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Table B3a : Setting of performance bands for SAIFI performance

SAlFl
Average SAIFl value Average annual SAIFl for a Regltlated Distribution System for the Second
Re"ulatorv Period
Standard deviation Standard deviation of the annual SAfF} val ues for a Regulated Distribution
Svstem for the 10 calendar veal'S ending on Dec 31,2010
Performance crreat~below ta~t Annual SAIFl more than 2 standard deviations above the SAIFI averacre
Target not achieved Annual SA1Fi more than I "tandard deviation, but less than or equal to 2
standard deviations, above the SAIH avera"e
Performance as per expectation Annual SAIFl between or equal to 1 standard deviation above and I
standard deviation below the avera 'e value
Target exceeded Annual SA1Fi more than I standard deviation, but less than or equal to 2
standard deviations, below the SAfFl avera"e
Tar"et crreatlv exceeded Annual SAIR more than 2 standard deviations below the SAfFl avera"e

Table B3b : Setting of performance bands for planned CAIDl performance

PLANNED CAlDl
Average CAIDI value Average annual planned CAlOr for a Regulated Distribution System for the
Second Recrulatorv Period
Standard deviation Standard deviation of the annual planned CAlOf values ti)r a Regulated
Distribution Svstem for the 10 calendar veal'S endinu on Dec 31, 2010
Performance greatly below target Annual planned CAIDI more than 2 standard deviations above the planned
CAIDI avera"e
Target not achieved Annual planned CAlDl more than 1 standard deviation, but less than or
eaual to 2 standard deviations, above the )lanned CAIDI average
Performance as per expectation Annual planned CAlDl between or equal to I standard deviation above and
J standard deviation below the avera"e value
Target exceeded Annual planned CAIDI more than J standard deviation, but less than or
eaual to 2 standard deviations, below the olanned CAIDl averacre
Target greatly exceeded Annual planned CAIDl more than 2 standard deviations below the planned
CAIDI averal'e

Table B3c : Setting of performance bands for SAIDI performance

SAII)(
Average planned SAIDI value Average annual SAlOl for a Regulated Distribution System for the Second
Regulatorv Period
Standard deviation Standard deviation of the annual SAIDI values for a Regulated Distribution
System for the 10 calendar veal's cndin" on Dec 31,2010
Performance "reatlv below tar"et Annual SAlOl more than 2 standard deviations above the SAIDI average
Target not achieved Annual SAlOl more than I standard deviation, but less than 2 or equal to
standard deviations, above the SAID] average
Performance as pCI'expectation Annual SAlOl between or equal to I standard deviation above and I
standard deviation below the avera"e value
Target exceeded Annual SAlOl more than 1 ~tandard deviation, but less than or equal tn 2
standard deviations, below the SAIDf averalJe
Tar"et "reatlv exceeded Annual SAlOl more than 2 standard deviation" below the SAIDI averacre

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Table B3d : Setting of performance bands for voltage regulation performance

VOLTAGE REGULATION
Target probability of voltage violation 4%
(pV")
Performance Neatlv below tar 'et Probabilitv of volta'e violation 'reater than or eoual to 6%
Tar"el not achieved Probabilit I of voltage violation between )IX, and 6(H,
Performance a~ Dcr eXDcctation Probabilitv of vo1ta"c violation on or bctween or eaual to 3% and 5%
Tar"et exceeded Probabilitv of voltaQe violation between 2% and 3'1"
Tar"et "reatly exceeded Probability of voita"e violation le~s than or equal to 2%

Table B3e : Setting of performance bands for system losses

SYSTEM LOSSES
Tar"et for svstem losses 9.5%
Performance "reat! y below tarrret Not aDDlicable
TaH!et not achieved Not aDDlicable
Performance a~ per cxpectation System losses on or between 8.5% to 9.5%
Target exceeded Svstem losses between 7.0% and 8.5%
Target "reatlv exceeded Sv~tem losses less than or eoual to 7.0%

