WESTERN NATURAL GAS COMPANY LIMITED 1997 RETURN ON COMMON EQUITY

Transcription

1 1 ALBERTA ENERGY AND UTILITIES BOARD Calgary Alberta CANADIAN WESTERN NATURAL GAS COMPANY LIMITED 1997 RETURN ON COMMON EQUITY Decision U99070 AND CAPITAL STRUCTURE, and Applications & GENERAL RATE APPLICATION Files , Procedural directions and partial Phase I decision 1.0 INTRODUCTION 1.1 Background On 28 November 1997 the Alberta Energy and Utilities Board (the Board or EUB) informed Canadian Western Natural Gas Company Limited (CWNG or the Company) that it would be in order to examine CWNG s rates for 1997 and On 12 December 1997 CWNG commenced negotiations with interested parties regarding 1998 revenues and revenue requirements and, as part of the negotiations, CWNG and other parties agreed to also address the 1997 Return on Common Equity and Capital Structure (the 1997 Matters). The EUB was subsequently notified that CWNG and interested parties were unable to arrive at a settlement for 1997 and Accordingly, CWNG filed a 1998 General Rate Application (the 1998 GRA) dated 17 August CWNG forecast in its application that its current rates would generate revenues of $4,932,000 in excess of its 1998 forecast revenue requirement. With respect to 1997, CWNG responded to the Board by letter dated 20 August 1998, submitting that 1997 rates were reasonable based on evidence prepared by CWNG s rate of return expert. CWNG argued that no further action was required in regards to The EUB s Notice of Hearing, dated 10 September 1998, reaffirmed the Board s commitment to examine the 1997 Matters. The matter of interim refunds was dealt with by a separate written proceeding. The Board by Order U98162, dated 26 October 1998, directed CWNG to refund to its customers 1997 and 1998 Interim Rate Adjustments by way of one-time refunds of $3,500,000 and $6,500,000 respectively. CWNG was directed to commence the refund during the month of November The refund was made to all standard rate groups, allocated based on the GRA forecast revenue on existing rates. The scope of the 1998 GRA was later expanded to include matters arising from CWNG s 1998/1999 Winter Period Gas Cost Recovery Rate (GCRR) application. The Company s GCRR was approved on an interim basis, as per Board Order U98156, with the intention of addressing Storage, Gas Supply, and Deferred Gas Account (DGA) issues at the 1998 GRA proceeding. Order U98156 received final confirmation by way of Order U99038 dated 26 March 1999.

2 Decision U Hearing The public hearing was convened on 11 January 1999 before Board members Dr. B. Bietz (Chair), Mr. B. McManus Q.C., and Mr. G. Miller. The scope of the proceeding included the 1997 Matters, the 1998 GRA, and certain DGA issues. The oral portion of the proceeding was completed on 17 March Those who appeared at the hearing and abbreviations used in this report are listed in the following table. THOSE WHO APPEARED AT THE HEARING Principals and Representatives (Abbrevations Used in Report) Canadian Western Natural Gas Company Limited (CWNG or the Company) Mr. L. E. Smith, Mr. D. Evanchuk The City of Calgary (Calgary) Mr. R. B. Brander, Ms. P. L. Quinton-Campbell The Municipal Intervenors (MI) Mr. J. A. Bryan, Q.C. The Consumers Coalition of Alberta (CCA) Mr. J. A. Wachowich The Federation of Alberta Gas Coops and Gas Alberta (FGA) Mr. L. J. Burgess, Q.C. The Alberta Irrigation Projects Association (AIPA) Mr. J. H. Unryn The Public Institutional Consumers of Alberta (PICA) Mr. R.T. Liddle, Ms. N. McKenzie Treaty 7 Tribal Council (Treaty 7) Mr. J. Graves The Peigan Nation Mr. A. O. Ackroyd T suu Tina Nation and T suu Tina Energy Corp. (T suu Tina) Mr. L. L. Manning

