Following the passage of Law No. 2 of 1998, a new structure for the Abu Dhabi water and electricity sector came into existence and went into effect on 1 January 1999. The sector was unbundled into segments separately responsible for production, transmission, and distribution / supply. The sector is now characterised by its ‘single-buyer’ model, with EWEC, TRANSCO, ADDC and AADC as monopoly companies.
The economic regulation of the sector companies draws upon the general duties of the DoE set out in the Law to promote competition in the sector, to ensure the operation and development of an efficient and economic sector, and to protect the interests of the consumers of water and electricity as to the terms and conditions and the price of supply.
These objectives are achieved mainly by the implementation of price controls for the monopoly companies (EWEC, TRANSCO, ADDC, AADC, and ADSSC) and by ensuring the economic purchase of water, electricity, and fuel by EWEC.
The price controls cap the revenue of the monopoly companies. In contrast, the revenues of the generation and desalination companies are constrained by the power and water purchase agreements (PWPAs) and the revenues of independent sewage treatment providers are constrained by the sewage treatment agreements (STAs), which are in turn subject to the economic purchasing licence obligations of EWEC and ADSSC, respectively.
Forms of Price Controls
Price controls set a ceiling on the revenue that can be recovered from licensed activities. The price controls, for the most part, are of a "CPI-X" type, which define maximum allowed revenue (MAR) that each company can recover in respect of its licensed activities during each year of the control period. Currently, there are separate controls for the water, electricity, wastewater and recyclable water businesses of the four network companies (TRANSCO, ADDC, AADC and ADSSC) and EWEC.
"CPI-X" regulation is increasingly being adopted worldwide and is seen as delivering the best long-run combination of low prices and high quality of services to customers. CPI stands for Consumer Price Index used to adjust the allowed revenue for inflation from one year to another. X is a factor used to establish an appropriate profile of revenue over years.
To ensure the economy and efficiency of the sector, the DoE’s responsibility is reflected in the operating licences of the sector companies, which are subject to various requirements in respect of their economic purchasing and efficient operation.
For example, EWEC in contracting for the purchase of capacity for water desalination or capacity for electricity generation, new or additional production capacity and fuel, shall purchase or otherwise acquire such capacity (or as the case may be, fuel and 'ancillary services') by adopting the most economic purchase method.
EWEC's contractual relationship with the new generation and desalination companies created under the Law takes the form of a number of power and water purchase agreements (PWPA). The PWPAs for new plants are mostly twenty-year contracts and competitively procured. For existing plants, payment terms in the PWPA are benchmarked against the costs of a new plant to ensure that they are efficient.
Similarly, the monopoly electricity and water transmission company (TRANSCO) which is also responsible for the economic despatch of plants and the settlement of payments, is subject to a licence obligation requiring the despatch of plants and procurement of 'ancillary services' to be on an economic basis.
Similar is the case with ADSSC, whose procurement of wastewater treatment services from independent sewage treatment plant under the sewage treatment agreements (STAs) is subject to satisfaction of its economic purchasing obligations.
The PWPA and fuel costs for EWEC and STA costs for ADSSC are treated on a pass-through basis under their price controls, subject to fulfilment of their economic purchasing obligations.
ADSSC's First Price Controls
Abu Dhabi Sewerage Services Company (ADSSC) became wholly owned by Abu Dhabi Holding Company (ADQ). It was established on 21 June 2005 by Law No. (17) of 2005 to provide sewerage services within the Emirate of Abu Dhabi. ADSSC took over ownership, management and operations of the sewerage system previously run by the Abu Dhabi and Al Ain Municipalities.
Like the network companies, ADSSC is a monopoly being the only provider of sewerage services, and it is therefore necessary for its activities to be price controlled to protect the interests of the consumers of sewerage services with regards to charges and the quality of service provided. The DoE set its first price control to apply from the date of establishment of ADSSC until the end of 2009.
The subsequent price controls for ADSSC run alongside the PC4 and PC5 controls for other network companies. Currently, there is a single price control that covers all the three businesses of ADSSC (i.e. collection, treatment and disposal).
First Price Controls
In 1999, following the restructuring of the sector, the RSB (Now the DoE) established initial price controls for the water and electricity businesses of EWEC (formerly ADWEC), TRANSCO, ADDC and AADC.
These price controls came into effect on 1 January 1999, and were initially set to last for three years. They were subsequently extended for a further year.
Under the first price controls (PC1), each of the three network companies (AADC, ADDC and TRANSCO) had separate price controls for its water and electricity businesses. There was no separation of controls between distribution and supply businesses of distribution companies and between water and electricity businesses of EWEC. For network companies’ revenue in each year was determined by a formula with three components: a fixed term and two variable terms that were linked to companies’ outputs or demands such as customer number, units transmitted or distributed and peak demands.
Each of these revenue drivers changed from year to year by the rate of increase in inflation less an "X" factor. The rate of inflation used in the price control formula was a composite of US and UAE consumer price inflation (CPI).
Distribution companies were allowed to pass-through the cost of purchases of electricity from EWEC through the BST and the cost of TRANSCO's transmission use-of-system (TUoS) charges.
EWEC's price control was somewhat different to the controls for the network businesses, as most of EWEC's costs represented payments under the PWPAs and fuel supply agreements which were therefore considered on a pass-through basis subject to economic purchasing obligation. EWEC's procurement costs, over which EWEC has direct control, were subject to a CPI-X incentive regulation for water and electricity combined.