Table B3f : Setting of performance bands for time to process applications

TIME TO PROCESS SERVICE APPLICA TIONS
Long-term average time to process a Average application processing time over the Second Regulatory Period
service mmlication
Standard deviation Standard deviation of the average time to proce~s applications, based on
actual cases for the Second Regulator' Period
Performance greatly below target Annual average processing time more than 2 standard deviations above the
Ion '-term avera"e value
Target not achieved Annual average processing time more than I standard deviation, but less
than or equal to 2 standard deviations, above the lonn-term avera"e value
Performance as per expectation Annual average processing time between or equal to I standard deviation
above and 1 standard deviation below the long-term avera"e value
Target exceeded Annual average processing time more than 1 standard deviation, but less
than or eoual to 2 standard deviations, below the lon"-term avera"e value
Target greatl y exceeded Annual average processing time more than 2 standard deviations below the
lonp~term average value

Tahle B3g : Setting of performance bands for time to provide connection

TIME TO PROVIDE CONNECTIONS
Long-term average time to provide a Average time to provide a connection over the Second Regulatory Period
connection
Standard deviation Standard deviation of the average time to provide a connection. based on
actual cases for the Second Re"ulatory Period
Performance greatly below target Annual average connection time more than 2 standard deviations above
the long-term average value
Target not achieved Annual average connection time more than 1 ~tandard deviation, but less
than or eoual to 2 standard deviation's. above the lonv-term avera"e value
Performance as per expectation Annual average connection time between or equal to I standard deviation
above and 1 standard deviation below the lon"-term avera"e value
Target exceeded Annual average connection time more than I standard deviation, but less
than or equal to 2 standard deviations, below the lon"-term avera 'e value
Target greatly exceeded Annual average connection time more than 2 standard deviations below
the lono-term averaoe value

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Table B3h : Setting of performance bands for call center performance

CALL CENTER PERFORMANCE

Long-term average time to provide a Average percentage of call" an"wered after 30 seconds over the Sccond
connection Rc"ulatorv Period
Standard deviation Standard dcviation of the average percentage of calls answered after 30
sec., based on actual numbers for the Second Re['ulatorv Period
Performance greatly below target Annual average connection time morc than 2 standard deviations above
the lon"-term avera"e value
Targct not achieved Annual average connection time more than 1 standard deviation, but less
than or eoual to 2 standard deviations, abovc thc lon"-tcrm avera"e value
Performance as per expectation Annual average connection time between or equal to 1 standard deviation
above and I standard deviation below the lon"-term avera 'e value
Target exceeded Annual avcrage conncction time morc than 1 standard deviation, but less
than or eoual to 2 standard deviations, below the lon"-term avera"c value
Targct grcatly exceeded Annual average connection time morc than 2 standard deviations below
the long-term average value

B3 GUARANTEED SERVICE LEVELS SCHEME

A guaranteed service levels (GSL) scheme will be applied to Regulated Distribution Systems
in terms of which Regulated Entities will compensate a Customer directly if certain service
delivery perfOimance thresholds are not met.
B3.1 Proposed GSL indices and payment levels
The indices that will be included in the GSL scheme are listed below. The actual
pett'ormance targets for each index will be determined by the ERC dUting the reset process
for the Third Regulatory Period.
a) GSLl: a Customer of a Regulated Distribution System experiencing more than the
target time of sustained interruptions over any Regulatory Year;
b) GSL2: a Customer of a Regulated Distribution System experiencing more than the
target number of sustained intelTuptions in a Regulatory Year;
c) GSL3: restoration of service to a Customer after a fault on the secondary side of a
Regulated Distribution System, including the service drop, does not occur within the
target time after the fault occuning; and
d) GSL4 : the Regulated Entity failing to provide a connection to a Customer on the day
promised, with cumulative payments applying for each day that a connection is later
than promised.
Regulated Entities should co11ect performance data against each of these indices dUting the
course of the Second Regulatory Period. This data will be provided to the ERC during the
reset period for the Third Regulatory Period, not later than eighteen months before the start
of the Third Regulatory Period. Final targets wi11be based on this information, as approved
by the ERe.
B3.2 Determining the penalty levels
Setting appropriate GSL perfonnance levels requires cunent information on actual
perrormance against the indices. The ERC will co11eet the information from Regulated
Entities over the Second Regulatory Period to determine the penalty levels that will apply
when GSLs are not met.

