PRELIMINARY TECHNICAL NOTE RTS/003/2015 SABESP'S EXTRAORDINARY TARIFF REVISION

Transcription

1 PRELIMINARY TECHNICAL NOTE RTS/003/2015 SABESP'S EXTRAORDINARY TARIFF REVISION March 2015

2 PRELIMINARY TECHNICAL NOTE - SABESP'S EXTRAORDINARY TARIFF REVISION TABLE OF CONTENTS 1. INTRODUCTION OVERVIEW BRIEF HISTORY THE EXTRAORDINARY TARIFF REVISION REQUESTED BY SABESP INCREASE IN ELECTRIC POWER COST GROUNDS REDUCTION IN THE WATER DEMAND CAUSED BY THE WATER CRISIS GROUNDS ARSESP'S ANALYSIS OF SABESP'S REQUEST FOR EXTRAORDINARY TARIFF REVISION VARIATIONS IN THE ELECTRIC POWER COST VARIATIONS IN THE DEMAND FOR WATER AND SANITARY SEWER SYSTEM TARIFF ADJUSTMENT REPOSITIONING INDEX OF THIS EXTRAORDINARY TARIFF REVISION ANNUAL ADJUSTMENT OF TOTAL TARIFF ADJUSTMENT FINAL REMARKS

3 1. INTRODUCTION The purpose of this Technical Note is to present the preliminary results produced by ARSESP for SABESP's Extraordinary Tariff Revision [Revisão Tarifária Extraordinária - RTS], requested by the Concessionaire through Official Letter P-0096/2015 of March 06, 2015, which will be submitted to public consultation and hearing. The basic data used to establish the new authorized tariff level derive from the new estimates made by SABESP in March 2015, subject of Administrative Proceeding In addition to the data sent by SABESP, the following data were considered to prepare this Technical Note: the result of SABESP's First Ordinary Tariff Revision [Revisão Tarifária Ordinária - RTO], focused on the business plan projections related to the events that led to the RTE; ARSESP's analyses during this process; the legislation in force; and the current water crisis scenario. This Extraordinary Tariff Revision uses the same methodology employed in the process of the First Ordinary Tariff Revision, whose results were presented in the Final Technical Note RTS/004/2014 and published in ARSESP's Resolution no. 484/2014, available on the Agency's website OVERVIEW BRIEF HISTORY The 2007 State Supplementary Law 1025 establishes that it is incumbent upon ARSESP to regulate and inspect the basic sanitation services, which include tariff issues. Based on these duties and under the legislation, in 2011 ARSESP began the First Tariff Revision process for SABESP, for the tariff cycle of 2012 to As a result of the issues identified by SABESP and ARSESP during this process, especially the determination and validation of the assets basis, ARSESP concluded the tariff revision in April 2014, and established the tariff repositioning index of % in relation to the tariffs in force at the time, as such index ensured the concessionaire's economic and financial balance in the tariff cycle and the Efficiency Factor (X Factor) set as % to be applied to the next annual adjustments, to be made in April 2015 and April The results were published by ARSESP through Resolution no. 484/2014 and Final Technical Note RTS/004/2014. However, due to the water crisis, in early 2014 SABESP asked for ARSESP's authorization to implement a Water Consumption Reduction Incentive Program for consumers of the Metropolitan Region served by the Cantareira water system, in order to ensure water supply. This program, which was approved by ARSESP Resolution no. 469/2014 of February/2014, aimed at granting a 30% tariff discount to users that reduced their monthly water consumption by at least 20% in relation to their average consumption in the period from February/2013 to January/