3 Decision U Pan-Alberta Gas Limited (Pan-Alberta) Ms. E. S. Decter Amoco Ltd. (Amoco) Ms. C. Worthy TransCanada Gas Services (TransCanada Gas) Mr. G. Toews Alberta Energy and Utilities Board staff Mr. B. Heggie, Board counsel Mr. W. Vienneau Mr. J. Cameron Mr. S. Lota Mr. J. Wilson 1.3 Rationale for Separate Decision The Board has received submissions from certain parties (AIPA, Calgary, CCA, Enmax) with respect to the need for early communication of its decisions regarding gas costs, unbundling of services, and related issues prior to the commencement of the 1998 Phase II hearing. Having reviewed the evidentiary record for the proceeding, the Board is satisfied that it can, and should, issue its decision and procedural direction with regard to those matters. The remainder of the Board s Phase I decision will be issued in due course. The Board notes that Calgary commented that some of its issues have been referred from one proceeding to another, without ever being addressed. The Board will directly address certain of those issues in this Decision, and clarify the process for addressing the other issues. In this Decision the Board will address, in general terms, two gas supply cost areas which relate to gas storage, and unbundling of services. Where there is overlap between those two areas, and the remainder of the Phase I, the Board has attempted to unscramble the issues in order to provide clear direction. It can be assumed that any issue not covered or addressed in this Decision, will be dealt with in the remainder of the 1998 Phase I decision. 2.0 GAS STORAGE There are a number of gas storage issues the Board must address. Those issues generally fit into one of the following broad categories related to gas storage: total cost (O&M, Depreciation, Return, etc.), storage revenue, affiliate transactions, and the role and rationalization of CWNG gas storage facilities. The Board intends to deal with the issues relating to total cost, storage revenue, and affiliate transactions in the remainder of the Phase I decision.

4 Decision U The role and rationalization of CWNG gas storage facilities can be further divided into two categories of issues; those relating to the joint regulated and non-regulated use of CWNG gas storage facilities, and those relating to the roles of regulated storage. Based on the amount of time spent during the proceeding dealing with these issues, the Board is aware that parties are very concerned about both of these categories. With regards to the joint regulated and non-regulated use of CWNG s gas storage facilities, the Board also intends to address those issues in the remainder of the Phase I decision. The Board wishes, however, to provide some procedural guidance in this Decision relating to the roles of regulated storage. It is the Board s understanding that the roles of regulated storage include, but are not limited to, security of supply and physical hedging against volatile natural gas prices. The issue of the roles of regulated storage has been before the Board previously, both in general rate applications and gas cost recovery rate applications. Most recently, Calgary raised objections with respect to the 1998/99 CWNG Winter Period GCRR application. The Board understood, based on Calgary s 9 October 1998 letter, that the objections related to two storage issues. Those issues related to an affiliate transaction, and a role of regulated storage (the use of incremental storage). Calgary was referred to the 1998 GRA, as confirmed by the Board s 1 December 1998 letter. The Board also invited Calgary to raise its concerns at the time of CWNG s reconciliation for the 1998/1999 Winter Period Deferred Gas Account, to take place in the fall of The Board considers that Calgary s storage issues will be addressed in either the remainder of the Phase I decision, or at the time of the 1998/1999 Winter Period DGA reconciliation. The Board intends to consider other issues relating to the roles of regulated storage in the context of the upcoming 1998 Phase II proceeding. The Board expects that parties will wish to address cost allocation and unbundling issues related to storage during the this proceeding. The Board will provide further comments in the next section dealing with unbundling of services. 3.0 UNBUNDLING OF SERVICES This section addresses the issues and alternatives raised during the Phase I proceeding related to the unbundling of services. Evidence was submitted suggesting that changes were required to CWNG s rate design, Terms and Conditions of service, and the DGA methodology. Argument and evidence submitted during the proceeding generally dealt with these issues together. The Board will follow that same approach. Position of CWNG The Company submitted that suggestions that it was inappropriate to recover certain other gas supply costs through the gas supply charge were not supported by evidence. The Company argued that there was no evidence or data presented by parties to justify their claims about what customers want.