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The methodology that will be used to establish the penalty levels is as follows:
(d) The ERC will calculate the total revenue allocation for the GSL scheme.
In accordance with Section B2.1.3(b) , this allocation will be calculated
as 0.5 % of the annual revenue requirement. Penalty levels will be
constant for the whole of the Third Regulatory Period, these will be based
on the annual revenue requirement for Regulatory Year 2012 (the start of
the period).

GSLRe\! = 0.005 x ARRz01Z

where ARR2012 is the annual revenue requirement ARR2012 for

Regulatory Year 2012 calculated in accordance with Section 4.7.7
(carried forward to article VI for subsequent regulatory periods)

(e) Based on the data submitted by the Regulated Entities and the
performance targets established for each index, the ERC will assess the
likely number of instances in a year that each of the performance target
levels will be exceeded. For example, the number of customers likely to
have faults exceeding the target time duration (GSL3) during Regulatory
Year t would be nGSL3.

(f) By allocating the same weighting to all the proposed GSL indices, the
revenue allocation will be made per index. For example, the revenue
allocated to the GSL3 measure would be :

GSURcl' = 0.25 x GSLRev

(g) The penalty amount for each index will be calculated by dividing the
revenue allocation for each index by the estimated number of times that
the penalty level for that index is expected to be exceeded. For example,
the penalty payable each time that an interruption on the secondary side
of a Regulated Distribution System is not restored within the target time,
would result in a penalty amount (rounded off) of:

PenGSL3 = GSL3Rev
nGSL3
B3.3 Adapting revenue requirements
An additional allowance will be made over and above the annual revenue requirement for
each Regulated Entity, to cover the anticipated average amount that would be payable
towards the GSL scheme. While this allowance will not be pmt of the annual revenue
requirement (which is calculated based on the building blocks), it will be added to the annual
revenue requirement for each Regulatory Year during the Third Regulatory Period for the
purposes of calculating the smoothing factor and setting the initial price cap that will apply
for the Third Regulatory Period.
Regulated Entities who manage to perform better than forecasted against the GSL will be
allowed to retain the savings on the extra revenue allowance. Conversely, those Regulated

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Entities that payout more penalties than forecast, will bear the additional cost, up to a
maximum of 0.5% of thc annual revenue rcquiremcnt for a Regulatory Year.29
This intention of the 0.5% of the annual revenue requirement allowance is to allow
Regulated Entities the option of incurring additional expenditure to avoid penalty situations,
or to remain revenue neutral if they maintain cun.ent petformance levels.
B4 Excluded events
There are a number of external events which can have a substantial impact on the actual
petformance of Regulated Distribution Systems against petformanee indices, but that are
predominantly outside the control of Regulated Entities. The ERe will allow these events to
be excluded from the statistics used to calculate network or service performance.
Events of which the impact on the peIformance of a Regulated Distribution System will
generally be excluded are:
• supply inten.uptions made at the request of a customer;
• load shedding due to a shortfall in generation;
• supply interruptions caused by a failure of the transmission network;
• excessive distribution voltage regulation caused by voltage levels at the transmission
supply points falling outside the boundaries described in the Philippine Grid Code;3o
• supply intcrruptions caused by a failure of a transmission connection asset, but only to
the extent that the interruptions were not due to inadequate planning of transmission
connections; and
• widespread supply interruptions due to rare and extreme events which were not
reasonably able to be foreseen, or if thcy could be foreseen, for which the impact could
still not be effectively mitigated even if appropriate responses were provided.
A Regulated Entity wishing to exclude the impact of a cettain event from the calculation of
the service performance incentive scheme would need to provide the ERe with the
following:
• a detailed description of the nature of the event for which an exclusion is sought and the
reasons justifying the exclusion of the event, including the provision of suppotting
evidence;
• cvidence of the impact of the event on the Regulated Distribution System reliability
perfOlmance, for each of the measures adversely affected;
• a description of the steps that the Regulated Entity took to mitigate against or respond to
the events; and
• evidence that the Regulated Entity was unable to further mitigate against the impact of
the event.