4 As the water crisis persisted, the Water Consumption Reduction Incentive Program was extended to all cities of the Metropolitan Region of São Paulo served by SABESP, and such extension was approved by ARSESP Resolution no. 480/2014. Later on, ARSESP authorized SABESP to increase the tariff bonus ranges of the Water Consumption Reduction Incentive Program, and give a bonus to users whose reduction was higher than 10% as of November 1, 2014, as established in ARSESP Resolution no. 514/2014. In this scenario of water crisis and adoption of measures to stimulate water savings, when the result of SABESP's First Tariff Revision was published in April 2014 ARSESP authorized the concessionaire to apply, on a future date, the repositioning index resulting from the tariff revision, as established in art. 1 of ARSESP Resolution no. 484/2014, which approved the Ordinary Tariff Revision (RTO) that had been concluded. Article 1, item III, of ARSESP Resolution no. 484/2014 also established that the next tariff adjustments would occur on April 11, 2015 and April 11, 2016, and that the next tariff revision would occur on April 11, In November/2014, Sabesp asked for ARSESP's authorization to apply the results of the RTO approved in April/2014, recalculating the amounts as a result of the application in December/2014. Therefore, ARSESP authorized SABESP to apply the % index as of December 27, 2014, which corresponds to the % index approved in the end of the Tariff Revision in April plus 1% on account of compensation for the postponement in its application, as published in ARSESP Resolution no. 520/2014. It is worth pointing out that such authorized index did not include any compensation to SABESP for decreased income caused by the Water Consumption Reduction Incentive Program that was in effect. Tariff discounts in relation to the maximum tariff approved by the regulatory body may be granted by the Concessionaire, but they do not justify a request for compensation. In January/2015, as the water crisis persisted, ARSESP authorized SABESP to apply the Contingency Tariff to users covered by the Water Consumption Reduction Incentive Program who exceeded the average consumption established, under the terms of ARSESP Resolution no. 545/

5 2. THE EXTRAORDINARY TARIFF REVISION REQUESTED BY SABESP The extraordinary tariff revision is an instrument established in art. 38, item II, of Federal Law no /2007, which provides that the revision will revaluate the conditions for the service provision and tariffs charged when facts not established in the agreement occur, facts that cannot be controlled by the service provider and that change its economic and financial balance. Upon publication of the Final Technical Note RTS/01/2012, which establishes the detailed methodology to be employed in SABESP's tariff revision, ARSESP defined that the events giving rise to an extraordinary tariff revision are those that: occur during the Tariff Cycle; for the most part cannot be controlled by the company; were not addressed in the Tariff Revision; and have a significant impact on the balance. In addition, when the request for extraordinary tariff revision was on SABESP's initiative, the request has to be submitted to ARSESP by means of a document specifying: the extraordinary event(s); the elements of the balance equation that were affected by the event (that is, the elements that were in disagreement with what was established in the tariff revision); a preliminary measurement of the (significant) impact on the company's economic and financial balance. Thus, on March 06, 2015, SABESP sent to ARSESP Official Letter P-0096/2015 requesting an Extraordinary Tariff Revision, with the Technical Note enclosed detailing the information. The events that caused SABESP to request an extraordinary tariff revision are: Increase in the electric power cost; Reduction in the water demand caused by the water crisis. These items will be detailed below. 2.1 INCREASE IN ELECTRIC POWER COST GROUNDS Two facts increased the costs of electric power generation and distribution: the water crisis that affects the hydroelectric power production (and has been adversely affecting the production and distribution of water by SABESP) and its combination with the effects of Federal Law 12783/2013. The criteria and premises used by SABESP to calculate the expenses estimated for 2015 and 2016 are explained below. For 2013 and 2014, the amounts indicated in table 2.1 (below) are realized amounts. 5