5 Decision U The Company also responded to criticism regarding the existing DGA methodology, stating that the DGA mechanism was functioning as it was intended to function. The Company also noted that the types of changes suggested by Calgary would introduce additional complexity to the DGA mechanism and its accounting procedures. In support of the existing DGA methodology, the Company referred to the results of its own customer survey, indicating approximately 70% of the respondents preferred the current practice of two seasonal rates or one annual rate. Position of Intervenors Calgary Calgary submitted that the Board should consider current market changes affecting the Company. Calgary suggested that as part of Phase I decision, the Board must provide appropriate directions to CWNG for use in its 1998 Phase II filing. Calgary submitted that small consumers would not have true market access, absent changes to the existing rate design. Calgary then presented its proposed steps for facilitating the direct purchase of natural gas by small or core customers. Calgary s proposed steps included the following changes: separation of gas supply and storage costs from the distribution charges; restructure the DGA mechanism; revise Terms & Conditions governing the direct purchase of gas by core customers. Calgary s argument for the separation of gas supply and storage costs from distribution costs was based on the premise that core customers purchasing their gas requirements from non-utility suppliers will be charged twice for many services associated with gas supply. Calgary suggested that any accounting changes required to implement these changes were not as difficult or costly as the Company stated. Calgary requested the Board to direct CWNG to identify all costs associated with gas supply that are currently being recovered through the gas distribution charge, and to direct CWNG to file unbundled rates as part of its Phase II application. Calgary submitted that the GCRR should recover all costs associated with gas supply, including storage, company owned production, gas transmission charges, and supply portfolio management. Calgary submitted that changes were required to the DGA mechanism to make it a more timely and accurate indicator of CWNG s gas supply cost. This information, according to Calgary, will assist consumers to lower their gas costs. Calgary disputed the views of CWNG and the FGA in this regard. Specifically, Calgary stated that CWNG s 1997 Purchase Gas Consultation Results study, referred to by the Company, was not entered as evidence or tested in the Phase I proceeding. Calgary also recommended changes to CWNG s existing Terms & Conditions related to transition charges, and a buy/sell rate (Rate 42). Calgary disagreed with the FGA concerning this rate, noting that the FGA is already benefiting from a buy/sell rate, and has since Calgary also commented that the majority of Rate 1 customers would have benefited from access to the same buy/sell terms available to the FGA.

6 Decision U Finally, Calgary argued that customers in other provinces make significant use of direct purchase currently, and this practice is growing rapidly. Parties supporting Calgary Those parties supporting Calgary to various degrees included: PICA, AIPA, and the Treaty Seven Bands. PICA submitted that CWNG was incorrect to suggest that core customers don t support the kind of customer choice advocated by Calgary. PICA suggested that it most definitely supported, in principle, measures such as those proposed by Calgary. To that end PICA submitted that the Board should implement Calgary s proposals, or alternatively, direct CWNG to enter negotiations with customers to address unbundling and related issues. AIPA considered that changes to the DGA/GCRR methodology were appropriate, but to a lesser extent than proposed by Calgary. AIPA suggested a seasonal variable monthly GCRR based on average forward monthly prices, while retaining a seasonal reconciliation of the DGA. Commenting on the separation of storage costs, AIPA noted that there are fundamental issues to be addressed. AIPA submitted that there were a number of different approaches to this issue, and that they would have to be considered in more depth than was provided in this proceeding. Treaty Seven Bands supported the position taken by Calgary with respect to customer choice. Parties not supporting Calgary Parties not supporting Calgary s evidence, for differing reasons, included: CCA, MI and FGA. The CCA stated that it did not support the Calgary position. The CCA stated that the issues were related to cost allocation and should not be determined in a Phase I proceeding. The CCA was concerned with Calgary s proposals, noting, not all residential customers have the knowledge necessary to enter into gas supply contracts that are beneficial to them. The CCA was also concerned with the impact on residential customers arising from the Board s decisions regarding Carbon storage costs. The CCA considered that these issues should be deferred until the 1998 Phase II hearing. The MI submitted that it did not oppose the unbundling or the generic reasons proposed by Calgary. However, the MI stated that it insisted any unbundling be fair, impartial, and tested by all affected parties. Furthermore, the MI suggested that a meaningful amount of support from customers should be demonstrated regarding the type of price signals proposed by Calgary, referring to proposed changes to the GCRR and DGA methodology. The MI suggested that the Phase I decision should segregate and quantify the various costs, to allow for proper testing and allocation of those costs between base rates and the