29 If this value is exceeded, the cap of 3% of the annual revenue requirement for the performance incentive
scheme could be breached .
.10Section 3.2.3.4 of the Philippine Grid Code (R.A. 9136) prescribes the RMS value of the long-duration
voltage to be ensured at any (transmission) Connection Point by the Grid Owner and System Operator to be

r
greater than 95% but less than 105% of the nominal (transmission) voltage level.

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The ERC \vill adopt the 2.5 beta approach, developed by the Institute for Elccttical and
Electronic Engineers (IEEE) to identify major event days.3!
Further tests will be applied to detennine the main cause(s) for the major event days,
isolating, where appropriate, the underlying event and formally classing it as "severe".
These tests include assessing the nature and rarity of an event, the ability to foresee and
prepare for an event, the ability of distribution companies to mitigate the effects of an event,
and the reaction of Regulated Entities after the event.
If after this consideration the ERe approves the classification of an event as extreme, the
impact of the event on the petformance indices would be excluded from the performance
statistics used as part of the performance incentive scheme.
BS Information disclosure
The third component of the performance incentive scheme is the measurement and
disclosure of further performance data. From the third regulatory period, Regulated Entities
will be required to measure the performance of each Regulated Disttibution System against
the following indices:
Network performance indices
• momentary average interruption frequency index (MAIH);
• frequency of tripping events per 100 circuit-km;
Service performance indices
• average time to respond to queries and complaints;
• average time to reconnect a service after payment of all dues.
The information has to be collected and supplied to the ERC on a monthly basis. In addition
to the monthly figures, the cumulative performance total against each index must also be
provided, from the start of the corresponding calendar year ti1l the end of the month for
which each index was measured.
The ERe intends to annually publicize the information disclosure data for all Regulated
Distribution Systems .

.11 IEEE Power Engineering Society. (2004, May). IEEE Std I366TM - 2003. IEEE Guide for Electric Power
Distribution Reliability Indices. New York, USA.

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APPENDIX C
CRITERIA FOR REGULATORY RESET EXPERTS

The main categOlies for which Regulatory Reset Experts will be retained by the ERC are
listed below, with the experience and qualifications required for individual experts working
on each category. These experience levels and qualifications may not necessary all lie in a
single expert, but rather in a team, or in a group of one or more expel1s working on a
category. Any individual making up part of such a team or group of Regulatory Reset
Experts working on a category, should have qualifications in one or more of the areas listed,
and have experience in one or more of the aspects listed against that particular category.
The requirements noted below are not intended to prevent a Regulatory Reset Expert from
using the support of analysts, administrative or other supporting staff in the provision of
services to the ERC in terms of the DWRG and it is not required or expected that such
supporting staff should have the experience or qualifications noted below. However, a
Regulatory Reset Expert shall review all the outputs from such supporting staff and accept
full professional responsibility for such outputs. All infOlTIlation and reports provided by a
Regulatory Reset Expert to the ERC shall be presented by the Regulatory Reset Expert in
his/her own name and capacity.
Asset valuation
Have experience in:
• Appraising electricity network plant and equipment, and land and buildings, within
the Philippines using a fair value methodology;
• Valuing electricity distribution network assets, in an overseas jUlisdiction, using an
optimized replacement cost valuation methodology; and
• Assisting regulated entities and/or regulators in overseas jurisdictions in reviewing or
determining regulatory asset bases used for the purposes of incentive or performance
based regulatory arrangements.
Have qualifications in (see below):
• Engineering;
• Accounting; and
• Business or Commerce.
Distribution system design. construction, maintenance and operation, load flow modelling
and distribution network benchmark service pcrrormance
Have experience in:
• Electricity network load flow modc11ing;
• Design, construction and maintenance of electTicity distTibution networks, including
project cost estimation, project planning, cost control and network constraint
elimination;
• McasUling and monitoring electricity network performance;
• DesIgn and/or augmentation of electricity networks for reduced lme losses; and