6 In 2014, 55% of the electric power used by SABESP came from electricity distributors (Regulated Contracting Environment [Ambiente de Contratação Regulada - ACR]) and 45% came from Free Contracting Environment [Ambiente de Contratação Livre - ACL], a total of 2,387 GWh; Electric power adjustments of the distributors with which SABESP is connected, through the increase in the price of electric power purchased by these distributors in the Short- Term Market in 2015 and 2016; The introduction, as of 2015, of the Tariff Flags system in the electricity bills, based on the evaluation of the National Electric System Operator [Operador Nacional do Sistema Elétrico - ONS], which defines the best strategy for thermal power plants to generate power and meet the demand. SABESP adopted the red flag for the most part of 2015 and the yellow flag for 2016; Non-application of the 15% discount of the sanitation sector to the additional amount referring to tariff flags as of March 2015, according to a resolution of the National Agency of Electric Power [Agência Nacional de Energia Elétrica - ANEEL], which increased the cost for SABESP; As of February 2015, application by ANEEL of Extraordinary Tariff Revision for all 58 electricity distributors; Based on the inflation estimate (measured by the Broad Consumer Price Index [Índice de Preços ao Consumidor Amplo - IPCA]), adjustment in the Tariff of Use of the Electricity Distribution System [Tarifas de Uso do Sistema de Distribuição - TUSD] and the Electric Power Tariff [Tarifa de Energia - TE] applicable to the electricity volume purchased in the ACR for For 2016, the IPCA was applied again, and part of the loans intended to bail out electricity distributors is expected to be paid; Elimination of the conventional tariff category by ANEEL, in the captive market of distributors where SABESP operates, which enabled purchase of electricity in voltage higher than 1 kv at lower costs. The elimination of the conventional tariff category as of 2015 entails classification in the blue or green time-season tariff categories, which means increased costs; With regard to the costs of electricity agreements in the Free Contracting Environment (ACL), the premise is that the electric power for the estimated load be adjusted by the General Price Index - Market [Índice Geral de Preços - Mercado IGPM]. The agreements in force end in December New agreements will take effect as of January 2016; For 2016, SABESP already has agreements to supply 40% of the load established in the ACL, with adjustments by IGPM; The remaining 60% supplied by the ACL will be contracted, and prices are estimated to be higher due to the current market conditions, with high prices and low liquidity. The electric power management strategy adopted by SABEST in the ACL establishes that the company will not work with risks resulting from an electric power transaction (exposição) (no contract) with the Electric Power Trade Chamber [Câmara de Comercialização de Energia Elétrica - CCEE]; 6

7 As to the electric power TUSD in the free market, the IPCA is estimated to be applied to the TUSD, using the same parameters of tariff Adjustments in ACR, TUSD and TE; and Increase in electric power consumption in 2015 and 2016: In 2015, SABESP estimates a consumption growth of 1.87% over 2014, which corresponds to 2,432 GWh (57% in the ACR and 43% in the ACL), resulting from the start-up of operations of new sewage pumping stations and maintenance of consumption levels in the cities outside the Metropolitan Region of São Paulo, despite the estimated reduction in water production and distribution and sewage collection for the year; In 2016, the estimate for electric power consumption is 2,681 GWh, which corresponds to a 10.26% increase over 2015, as a result of the resumption of water consumption levels. The table 2.1 below shows a summary of amounts realized (2013 and 2014) and projected ( ) by SABESP for electric power consumption and expenses. Table 2.1 Summary of electric power consumption and expenses for the period of Values in R$ millions at current prices Historical and Estimate of Electric Power Consumption GWh Description Variation (2015/2014) 2016 Variation (2016/2015) ACL Consumption % % ACR Consumption 1, % % TOTAL Consumption 2, % % Historical and Estimate of Electric Power Expenses R$ million Description Variation (2015/2014) 2016 Variation (2016/2015) ACL: electric power expenses % % Adjustment of agreements Tax variation Consumption variation ACL: TUSD expenses % % RTE in TUSD Tariff adjustment Consumption variation Previous year s adjustments residual effect ACR: Electric Power + TUSD expenses % % Consumption variation Residual effect of adjustments of the previous year Elimination of tariff categories Flags RTE Tariff adjustment published until Mar/ Estimated tariff adjustment TOTAL expenses % 1, % 7

