Margins and Tariffs
We develop studies of costs, margins, prices, and tariffs of greenfield or existing infrastructure projects, private or free market, and/or regulated services, depending on each case, the production cost of the good or service is determined considering the corresponding profitability by the investor.
The price of the good or service allows entering a competitive market and repaying the CAPEX and OPEX costs, at the minimum expected rate of return, in the corresponding period of life of the Project.
STUDIES OF MARGINS AND TARIFFS
- Market demands studies.
A market study considers current demand and projected demand for substitution and demographic growth. The market can be segmented by consumption sector or by geographic area.
An analysis of the technical, environmental, and social feasibility of the service expansion areas must be included in the considered projection horizon.
According to each project, the categories of consumption considered may be petrochemical plants, process plants, LNG and sectors of electricity generation, industry, transportation, commercial and residential.
A strategic expansion plan must be developed that considers a balance between the highest profitability for the investor and the economic and social benefits for the demanding market.
- Engineering infrastructure design and modeling.
If it is a new infrastructure, the corresponding engineering design must be made more efficient.
If it is an existing infrastructure and it is a regulated service, such as the transportation of crude oil or gas or the distribution of gas through networks and according to what is established by local regulations, it can consider an efficient hydraulic design with the real volumes and projected in the calculation horizon.
- Design efficiency is associated with the concept of New Replacement Value (VNR).
If there is an expectation of significant future demand, a long-term design will result in a greater dimension of the infrastructure but allows convenience for users of stable long-term rates; short-term designs, with a conservative demand, cause periodic adjustments of the infrastructure and costs and fees that may affect market stability.
Once the design volume is defined, all possible design combinations must be considered and the most efficient, in economic terms, selected.
- Development current and projected CAPEX.
According to the results of the design or redesign developed in the previous stage, a detailed costing system is developed, considering the following.
Direct Investment Costs:
- A first breakdown of the components of the system is considered.
- One component can be Piping, another Pumping or compression stations, storage, etc., each of these can have a variety of dimensions, diameters, and capacities, which will be installed in different types of terrain, accesses, regions with vegetation and different rainfall, etc.
- Within each component, the set of specific components must be developed, with their specific technical description.
- Each specific component is segmented into a set of activities or construction processes that cover the different field works and disciplines of engineering: civil, mechanical, electrical, and cathodic protection, instrumentation, etc.
- For each activity or construction process, the detail of the required resources and unit costs is developed, which includes labor, equipment and tools, logistic support, etc.
- According to the level of engineering, we can develop the CAPEX Class 4, 3, or 2, according to the AACE International Recommended Practices.
Indirect costs are the costs of management and administrative support required and associated with the construction process.
- Development of operating costs.
The operation and maintenance costs, also include marketing and administration costs, can be developed according to the following.
Direct Costs of Operation:
- Specific components are defined in the previous section.
- It is determined, the efficient processes of operation and maintenance for each specific component, the recommendations of the equipment manufacturers, and the judgment of experts will determine the frequency of maintenance and the requirements of resources, labor, materials, tools, and necessary equipment and support logistic.
- Information on O&M costs from other comparable companies (Benchmarking) serve as a reference to referentially evaluate the efficiency of the system.
Indirect costs are the costs of management and administrative support required and associated with the operation and maintenance of the system.
- WACC calculations and support.
The WACC or Cost of Capital, is the discount rate to be used in the calculation of the discounted cash flow, or to discount the future flows of CAPEX, OPEX, and projected volumes in the calculation of the margins or rates. The WACC for its acronym in English (Weighted Average Cost of Capital) represents the minimum rate of return of the committed investments. In a regulated service, the WACC whose value is correlated with the risks of the project, can be calculated, and proposed by the private company for the approval of the regulatory entity.
- Average cost of the service.
The Average Cost of the service, of the calculation period, is the quotient of the updated sum at the discount rate of recognized costs and the updated sum of the volumes at the same discount rate. The recognized costs depend on local regulations and may include the annualized investment that includes profitability, or the return on the non-depreciated investment plus depreciation, the annual cost of operation, maintenance, and administration, taxes or not, according to what the regulation establishes.
The Average Cost, which represents the unit cost of the service, is calculated in a discounted cash flow, based on a regulated discount rate (r), approved by the Regulator and/or defined by the investor if it is a private not regulated business. In the latter case, this average cost becomes the minimum price that the investor must charge for his service to earn a return equal to WACC, the minimum rate of return on invested capital.
- Margins and tariffs applicable
The final margins and tariffs applicable are broken down based on the determined average cost, depending on what is established by the applicable regulation, this can be maintained in a single Margin or Stamp Rate, or recalculated in rates by sections, or broken down into margins according to consumption volumes of each category of consumption, among others.
- Support during the regulatory process.
In the case of a regulated business, the approval of the Regulatory Body is required, through a regulation process with public presentations, often with citizen participation, until culminating in the approval of the final rates.
- Sustainability analysis of the regulated business.
Includes a business sustainability analysis, and uncertainty scenarios are evaluated. An uncertainty is characterized by its lack of predictability. Its possible occurrence is analyzed, and control strategies are recommended.