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• Electricity network performance monitoring and benchmarking against overseas

distribution entities.
Have:
• Qualifications in Engineering (see below); or
• Other qualifications relevant to the matters referred to above.
Accounting
Have experience in:
• Administering, reviewing or developing financial accounting, asset register or
operational systems;
• Auditing, accounting, asset register and operational systems, leading to the issuance
of an audit opinion on statutory financial reports; and
• Assisting with asset valuation assignments.
Have qualifications in:
• Accounting (see below).
Corporate finance, financial modelling and pricing
Have expetience in:
• Principles of asset valuation of electricity networks to optimized replacement cost
and/or deprival value;
• Estimation of weighted average eost of capital for regulatory and commercial
purposes;
• Cash flow and financial modc11ing and financial forecasting;
• Credit rating analysis and estimation;
• Analysis and/or development of operating and maintenance expenditure, and capital
expenditure, forecasts in the electricity sector;
• Developing submissions to electricity regulators or as a regulator/regulator's advisor
in examining such submissions;
• Regulation of electricity network prices or tariffs;
• Analysis of service and financial performance against local and overseas
benchmarks; and
• Analysis of discounted cash flow or similar financial modelling.
Have qualifications in (see below):
• Business or Commerce;
• Economics;
• Accounting: and
• Engineering.

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Economic analysis and economic modelling

Have experience in:
• Economic forecasting of economic growth and/or electricity demand.
Have qualifications in:
• Economics (see below).
Fire Inspcction
Have experience in:
• Investigation of the causes of fires in buildings or plant and equipment; and
• Assessing the risks of fire and effectiveness of fire prevention and control systems.
Have qualifications in:
• Engineering (see below); or
• Fire investigation.
Insurance and claims risk adjustment
Have experience in:
• Investigation and assessment of force majeure events; and
• Estimation or examination of the costs resulting from force majeure events, including
direct replacement costs and the opportunity costs associated with continuation of
electricity supply.
Have qualifications in (see below):
• Engineering; or
• Business or Commerce; or
• as an Actuary.
Professional qualifications
Where a person is required to have qualifications in Accounting, that person must be
registered as a celtified public accountant under the Revised Accountancy Law (Presidential
Decree No.692) who possesses the independence as defined in Part II Section 14 of the Code
of Professional Ethics for Cel1ified Public Accountants as promulgated by the Board of
Accountancy and approved by the Professional Regulation Commission.
Where a person is required to have qualifications in Engineering, Economics or Business or
Commerce, or as an Actuary, that person must:
• have graduate or post graduate qualifications in that discipline from a reputable
Philippines or overseas university, with demonstrable experience of having worked in
that field for three years or longer; or

• be a member of a professional institute in the Philippines or an overseas jurisdiction

which represents that discipline, with a grading according to the rules of that institute
that is higher than entry or training level.

()
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Notwithstanding the above, the ERC may decide to appoint a Regulatory Reset Expert who
does not comply with these requirements for professional qualifications, where it has been
proven to the satisfaction of the ERC that the Reset Expert has marc than 10 years
demonstrable professional experience in the relevant discipline that is directly relevant to the
service to be rendered. In such a case the ERC will communicate the decision in advance to
the affected Regulated Entity or Entities, providing the supporting information on the
experience of the intended Regulatory Reset EXpet1 and why this appointment is considered
appropriate for the task to be performed.