8 As demonstrated in table 2.2 below, for 2013 and 2014 the realized amounts are nearly 1.5% above the amounts estimated in the Business Plan of the Ordinary Tariff Revision (RTO). For 2015 and 2016, SABESP projected an increase of 55.5% and 96.2%, respectively, in relation to the amounts projected previously. Table 2.2 Comparison of the electric power costs realized and projected by SABESP for Values in R$ millions at prices of December/2012 Description Electric power costs (R$ thousands) Realized Estimate Business Plan (RTO) 527, , , ,359 Realized and SABESP s Projection 535, , ,750 1,040,110 (RTE) Variation (RTE/RTO) 1.56% 1.49% 47.55% 85.28% 2.2 REDUCTION IN THE WATER DEMAND CAUSED BY THE WATER CRISIS GROUNDS In accordance with the Technical Note presented by SABESP, to complement Official Letter P- 0096/2015, the month-by-month comparison of the flow of the Cantareira system for 2014 demonstrates that there was a significant reduction in such flow, which is a rare and extreme event, without a specific frequency and therefore unpredictable. As a result of such decrease, there was a 25% reduction in water production in the Metropolitan Region of São Paulo, from 70 m³/s in January 2013 to 52 m³/s in January This event changed the water demand, as consumers had economic incentives (bonus and contingency tariff) to reduce consumption as an alternative to a more severe reduction in the water supply. The variations between the estimated amounts and the realized amounts of physical data related to the demand from 2012 to 2014 are presented in table 2.3. In 2014, there was a 7.85% reduction in the total measured volume in comparison with the volume estimated in the Business Plan approved in the RTO. 8

9 Table 2.3 Estimated demand data in the business plan and data realized to 2014 Description WATER SEWAGE TOTAL Connections Business Plan (RTO) 7,013,260 7,182,670 7,356,128 5,692,333 5,996,650 6,245,153 12,705,593 13,179,320 13,601,281 Realized (RTE) 7,006,288 7,184,610 7,475,771 5,686,826 5,866,535 6,161,134 12,693,114 13,051,145 13,636,905 Variation -0.10% 0.03% 1.63% -0.10% -2.17% -1.35% -0.10% -0.97% 0.26% Savings Business Plan (RTO) 9,544,740 9,715,017 9,934,487 7,998,082 8,329,044 8,658,279 17,542,822 18,044,061 18,592,766 Realized (RTE) 9,512,280 9,777,078 10,201,745 7,992,956 8,260,431 8,688,581 17,505,236 18,037,509 18,890,326 Variation -0.34% 0.64% 2.69% -0.06% -0.82% 0.35% -0.21% -0.04% 1.6% Measured Volume Business Plan (RTO) 1,894,880 1,927,115 1,968,777 1,377,036 1,440,100 1,495,262 3,271,916 3,367,215 3,464,038 Realized (RTE) 1,895,264 1,926,895 1,821,224 1,379,529 1,414,224 1,370,832 3,274,793 3,341,118 3,192,056 Variation 0.02% -0.01% -7.49% 0.18% -1.80% -8.32% 0.09% -0.78% -7.85% Billed Volume Business Plan (RTO) 2,097,632 2,133,316 2,179,436 1,524,379 1,594,191 1,655,255 3,622,011 3,727,507 3,834,691 Realized (RTE) 2,088,635 2,131,455 2,058,413 1,533,242 1,577,670 1,564,433 3,621,876 3,709,125 3,622,846 Variation -0.43% -0.09% -5.55% 0.58% -1.04% -5.49% 0.00% -0.49% -5.52% SABESP also presented a new projection of the physical data related to the demand for the remaining period of the tariff cycle - years of 2015 and 2016, shown in table 2.4. To define the new projected physical data, SABESP considered that there will be no reversal of, but rather increase in, the trend for reduction in the volume measured for In 2016, the volume will grow again in relation to 2015, but it will not reach the consumption levels projected before the crisis. Table 2.4 Projected demand data and 2016 Description WATER SEWAGE TOTAL Connections Business Plan (RTO) 7,531,193 7,706,776 6,499,095 6,758,447 14,030,288 14,465,223 New estimate (RTE) 7,587,995 7,764,995 6,348,000 6,601,000 13,935,995 14,365,995 Variation 0.75% 0.76% -2.32% -2.33% -0.67% -0.69% Savings Business Plan (RTO) 10,155,857 10,377,801 8,994,843 9,338,682 19,150,700 19,716,483 New estimate (RTE) 10,429,995 10,672,995 9,031,000 9,391,000 19,460,995 20,063,995 Variation 2.70% 2.84% 0.40% 0.56% 1.62% 1.76% Measured Volume Billed Volume Business Plan (RTO) 2,010,749 2,052,934 1,551,620 1,609,261 3,562,368 3,662,195 New estimate (RTE) 1,712,022 1,887,780 1,334,169 1,493,745 3,046,190 3,381,525 Variation % -8.04% % -7.18% % -7.66% Business Plan (RTO) 2,225,899 2,272,598 1,717,643 1,781,452 3,943,542 4,054,050 New estimate (RTE) 1,937,469 2,136,173 1,524,599 1,706,474 3,462,068 3,842,647 Variation % -6.00% % -4.21% % -5.21% 9

