Orr Mineral Developments Ltd.

Transcription

1 Alberta Energy and Utilities Board Decision Orr Mineral Developments Ltd General Rate Application November 4, 2003

2 ALBERTA ENERGY AND UTILITIES BOARD Decision : Orr Mineral Developments Ltd General Rate Application Application No Published by Alberta Energy and Utilities Board Avenue SW Calgary, Alberta T2P 3G4 Telephone: (403) Fax: (403) Web site:

3 Contents 1 INTRODUCTION SUMMARY OF THE APPLICATION General Rate Application Monthly Gas Cost Rate Rider ORDER... 6 APPENDIX A HEARING PARTICIPANTS... 9 APPENDIX B ORR MINERAL DEVELOPMENTS LTD. APPROVED RATES EUB Decision (November 4, 2003) i

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5 ALBERTA ENERGY AND UTILITIES BOARD Calgary Alberta Decision ORR MINERAL DEVELOPMENTS LTD. Application No GENERAL RATE APPLICATION File No INTRODUCTION In its application dated August 12, 2003, as updated on October 20, 2003 Orr Mineral Developments Ltd. (OMD) applied to the Alberta Energy and Utilities Board (Board) for approval of its distribution rates for residential and small commercial customers in its Suffield service territory. OMD also requested approval to establish a new methodology for calculating monthly gas costs, and to recover a short fall related to the increased costs of gas via a rate rider. Lastly, OMD requested approval to change its method of measuring gas from Mcf (1000 cubic feet) to gigajoule (GJ) in order to make it easier for customers to understand their bills and to compare rates to those of other gas companies. The Board issued a Notice of Hearing on September 18, 2003, and arranged to have the Notice of Hearing mailed out with customer billing statements. The Board anticipated that a hearing would be held on October 21, 2003, and invited interested parties to pre-register their attendance at the hearing no later than October 9, By letter dated October 10, 2003, which also was mailed out with customer billing statements, the Board advised that the public hearing for this Application would proceed as planned. The Board held a hearing on October 21, 2003 at the Suffield Community Centre. Approximately 30 individuals attended the hearing; a list of registered individuals is contained in Appendix-1. The Board panel assigned to this Application was Gordon J. Miller (Presiding Member), T. McGee and R. D. Heggie. The Board considers that the record for this Application closed on October 21, SUMMARY OF THE APPLICATION 2.1 General Rate Application OMD indicated that forecast revenue for 2003 from existing rates would fall short of OMD s costs by $17,757. OMD indicated that it had not had a rate increase for five years, and that increasing the variable delivery charge from $1.60/ Mcf to $2.70/Mcf was necessary to meet the increased costs of supplying customers in its service territory. Issues of the Interested Parties Interested parties questioned OMD on a number of items related to the General Rate Application (GRA). Questions were raised regarding specific items that contribute to OMD s operating expenses, revenue requirement, and calculation of the variable delivery charge. EUB Decision (November 4, 2003) 1

6 Views of the Board The Board notes that revenue requirement is a key component in setting the delivery rates of a utility. For OMD, the revenue requirement is composed of an operating return, utility expenses, amortization (or depreciation) and income taxes. The total revenue from fixed, variable, and penalty charges is then subtracted from the revenue requirement to determine whether an increase in rates is justified. If the total revenue is not greater than the revenue requirement, a utility is justified in seeking a rate increase. In the case of OMD, the revenue from rates fell short of the required costs to provide utility service in 2003 by $17,757. The Board notes that as a result of the $17,757 shortfall, OMD calculated new rates for 2003 to meet the new revenue requirement. Based on 2003 gas consumption forecasts, OMD estimated that a $1.10/Mcf increase to the current $1.60/Mcf variable delivery charge would increase the total revenue of the company to a level that reasonably meets the new revenue requirement. Such an increase will allow OMD to better recover the costs of operating the utility and reduce the possibility of financial losses in the future. The Board notes that a major component of revenue requirement is operating expenses. During the hearing, OMD noted that many of the operating expenses had remained fairly constant over time. Further, due to a maintenance sub-contract with Forty Mile Gas Co-op, OMD received 24-hour on call service from four qualified gas fitters at a lower cost than what had been obtained previously by having a person employed by the company. The Board notes that the guidelines for the maintenance sub-contract with Forty Mile Gas Co-op is set out by the Federation of Alberta Gas Co-ops. As part of these guidelines, gas lines receive monthly inspection and cathodic protection readings, while leak detection on the system is conducted on a yearly basis. The maintenance sub-contract allows OMD to follow all codes and regulations that are set by either the Pipeline Act or any other applicable federal or provincial laws. The Board notes that a number of interested parties considered that the maintenance sub-contract with Forty Mile Gas Co-op provided the service levels expected by customers and helped to ensure the safety and integrity of the gas system. Based on the information contained in the GRA tables, the relative stability of operating expenses, and the maintenance sub-contract with Forty Mile Gas Co-op, the Board considers that OMD s proposal to increase the variable delivery charge to $2.70/Mcf to be reasonable. Therefore, the Board approves OMD s proposed variable delivery charge of $2.70/Mcf. 2.2 Monthly Gas Cost Due to operational concerns and to meet the demand requirements of customers, OMD began receiving gas supplies from Forty Mile Gas Co-op in November OMD proposed that the cost of gas be set to match the Gas Alberta price on a month-by-month basis using the methodology contained in the Monthly Gas Cost (MGC) table. According to the MGC methodology, gas costs for the current month would consist of an estimate of the cost of purchasing gas from Forty Mile Gas Co-op, which includes both the commodity cost and delivery charge. This amount would then be offset by an estimate of OMD gas sales from producing wells to determine a net gas cost. OMD production expenses, which 2 EUB Decision (November 4, 2003)