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APPENDIXD
OPTIMIZA TlON PRINCIPLES

For the purposes of Section 4.8.6, the following optimization principles will be applied when
undertaking the optimizing of the re-valuation of the Regulatory Asset Base.
nt. Background
The intention of optimization when valuing a distribution network is to ensure that
the network would use the most cost-efficient design that would provide the
required service potential. In theory such a state could only be achieved if an
approach is followed that completely disregards the design and configuration of the
existing asset base. However, such an approach would be cost intensive and is
likely to result in variable and inconsistent outcomes and also does not reflect the
constraints that an existing network impose on new network developments.
The form of optimization applied here uses the existing network as the starting
point for the valuation. A series of optimization tests must be systematically
applied to the whole network to identify stranded assets, excess capacity and over-
engineering. Where necessary, the network is notionally redesigned to provide an
optimized network.
Optimization is to be undcttaken after the replacement cost (RC) distribution
network has been determined. The output from this process is the optimized
replacement cost (OR C).
Thc base ru1cs for establishing the optimized network arc that it should:
(A) provide a quality of supply similar to that which currently exists, except where
this exceeds the approved standard quality of supply ctiteria; and
(B) have a capacity similar to that of the existing network, except where this
exceeds allowed future load growth.
Optimization consists of fi ve stages:
1) excluding stranded assets;
2) optimizing the configuration of the network;
3) optimizing the capacity of elements in the network;
4) optimizing network engineering; and
5) optimizing stores and spares.
The determination of indexed historical costs, replacement costs or modem
equivalent replacement costs for existing individual network components is not
part of the optimization process. This shall be done prior to calculating the RC.

D2 Life cycle analyses

As a general rule, optimization will involve the selection of the lowest cost asset
that would provide the required capacity and service levels at a particular point on a
distribution network. However, the most cost-efficient design is the one that

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standard lives. The situation may therefore arise where the use of a lower cost asset
is avoided because of such life cycle cost analysis. In such cases, a general
description of the analysis and assumptions used should be included in the valuation
repOt1.
In undertaking life cycle cost analyses to detelmine the most efficient design, the
following may be taken into account:
(a) the capital and operating costs over the life of the asset;
(b) other costs that are incurred by the Regulated Entity as a result of
the use of the asset; and
(c) the cost of losses to the extent that these are caused by the
existing load and the allowed future load growth.
D3. Constraints on Optimization

The optimization process shall be carried out subject to the following constraints:
a) the potential level of service of the optimized network shall not exceed that of
the existing network, and the performance of any part of the optimized
network shall not exceed the Regulated Entities disclosed quality of supply
criteria, unless nonstandard contracts with customers exist that require the
Regulated Entity to provide an enhanced quality of supply;
b) the location of points of connection to other networks should be assumed to
be fixed. However, where a point of connection can be bypassed and replaced
with a more cost-efficient network arrangement, then that point of connection
shall be deleted for valuation purposes;
c) the location and number of connection points to consumers should be
assumed fixed;
d) the optimized network should only use the voltage levels used on the existing
network; and
e) the existing geographic boundaries of the Regulated Entity's supply area
should be assumed to be fixed.
D4. The Process of Optimization
Optimization of the network shall be undertaken on a systematic basis. The
optimization process must examine the existing network and determine whether a
more cost-efficient design could meet the required quality of supply criteria
throughout the allowed planning period. Optimization shall be undet1aken
systematically across the network and shall include, in particular, the following
network components:
a) points of connection to other networks;
b) substation's and primary distribution switching stations;
d) subtransmission lines and primary distribution circuits;
e) high voltage distribution feeders; and
f) the low voltage disttibution system.

