CENTRA GAS MANITOBA INC COMPETITIVE LANDSCAPE PROCEEDING CENTRA S ROLE IN THE NATURAL GAS MARKET INDEX. 3.0 Overview...1

Transcription

1 Tab Index April, 00 CENTRA GAS MANITOBA INC. 00 COMPETITIVE LANDSCAPE PROCEEDING CENTRA S ROLE IN THE NATURAL GAS MARKET INDEX.0 Overview.... Centra s Current Product Offering.... Potential Abandonment of Hedging with Possible Amendments to the Rate Setting Mechanism (PUB Item A).... Establishment of Equal Payment Plan as Default Condition (PUB Item B).... Entrance of Centra into the Fixed Price Market (PUB Item C)...

2 Tab Page of April, 00 CENTRA GAS MANITOBA INC. 00 COMPETITIVE LANDSCAPE PROCEEDING CENTRA S ROLE IN THE NATURAL GAS MARKET.0 Overview 0 This Tab summarizes Centra s current role and potential future in the Manitoba natural gas marketplace. The Tab responds to issues identified in Items A, B, and C of the issue list provided by the PUB. Section. reviews Centra s role as the system gas supplier and its mandate to acquire, manage and distribute supplies of natural gas to meet Manitoba market requirements in a safe, cost-effective, reliable and environmentally appropriate manner. Section. considers the implications of changes to the current Primary Gas product with respect to hedging. Section. considers the suggestion of changing the Equal Payment Plan to the default payment option. Section. discusses the opportunity for Centra to enter the fixed price market in order to address needs in the marketplace.. Centra s Current Product Offering 0 Centra must provide and maintain an adequate natural gas system to meet the requirements of customers. As the subsidiary of Crown-owned Manitoba Hydro, Centra has a long-term interest in offering a safe, secure and reliable supply of natural gas at cost-effective prices to the citizens of Manitoba. Centra does not profit from the sale of natural gas.

3 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 Natural gas is an essential source of heat and energy to Manitobans, and Centra s role as the incumbent LDC supplier is of critical importance. Centra s regulated Primary Gas product provides both an alternative to broker offerings and a benchmark by which other offerings can be measured. 0 Centra s current Primary Gas product offering is based upon an indexed cost of gas that fluctuates with market conditions and is passed on to customers at cost. Gas purchased at an index price is generally accepted as the consensus opinion of the marketplace as to the fair market value for gas at any given time. However the price of gas purchased on an index can be very volatile. In order to manage the volatility, Centra s Primary Gas rate changes quarterly through the RSM which balances market responsiveness with reduced rate volatility. The parameters of the RSM were updated in June 00 as a result of Board Order /0 to reflect inclusion of 00% of the changes between the - month forward price for Western Canadian supplies, weighted for the cost of gas in storage, and the existing Primary Gas sales rate. The increase from 0% to 00% of the strip price change increased market responsiveness and price transparency but also increased potential for rate volatility. 0 Centra hedges its Primary Gas supply to reduce its customers exposure to extremely volatile market prices for natural gas. Centra s general practice since 00 has been to hedge using costless collars with an upper out-of-the-money bandwidth set by placing the upper limit at a price 0 cents above the current futures market price, with the corresponding floor being established by the market. As a result of Order /0, Centra has recently increased the bandwidth as of January 00, purchasing costless collars

4 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 with upper bandwidths at prices approximately % above market, the absolute value of which is dependent upon the cost of gas at the time of the purchase. Centra s system supplied customers will therefore have greater participation in subsequent market price reductions in a falling market after the placement of hedges, at the cost of an increase in rate volatility.. Potential Abandonment of Hedging with Possible Amendments to the Rate Setting Mechanism (PUB Item A) 0 Centra has performed analysis of both its Primary Gas Hedging program and the RSM. Changes to either component can have a deleterious effect on the other. An example of this occurred, as discussed above, when the inclusion factor was changed from 0% to 00%. Although this change increased market responsiveness and reduced PGVA balances, a corresponding increase in rate volatility was the natural result. In an attempt to mitigate some of the resulting volatility, Centra implemented the current hedging program. In the absence of the current hedging program, system supply customers would have experienced significant rate volatility. Centra s hedging program has delivered annual volatility reduction of Primary Gas rates of between 0% and % during the five fiscal years since April The parameters of Centra s current hedging program are defined on the basis of customer research which indicated that there may be variation between customers with regard to their risk tolerances. Market research in and 00 provided some general conclusions: that the tolerance level of price volatility is relatively small; and that no