The DoE published separate consultation papers on PC1 controls for distribution companies, TRANSCO and ADWEC (Now EWEC).
Second Price Controls
During 2002, the DoE (formerly RSB) undertook a review of the price controls which apply to the sector monopoly companies (ADWEC (Now EWEC), TRANSCO, ADDC and AADC) and set the second price controls (PC2) to apply for three years from 2003 to 2005.
PC2 controls presented the following main differences from PC1:
- a new term was introduced into TRANSCO's price controls to allow the pass-through of the costs of ancillary services, subject to the existing economic purchasing obligations;
- TRANSCO's 'unit transmitted' revenue drivers for electricity and water were redefined to refer only to units transmitted through exit meters complaint with the Metering and Data Exchange Code (MDEC);
- CPI was defined solely in terms of UAE inflation (some of the first controls used both UAE CPI and US CPI);
- for ADDC and AADC, the price controls were extended in scope to also include the distribution and supply businesses assumed to have been inherited from RASCO with effect from 1 January 2001; and
- a performance incentive scheme, represented by a new term "Q" in the price control formulae, was introduced to additionally link maximum allowed revenues to certain aspects of each company's performance.
Third Price Controls
During 2004 and 2005, the DoE (formerly RSB) undertook a review of the price controls, which apply to the sector monopoly companies (ADWEC ‘Now EWEC’, TRANSCO, ADDC and AADC) and set the third price controls (PC3) to apply for four years from 2006 to 2009.
The form of controls remained CPI-X revenue capped linked to 'revenue drivers' with a Performance Incentive Scheme (PIS). The new incorporated structural features compared to PC2 are as follows:
- all controls were set for a four-years duration (2006 - 2009 inclusive);
- separate price controls were introduced for EWEC's water and electricity businesses;
- all income from licensed activities were included within 'regulated revenue';
- ADWEC was required to produce a formal report to the DoE of its unit production costs increase (for water and electricity separately) compared to the previous year; and
- the definitions of revenue drivers were unchanged from the PC2 period except for peak demand-related drivers for TRANSCO (for both water and electricity), which were based only on metered units in compliance with the Metering and Data Exchange Code at exit points on leaving the transmission system.
In March 2006, the DoE published an Addendum to PC3 Final Proposals, concerning ADDC and AADC only. PC3 were accepted by all licensees concerned (AADC, ADDC, ADWEC ‘Now EWEC’ and TRANSCO) and came into effect on 1 January 2006.
Fourth Price Controls
During 2008 - 2009, the RSB (Now DoE) undertook a review of the price controls for all the four network companies (AADC, ADDC, TRANSCO and ADSSC) and set the fourth price controls (PC4) to apply for four years from 2010 to 2013.
The RSB (Now DoE) undertook a separate review of price controls for ADWEC to set the new controls to apply for five years (2010-2014).
For network companies, the form of controls remained CPI-X revenue capped linked to 'revenue drivers' with a Performance Incentive Scheme (PIS). A number of changes were made to the price controls, particularly the following:
- AADC and ADDC were allowed a pass-through treatment of their electricity purchases from embedded generation (subject to economic purchasing obligation);
- ADSSC was allowed a pass-through treatment of costs paid under sewage treatment agreements (STAs) (subject to economic purchasing obligation);
- TRANSCO's price controls were extended to cover unlicensed transmission activities outside the Emirate of Abu Dhabi that use the common assets shared by the licensed and unlicensed activities; and
the existing performance incentive scheme (PIS) were enhanced with further incentives
Fifth Price Controls
The RSB (Now DoE) from 2012-2013 consulted on new price controls for the four network companies (AADC, ADDC, ADSSC and TRANSCO) to apply for the fifth price controls (PC5) to take effect from 1 January 2014.
First Regulatory Controls
Second Regulatory Controls
In March 2021, the DoE commenced its review of the multi-year, incentive-based price controls that apply to the following water, wastewater, recycled water and electricity companies in the Emirate of Abu Dhabi; AADC, ADDC, ADSSC / SWS, TRANSCO, and EWEC, taking effect between 2023 - 2026. Our final decision on the form, structure, separation, and duration of RC2 controls includes:
- continuing with the CPI-X revenue cap form of controls for all companies;
- retaining the current scope and separation of price controls for all companies but removing the SO function and related cost allowances from TRANSCO’s price controls;
- using a zero X factor for all businesses for RC2;
- at this stage, not to proceed with output-based regulation (OBR). DoE accepted the network companies’ suggestion to form a working group during RC2 and further study this initiative. We will continue monitoring the trends and upon the workgroup outcomes will consider whether to revisit this issue in the future price control reviews;
- retaining the existing cost pass-through arrangements for all businesses;
- setting of RC2 in 2022, a mid-term capex review and adjustments, and annual specific Opex allowance adjustments; and
- structuring the MAR formula for each company with a fixed element and a variable element linked to the output-based revenue driver
Recycled Water First Regulatory Control (RW RC 1)
In 2018, the DoE commenced the first regulatory control review for the recycled water distribution and supply companies in the Emirate of Abu Dhabi through a consultation process. The recycled water distribution and supply companies in the Emirate of Abu Dhabi are:
(a) Al Ain Distribution Company (AADC); and
(b) Abu Dhabi Distribution Company (ADDC)
The first consultation paper was published in June 2018, and the second consultation
paper was issued in December 2018. The draft Proposal Paper was issued in September 2019.On 6th February 2020, the DOE published the final proposals for recycled water first regulatory controls (RC1).