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D5. Future Load Growth

The maximum capacity of any part of the optimized network shall be determined by
the allowed future load growth, which is the maximum forecast load on the relevant
part of the network under contingency operating conditions over the allowed
planning period. However, in no case shall optimized capacity exceed existing
capacity.
In order to ensure compliance with this clause, when preparing valuations
Regulated Entities shall disclose both existing loads and the load forecast used as a
basis for optimization. As a minimum, existing and forecast loads shall be provided
for each grid connection point, each main substation and each high voltage
distribution feeder. Clear justification and a detailed derivation of the load growth
forecasts are required. Both the existing maximum demand and the highest forecast
maximum demand during the planning period shall be provided.
Allowances should be made, where possible, for different growth rates in different
parts of the network. Existing loads may be estimated where metering is not
available.
The load forecast shall include only future electricity loads that can reasonably be
expected to be supplied from the distribution network. A load outside the existing
geographic boundaries of a Regulated Entity's area of supply shall not be included
in the forecast unless a written customer contract to supply the load exists at the
time of the valuation.
The planning periods over which future load growth can be allowed for shall not
exceed the following:
a) for subtransmission lines, substations (excluding transfonners), primary
distribution circuits and points of connection to a transmission network, 15
years;
b) substation transfoffilers, 10 years;
c) high voltage (HV) and low voltage (LV) distribution, and other network
assets, 5 years.
D.6 Quality of Supply
The optimized network shall be designed lo supply the existing load, and the
allowed future load growth, with a quality of supply that matches the level that
cun"ently exists for each pat1 of the network, except where this is greater than the
quality of supply criteria as approved by the ERe.
For the optimization process, Regulated Entities shall disclose the quality of supply
ctiteria that it currently uses as a basis for network design. This should be based on
their analysis of customer requirements and assessment of network maintenance
requirements and costs.
Relevant quality of supply criteria include:
a) the degree ,of security (redundancy) in different circumstances or localities; ,
b) target reliability indices for different areas of the network (CBD, urban, rural);
c) voltage regulation criteria; and
()
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d) levels of electrical losses.

The degree of seculity may be disclosed either in probabilistic or deterministic
terms. A deterministic approach could reference the level of in-built redundancy,
i.e. as (n) or (n-1) or (n-2) component redundancy. (An (n) security level implies no
component redundancy so that if a component fails, then customer supply is lost.
An (n-I) security level is one in which customer supply is not inteJTupted in the
event of any single component outage etc.) lJTespcctive of whether probabilistic or
deterministic criteria are used, it is necessary for a Regulated Entity to express its
degree of security critelia in such a way that the optimization process is transparent
and can be shown to have been applied consistently across all parts of the network.
The ERC will apply the quality of supply critelia in Table 01 as part of its
optimization process, unless compelling information is provided by a Regulated
Entity that justifies an altemative approach.
The power factor, voltage variations, technical losses and signal distortion
categories will not be used for optimizing out assets. They are included as
additional criteria that could constitute sufficient justification of the need for
distribution assets.
Existing Distlibution System assets that provide a quality of supply greater than that
disclosed by the Regulated Entity (as approved by the ERC) or the criteria in table
A2, shall be optimized out, except where the assets arc required to meet contractual
obligations to provide an improved quality of supply to specific customers, where
specific conditions have been negotiated with those customers to compensate the
Regulated Entity for the provision of non-standard quality of supply levels.
Table Dl : Quality of supply criteria
Quality category Network components Quality level
Degree of network Points of connection to n-]
security transmission network
Sub-transmission network32
Substations
Plimary switching stations
Primary distribution feeders]]
Secondary distribution feeders n-O
Low voltage network
Power Factor All >85% lageine

32 For the purposes of optimIzation, sub-transmission assets are detlned as those assets used on Regulated
Distribution Systems to connect transmission and distribution substations. It does not include those assets
owned by Regulated Entities to directly connect large consumers to the transmission network.
33 A primary distribution circuit is a distribution voltage circuit used for transporting
electricity to other circuits at the samc or lower distribution voltage levels. In general, but
not always, primary dlstnbutIOn Circuits Willnot be used for the direct supply of clectncity