5 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 protection from rate volatility is unacceptable. 0 The majority of natural gas customers remain with Centra s Primary Gas supply option. Centra believes that its current Primary Gas product, along with the existing hedging policy and practice and the available billing options combine to provide the product that best corresponds to the mix of attributes desired by a broad range of customers. Centra is of the view that these mechanisms are currently working as intended and that consumers are well served by them. To abandon hedging in favour of an unhedged product may lead to significantly greater rate volatility and possible hardship for some customers. As an alternative to hedging, consideration could be given to other rate smoothing mechanisms such as returning to the 0% RSM. However, it should be recognized that the use of other smoothing mechanisms would detract from rate transparency and could result in unacceptably high balances in PGVA deferral accounts. A further complication is that customers switching between utility and broker service may not realize the benefits or pay the costs of any balances in deferral accounts to which they may have contributed. 0. Establishment of Equal Payment Plan as Default Condition (PUB Item B) Centra offers a variety of payment options for customers including pre-authorized payment, an equal payment plan ( EPP ), electronic payment through Canada Post s E- Post or Manitoba Hydro s recently introduced MyBill. This allows customers the ability to

6 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 manage payment of their utility bill in accordance with their individual preferences. Such choice in billing options is common among LDCs in Canada. Nearly half of Centra s existing customers are currently enrolled in the EPP. This is indicative of customers desire to have some assurance that their monthly gas bills will not vary significantly. The program essentially insulates the customer from two major contributors to bill volatility, price fluctuation and weather variation, which when combined can have a significant impact on month to month changes to bills. 0 Participation rates in the EPP have been steady for many years indicating the maturity of the plan. According to the customer research conducted in 00 by Western Opinion Research and filed with the PUB as recently as the 00/0 Non-Primary Cost of Gas Application, over 0% of customers surveyed were aware of the EPP option. The research found that customers who chose not to use the EPP viewed the other payment options as more suited to their preferences. The EPP is offered to customers whenever they change residences and is routinely advertised through bill inserts and on the Manitoba Hydro website. 0 Establishing the EPP as the default billing option for customers would be akin to negative option marketing. Negative option marketing is defined as a product or service that is offered to the public with consumer inaction construed as contractual acceptance. The consumer is then bound to the terms of the contract unless they actively choose to remove themselves from the contract. While Centra recognizes the value that many Reluctance to Regulate: The Case of Negative Option Marketing, Vol, American Business Law Journal, page.

7 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 customers place upon the EPP, it views that establishing the EPP as the default condition would result in customer dissatisfaction.. Entrance of Centra into the Fixed Price Market (PUB Item C) 0 Centra has consistently maintained that it be allowed to enter the market with alternatives to its existing service offerings. While LDC s have not traditionally participated in alternative product offerings, as a Crown-owned utility whose primary motivation is to provide customers with the best possible service, Centra believes it has an obligation to develop products and services to better meet its customers needs. The ability of Centra to offer alternative product offerings would provide more choice to meet consumer needs. Centra intends on identifying and evaluating, through market research, other such products that may be of value to its customers. While Centra has supported the development of a competitive market for Primary Gas in Manitoba, it is of the view that the competitive market has not flourished in the manner originally envisioned in the 0 s. 0 In conjunction with any offering, Centra will require the ability to provide information to customers in a timely fashion. Centra is firmly of the view that customers should have the necessary information to make informed choices, and to facilitate that objective, Centra must have the ability to provide full and accurate information to customers in a timely fashion. Centra will seek to ensure that customers understand the benefits, risks and costs associated with any product offering through effective customer information

8 Centra Gas Manitoba Inc. Tab 00 Competitive Landscape Proceeding Page of Centra s Role in the Natural Gas Market April, 00 initiatives. In that regard, the current process of obtaining stakeholder approval for advertising materials is lengthy and time consuming, and has resulted in little meaningful information reaching the customers.