7 Decision U GCRR. It was submitted that this could be done in the Phase II. The MI proposed that changes to the DGA process and direct purchase tariffs might be dealt with in the Phase II, or in a separate generic proceeding. The FGA submitted that the Board should disregard any of Calgary s proposals regarding this issue, in the Phase I, or in the Phase II. The FGA submitted that Calgary s proposals would merely add a level of complexity to customers bills, without saving customers any money. The FGA commented that Calgary s proposals did not have the support of customers, and that proposals to move storage costs to gas supply were unworkable. The FGA submitted that it was the proximity of Alberta utilities to the commodity market, not the allocation of costs, that was the reason for a lack of direct purchase activity on the part of CWNG s core customers. Regarding gas management costs, the FGA submitted that prior proceedings have dealt with the allocation issue. The FGA submitted that physical management of facilities must be performed regardless of who is supplying gas to customers. Board Findings The Board generally agrees that structural barriers to direct purchase should be eliminated. The Board would also generally agree that the inclusion of a gas supply component in the distribution rate could constitute such a barrier. The Board notes suggestions by parties that it must provide appropriate directions to CWNG with respect to unbundling issues, for use in the 1998 Phase II filing. However, the Board is not convinced that it would be the most expeditious and efficient approach to attempt to completely address these issues in the 1998 Phase I or Phase II proceedings. The Board notes that not all affected parties were prepared to deal with the proposed unbundling issues in the 1998 Phase I proceeding. The Board does not consider that it will unduly disadvantage customers by deferring some of these issues to a future proceeding. In addition, the Board considers there are several conceptual questions that require further clarification before specific directions can be determined. The Board s preference is to hear further discussion of those issues during the 1998 Phase II. Therefore, the Board is prepared to conceptually address unbundling issues in the CWNG 1998 Phase II proceeding. The Board considers that this proceeding may provide a more appropriate forum in which to discuss the types of changes being proposed by Calgary. The Board also feels that all parties would benefit from the conceptual exercise of attempting to separate gas supply costs from distribution costs. This discussion may result in a framework for future gas utility filings. Without such a framework, the Board does not consider that it could provide anything more than general directions to CWNG regarding its 1998 Phase II filing. The Board believes that fundamental issues remain to be resolved before it can determine the appropriate allocation of costs as either gas supply or distribution. While the Board cannot predict what the outcome will be from the 1998 Phase II proceeding, it is unlikely that the Board would be in a position to implement any changes until late 1999 at the

8 Decision U earliest. The Board may however be in a position to provide clear direction to CWNG regarding its 1999 Phase I filing, prior to the commencement of that hearing. The Board finds that it requires more information from the Company and its customers in order to resolve the issue of the role of regulated storage. It is also not clear to the Board how the security of supply, physical hedging of gas costs, and other roles of CWNG s gas storage impact the costs attributable to gas supply and distribution. To differing degrees, the Board also has unresolved questions regarding production and gathering, gas operations, and gas management costs. Given all of the above questions, it is not possible for the Board to consider implementing the types of changes, to the extent proposed by Calgary, in either the 1998 Phase I or the 1998 Phase II. The Board also has concerns regarding the types of changes being proposed by Calgary to CWNG s Terms and Conditions of service, and the DGA methodology. The Board notes that CWNG s transition charges were established in the Board s Decision U96052, dealing with the joint application by CWNG and Northwestern Utilities Limited. The buy/sell rate (Rate 42) is also a joint rate. As well, the Board has been reluctant to consider changes to the DGA methodology for one utility, to the exclusion of the others. The Board has preferred to address these types of changes in a proceeding where all affected parties have an opportunity to be heard.

9 Decision U Having considered the views of all parties the Board wishes to provide the following summary of its directions regarding the unbundling of services: The Board will not address the substance of the rate design or cost of service issues proposed by Calgary in this partial decision, or in the remainder of the 1998 Phase I decision. The Board would expect to conceptually address those issues during the 1998 Phase II proceeding. Specifically, the Board expects to hear argument regarding the various alternatives and issues associated with the separation of gas supply costs/rates from distribution costs/rates. The Board also expects that issues regarding the roles of regulated storage, referred to in the previous section of this decision, will be raised at that time. Depending on what transpires during the 1998 Phase II proceeding, the Board expects to be in a position to issue further direction to CWNG to be incorporated into its 1999 General Rate Application, already filed with the EUB on 3 May The Board will not provide direction at this time regarding the suggested revisions to CWNG s DGA methodology, or to CWNG s Terms and Conditions of service, relating to transition charges, and the buy/sell rate (Rate 42). The Board is not precluding parties from raising these issues again in the CWNG 1998 Phase II proceeding, but notes that these issues may have an impact on the other Alberta gas utilities, and therefore be better suited to a generic proceeding, or a future proceeding that allowed for the participation of those utilities and a wider range of interested parties. Dated at Calgary, Alberta on. ALBERTA ENERGY AND UTILITIES BOARD B. F. Bietz* Presiding Member (original signed by) B.T. McManus, Q.C. Member (original signed by) G.J. Miller Member * Mr. Bietz was unavailable for signature but concurs with the contents and issuance of this Decision.