«
to customers or for the direct supply of dlstnbution transfo~s that fee ';bw voltage
network. / j

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 Rules for setting Distribution \Vheeling Rates
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Voltage variations All >90% of nominal voltage level

<110% of nominal volta.ge level
Sional distortion All Total Harmonic Distortion <5%
Technical system All <~ 6.5% of cncrgy convcycd
losses

D7. Excluding Stranded Assets

Any system fixed assets not rcquired to supply line services to existing customers,
and which could thereforc be disconnected, shall be identified and excluded from
the optimized network. Such asscts arc known as stranded assets and should be
optimized out.
DB. Optimizing System Configuration
Optimization of the system configuration shall be earned out by considering
alternative configurations subject to the constraints on optimization and in
accordance with the relevant criteria relating to the quality of supply declared by the
Regulated Entity. The optimized configuration is the one that satisfies the relevant
optimization cliteria in the most cost efficient manner.
In the process of optimizing the system configuration, ceTtain assets or groups of
assets may become excess to requirements and should be valued at nil, while other
new assets may need to be notionally brought in.
D9. Optimizing Network Capacity
After the configuration of the system has been optimized, the elements within that
system shall be optimized by considering whether lower capacity, more cost-
efficient elements would be adequate.
Civil enginecring works such as sparc ducts, cable tunnels and switchyard bays not
currently used shall be optimized out unless they will be required to mcet the
allowed future load growtb. If the future use of such assets is only intended to
provide an improved quality of supply, rather than an increase in system capacity,
the assets shall be optimized out since the optimized system shall not provide a
quality of supply greater than that which currently exists.
DIO. Optimizing Network Engineering
As part of the process of optimizing the network, the engineering of the network
shall be examined to confirm that the optimized asset base is not over-engineered,
given the required quality of supply criteria. Over-engineering may occur if parts of
the existing asset base are engineered to a standard that exceeds the Regulated
Entity's current practice or if a more cost-efficient engineering arrangement or
configuration would be used if the existing assets were replaced. The Regulated
Entity's design and construction standards, and the standard of engineering applied
to its most recent projects should be used as (he benchmark for this test. Where a
more cost-efficient arrangement would result if the required level of service were
provided by applying the Regulated Entity's existing engineering standards then the
relevant assets shall be replaced by a notional asset arrangement that reflects current
practice.

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 Rules for setting Distribution Wheeling Rates
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Dll. Optimizing Network Equipment Spares

Network equipment spares may be included in the ORC valuation as long as the
spares are suitable replacements for assets installed in the network. However, the
quantity of spares in valuation shall not exceed the reasonable quantity of spares
required to meet the Regulated Entity's disclosed quality of supply cliteria.
Stranded assets may be valued as network sparcs, subject to the criteria set out
above. Stranded assets not required as network spares shall be
assigned a zero value for the purposes of the valuation.
D.12 Assets to be subject to optimization
Only fixed assets forming patt of a Regulated Distribution System owned by a
Regulatcd Entity or subject to a finance lease are to be included as pal1 of the
optimized replacement cost of the Regulated Distribution System. Such fixed assets
are assets that are tangible in naturc, have relatively long useful lives, and are used,
or intended to be used, for the conveyance or supply of electricity.
Where an easement forms an integral part of a network asset, it should be
considered to be a system fixed asset and may bc included in the valuation. Stores
and spares held in stock that can be used in the network in place of existing network
assets may be included in the valuation to the extent that the quantities of items
included in the valuation are appropriate, considering the historical reliability of the
equipment and the number of items installed on the network.
General plant (non-system assets) as described in Section 4.8.5 shall not be included
in the ORC valuation.
To avoid any uncertainty, it is noted that assets forming part of the Regulatory
Asset Base but not subject to optimization would still be included in the valuation
of the Regulatory Asset Base in the Initial Re-valuation Report.

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