
E i
Ö Minor Dispute re: proper price for inter-
inter-zone water transfers
b
between the
h two service
i areas
Ö Major Dispute UNC 24/H6N/OL MWCI vs. MWSS and its
Regulatory
g y Office issues include,, among g others,, the
interpretation of the contract as to the frequency of
determination of the Appropriate Discount Rate (ADR)
Ö Major Dispute UNC38/HGN/KGA MWSI vs. vs MWSS – this was
withdrawn after the parties came to an amicable settlement