10 3. ARSESP'S ANALYSIS OF SABESP'S REQUEST FOR EXTRAORDINARY TARIFF REVISION The Extraordinary Tariff Revision (RTE), depending on the reason and circumstances that led to it, may be limited to a specific fact or have a more general nature, with a complete revision of the service provision conditions. Likewise, and according to the evaluation of the regulatory entity, it may be applied only to the remaining period of the tariff cycle under way, or a new and complete tariff cycle may be initiated. Given the urgent nature of an Extraordinary Tariff Revision, and recognizing the impact of the water crisis, and consequent reduction in the demand, and the changes in the electric power costs on SABESP's economic and financial situation, ARSESP decided to grant the request of this RTE. In the case of SABESP's Extraordinary Tariff Revision, ARSESP understands that the water crisis will set new paradigms for the provision of water and sewage services as to aspects of demand and supply, given that such water reduction was not anticipated when SABESP's business plan was approved in the Ordinary Tariff Revision concluded in early Its effects and impacts will be known only in the medium term. ARSESP adopted new projections for 2015 and 2016 related to the parameters mentioned above, whose deviations will be assessed by the end of the tariff cycle, and compensatory measures will be adopted in the following cycle, if necessary. It is worth pointing out that, given the severity of the water crisis, the projections presented have a degree of uncertainty as to the new consumption level, the offer of water and sewage services, and the new scenario of the electric power sector, which will be known once the effects of the crisis are clear. The adoption of measures by SABESP to reduce costs and improve operating efficiency to manage the crisis may contribute to reduce the physical and financial impacts of the water shortage. Likewise, the Concessionaire must carefully analyze its discount policy, in order to protect the economic and financial situation of the Company. Finally, it is important to clarify that the reduction in SABESP's revenue caused by discounts (bonus) granted to users under the Water Consumption Reduction Incentive Program is not being offset; in the price cap category (regulação por preço máximo), granting tariff discounts is a prerogative of the service provider, therefore not subject to future offset. 3.1 VARIATIONS IN THE ELECTRIC POWER COST In the Ordinary Tariff Revision concluded in early 2014, considering that the electric power expenses represent a significant part of SABESP's operating expenses (OPEX), ARSESP adopted a 15% discount in the unit costs of electric power originally estimated in the company's Business Plan, as a result of the enactment of Law no /2013 (see Final Technical Note RTS/004/2014 item 7.3). Such measure was adopted after comparison between the electric power unit cost of January to September/2013 (after such law was enacted) and the unit cost of the same period in 10

11 2012. Therefore, the conclusion was that a new level of electric power costs had been set, and it was projected for the remaining period of the tariff cycle. However, this scenario changed significantly by the end of 2013, as indicated in item 2.1 of this Technical Note, and that raised the electric power costs projected by SABESP. The nominal unit costs resulting from the amounts presented in table 2.1 are: R$ /MWh for 2013; R$ /MWh for 2014; R$ /MWh for 2015; and R$ /MWh for To quantify the impact of this cost increase on SABESP's maximum tariff (P 0 ), ARSESP revaluated the Discounted Cash Flow [Fluxo de Caixa Descontado - FCD] of the period presented in the Ordinary Tariff Revision (Chart 12.1 of Technical Note RTS/004/2014). To that effect, the agency used the new electric power unit costs realized ( ) and projected ( ) by SABESP, mentioned above, to assess the actual annual variation of the unit cost, used as an indicator of such cost increase. Table 3.1 below shows the annual actual variation of the electric power unit costs at constant prices of Dec/2012 (currency used in the Discounted Cash Flow presented in the Ordinary Tariff Revision), obtained from the above-mentioned unit costs considering the IPCA variations used in SABESP's projections. Table 3.1 Actual Increase in Power Unit Costs Year IPCA Electric Power Cost (R$/MWh) Variation Dec/Dec (*) Index Dec (*) Year Average Index Nominal Actual** Prices Dec/12 Actual Δ on previous year Actual accrued Δ % 3, , % 3, , % % , , % -7.22% % 4, , % 30.74% % 4, , % 52.59% (*) Used by SABESP to estimate electric power costs. (**) Actual electric power costs at prices of Dec/2012 = nominal cost of year X (year average index / index of Dec/12) 11

12 These actual variations were applied to all electric power unit costs used by ARSESP's Economic and Financial Model to calculate the new power expenses taken into account in this Extraordinary Tariff Revision for the period , thus using the same methodology employed in the Ordinary Tariff Revision concluded in April VARIATIONS IN THE DEMAND FOR WATER AND SANITARY SEWER SYSTEM The Economic and Financial Model used by ARSESP in the tariff revision process makes the market projections contained in SABESP's Business Plan based on estimates of unit consumption for residential users and on annual growth rates for non-residential users and permit holders. It is worth mentioning that, when the result of the Ordinary Tariff Revision (RTO) was published, the demand data for 2011 and 2012 were already known, and therefore were considered to calculate the P 0. ARSESP evaluated the total measured and billed volumes realized in this tariff cycle and found that the projection in the RTO for 2013 was in line with the values effectively realized. However, reductions of 7.85% and 5.52% in the total volumes measured and billed, respectively, were found for 2014 in relation to those estimated in the Business Plan. Such reduction was caused exclusively by the reduced offer, a result of the water crisis (see Table 2.3). After analysis of the data, ARSESP accepted the demand projections presented by SABESP and understands that the current scenario still does not enable an accurate definition of the water crisis effects. Tables 3.2 and 3.3 demonstrate the values considered by ARSESP to calculate the new repositioning index of this RTE. Table 3.2 Data of water supply demand considered in the RTE Description WATER SUPPLY Realized Estimated CONNECTIONS Unit 7,006,288 7,184,610 7,475,771 7,587,995 7,764,995 (December) Annual 2.79% 2.55% 4.05% 1.50% 2.33% Δ Residential 6,276,408 6,443,267 6,686,229 6,796,751 6,955, Commercial (includes 633, , , , ,791 Proprietary Buildings) Industrial 60,935 61,778 65,519 66,503 68, Public 35,186 35,345 36,446 36,993 37, SAVINGS (December) Unit 9,512,280 9,777,078 10,201,745 10,429,995 10,672,995 Annual 2.99% 2.78% 4.34% 2.24% 2.33% Δ Residential 8,773,077 9,027,246 9,412,232 9,622,818 9,847, Commercial (includes 642, , , , ,121 Proprietary Buildings) Industrial 60,939 61,788 65,562 67,029 68, Public 35,542 35,372 36,582 37,400 38,272 12

13 3 MEASURED VOLUMES Unit 1,895,264,433 1,926,894,676 1,821,223,935 1,712,021,589 1,887,779,693 (Annual total m3) Annual 2.22% 1.67% -5.48% -6.00% 10.27% Δ 3.1 Retail 1,598,252,774 1,627,462,343 1,574,385,433 1,492,228,440 1,648,077, Residential 1,361,433,616 1,387,703,486 1,346,842,446 1,276,559,450 1,409,883, Commercial (includes 148,554, ,788, ,979, ,570, ,624,739 Proprietary Buildings) Industrial 35,400,586 38,244,817 35,444,563 33,594,941 37,103, Public 52,863,726 52,725,190 50,119,291 47,503,889 52,465, Permit holder 297,011, ,432, ,838, ,793, ,702, BILLED VOLUME (Annual Unit 2,088,634,690 2,131,455,167 2,058,412,660 1,937,469,145 2,136,172,959 total m3) Annual Δ 1.76% 2.05% -3.43% -5.88% 10.26% Table 3.3 Data of sanitary sewer system demand considered in the RTE Description SANITARY SEWER SYSTEM Realized Estimate CONNECTIONS Unit 5,686,826 5,866,535 6,161,134 6,348,000 6,601,000 (December) Annual 3.53% 3.16% 5.02% 3.03% 3.99% Δ Residential 5,052,136 5,218,653 5,476,169 5,642,260 5,867, Commercial (includes 555, , , , ,507 Proprietary Buildings) Industrial 51,356 52,000 55,414 57,095 59, Public 27,354 27,768 28,925 29,802 30, SAVINGS (December) Unit 7,992,956 8,260,431 8,688,581 9,031,000 9,391,000 Annual 3.72% 3.35% 5.18% 3.94% 3.99% Δ Residential 7,348,998 7,603,897 7,993,484 8,308,509 8,639, Commercial (includes 565, , , , ,985 Proprietary Buildings) Industrial 511,356 52,000 55,448 57,633 59, Public 27,381 27,790 29,029 30,173 31,376 3 MEASURED VOLUMES Unit 1,379,528,939 1,414,223,665 1,370,832,391 1,334,168,539 1,493,745,048 (Annual total m3) Annual 7.18% 2.51% -3.07% -2.67% 11.96% Δ 3.1 Retail 1,352,192,731 1,384,827,669 1,346,593,765 1,291,450,599 1,447,155, Residential 1,131,388,974 1,159,657,391 1,130,982,110 1,084,668,265 1,215,442, Commercial (includes 140,705, ,029, ,155, ,538, ,397,971 Proprietary Buildings) Industrial 38,758,701 41,769,828 39,417,425 37,803,277 42,361, Public 41,339,303 41,370,849 39,038,820 37,440,176 41,954, Permit holder 27,336,208 29,395,996 24,238,626 4,717,940 46,589, BILLED VOLUME (Annual Unit 1,533,241,743 1,577,669,916 1,564,433,350 1,524,599,169 1,706,473,757 total m3) Annual Δ 7.61 % 2.90% -0.84% -2.55% 11.93% 13

14 4. TARIFF ADJUSTMENT 4.1. REPOSITIONING INDEX OF THIS EXTRAORDINARY TARIFF REVISION The new level for the Maximum Price (P 0 ) established in this RTE includes the cumulative effect, in the Discounted Cash Flow, of the two components that gave rise to this RTE, namely: i) adjustments due to reduction in the demand for services, caused by a decreased supply resulting from the water crisis; and ii) adjustments due to the increase in the electric power costs caused by changes in the energy industry. To generate the Discounted Cash Flow for this RTE, the changes made in the original Business Plan used in the Ordinary Tariff Revision exclusively refer to the above-mentioned variations in the demand for water and sewage services and in the electric power costs. With regard to the demand (connections, savings and volumes), the data realized for 2013 and 2014 and new projections for 2015 and 2016 were used, as previously presented. To determine the new electric power costs, the actual increases mentioned in item 3.1 of this technical note were applied to the unit costs related to the projection basis used in the RTO (2012). The other components of the OPEX were re-projected by the Economic and Financial Model based on the new demand that was considered. For the other components used to calculate the Maximum Price (Basis of Assets, Investments and other items not affected by the demand variations), the amounts of the Business Plan approved for the Ordinary Tariff Revision were maintained. Changes in these items were not the subject of the request in this RTE, and no new Business Plan was developed. All projections of FCD still refer to prices of Dec/2012, which was the original currency used in the Business Plan of the 1st Ordinary Tariff Revision. Table 4.1 below shows the FCD with the adjustments to the demand and to the electric power cost subject of this RTE, as well as its effects on other components used to calculate the maximum price (P 0 ). 14

15 Table 4.1 Discounted Cash Flow - RTE Description Formula Elements 2012 Present Value Tariff Cycle (R$ Dec/2012) Billed volume (A+E) - (1000m3) VF 12,096,945 3,709,125 3,622,846 3,462,068 3,842,647 + Direct required revenue (tariff) RRD 32,388,192 93,930,760 9,699,758 9,269,294 10,288,249 + Indirect revenue RI 632, , , , ,079 + Other Revenue RN 46,296 13,997 13,997 13,997 13,997 - COFINS/PASEP COP 2,413, , , , ,670 - Operating expenses (OPEX) OPEX 14,275, ,454 4,144,735 4,300,613 4,721,822 - Irrecoverable revenue (bad debt) INC 652, , , , ,188 - Income tax/social contribution IRCS 4,315,208 1,411,289 1,341,448 1,141,354 1,303,316 - Investments CAPEX 7,596,528 2,403,450 2,275,913 2,126,199 2,370,128 - Works in progress remuneration JOAR 459, , , , ,274 - Working capital variation DWK 43, ,957-23,544-91,608 15,400 - Initial base of capital BRL0 26,733, Final base of capital BRLT 23,423, ,938,139 = Free cash flow + Bdk VPL = 0,00-26,733, ,282 1,103, ,059 32,934,664 P 0 Calculated (Dec/12 prices) = R$ / m3 IRR = 8.060% As seen above, the Maximum Price resulting from the adjustments in SABESP's Business Plan considered for this first Extraordinary Tariff Revision, at prices of Dec/2012, is R$ /m3 which, if compared to the value of the first Ordinary Tariff Revision (R$ /m3), results in a Repositioning Index of % ANNUAL ADJUSTMENT OF 2015 In April 2014, upon publication of the repositioning index of % on the tariffs in force at the time resulting from the RTO, whose publication was estimated for May 11, 2014, the tariffs were adjusted for inflation based on the IPCA variation until March The next annual tariff adjustment occurs on May 11, 2015, effective on May 11, 2015, as published in ARSESP Resolution no. 484/2014. Thus, it is necessary to adjust for inflation the Maximum Price (P 0 ) in force for the price of March 2015, which corresponds to the 12-month period since the approval of the Ordinary Tariff 15

16 Revision. It will be adjusted based on the IPCA variation in the period from March 2014 to March When this Technical Note was concluded, the IPCA variation index for March 2015 had not been published yet. An estimate of IPCA variation of 1.2% (March 2015) was temporarily used to calculate the Maximum Price, which results in an IPCA variation of 8% accrued in 12 months. This estimate will be duly adjusted when the official index for March 2015 is published. According to Technical Note RTS/004/2014, the annual X Factor of % must be deducted at each tariff adjustment. Thus, the annual adjustment estimated for 2015 is % TOTAL TARIFF ADJUSTMENT Considering the cumulative effect of the Extraordinary Tariff Revision and of the 2015 annual adjustment, described in items 4.1 and 4.2, respectively, the total tariff adjustment will be %, which corresponds to the application of % to the tariff in force, resulting from the Extraordinary Tariff Revision, and then application of % of inflation adjustment by IPCA minus the X Factor. Table 4.2 Total Tariff Adjustment RTE Result 6.36% 2015 Adjustment 7.06% IPCA* 8.00% X Factor 0.94% Total Adjustment (RTE+Adjustment) 13.87% * Considering an estimate of 1.2% for March/2015 The total tariff adjustment, which will include the official IPCA of March 2015, will be applied to the tariffs currently in force, whose amounts will be disclosed in the Final Technical Note to be prepared after the end of the public consultation and public hearing. These values may be applied 30 days after their publication, under Law 11445/

17 5. FINAL REMARKS After analysis of the request for Extraordinary Tariff Revision submitted by SABESP, ARSESP decided to grant it, making changes to the unit costs of electric power and to the demand components in the business plan, and keeping the methodology used in the First Ordinary Tariff Revision concluded in April This Extraordinary Tariff Revision concerns the remaining period of the current tariff cycle and it may be applied at any time. The estimated date for the next tariff adjustment continues to be April 2016, and the next ordinary tariff revision will occur in April It is important to point out that, since this is an extraordinary tariff revision, there is no minimum frequency established in the legislation; it may occur at any time, irrespective of the date the previous tariff adjustments occurred. The evaluations to be carried out in the end of the current tariff cycle will also consider the effects of this RTE to determine any compensatory adjustments for the following cycle, in order to ensure the economic and financial balance of the Concessionaire. We reiterate that the loss of income caused by bonus granted by the Concessionaire is not being considered in this RTE and cannot be offset through tariffs. Therefore, SABESP should evaluate its discount policy, which is a prerogative of the Concessionaire, considering the balance in the provision of services. 17