7 include the costs of compression, gathering, and royalty charges, are also factored into determining the net gas cost. To determine the monthly gas cost that would be charged to consumers, the costs or credits associated with truing up past estimates from previous months would be added to the net gas cost. This combined amount would then be divided by the estimated sales to give a gas price per unit of volume. According to the updated information, OMD indicated that the past deficiencies of $19, plus the estimated net gas cost for October of $2, when divided by the estimated sales volume of 1846 GJ, would result in a monthly gas cost for October of $12.29/GJ. OMD proposed that the past deficiencies be collected as a rate rider. As a result, the gas cost for October would then be calculated as the estimated net gas cost of $2, divided by the estimated sales volume of 1846 GJ, resulting in a charge of $1.54/GJ. Issues of the Interested Parties Interested parties sought further details about OMD s proposal to switch the monthly gas cost from a fixed price to a monthly flow through of actual prices. The concern was also raised that if the system was extended to meet new developments, current customers could experience higher gas prices, as there would be a greater number of customers consuming the limited output from OMD gas wells. Views of the Board The Board notes that OMD began receiving gas supplies from Forty Mile Gas Co-op in November of The gas supply from Forty Mile Gas Co-op was both dry and odorized. The Board heard that in the past, wet gas from OMD s producing wells froze in the gas lines, creating a loss of service and maintenance difficulties during the winter months. Further, the Board notes from Decision that during these critical winter months additional gas supply was required to meet customer demand, as OMD producing wells were not able to deliver the required volume of gas. The Board considers that OMD s decision to switch to Forty Mile Gas Co-op for obtaining gas supply to be beneficial to customers. Supply issues will be eliminated, as OMD customers will be receiving a steady stream of dry gas to meet heating and other consumption demands. The Board notes that in the past OMD charged $1.30/Mcf for natural gas. When obtaining supply from Forty Mile Gas Co-op, OMD is faced with gas costs that vary on a monthly basis. OMD proposed that the cost of gas be adjusted on a monthly basis to avoid having to catch up on variances in the future. The Board considers that it would be appropriate to adjust the cost of gas on a monthly basis to match OMD s gas costs, thereby avoiding the use of rate riders in the future to deal with variances. The Board notes that during the hearing, OMD confirmed that the gas cost calculation would be submitted to the Board on a forecasted monthly basis. The Board notes that other gas utilities in the province file similar information to the Board for approval. This information is required to be filed five working days before the end of the month so that the Board has sufficient opportunity 1 Decision Orr Mineral Developments Ltd., Interim Rate Rider and General Rate Application, dated December 23, 2002 EUB Decision (November 4, 2003) 3

8 to approve the requested rates prior to the commencement of the following month. The Board considers that a similar standard should apply to OMD. The Board notes that OMD typically sends out its billing statements for the past month s consumption during the second week of the current month. To allow OMD the opportunity to advise customers in advance of the approved monthly gas cost for the following month, the Board directs OMD to file its monthly gas cost estimate five working days before OMD will issue its billing statements. In addition, the Board directs OMD to notify customers on or with their billing statements the approved forecast cost of gas for current consumption. The Board notes that during the hearing, the gas cost forecast for October was determined to be $1.54/GJ. The Board also notes that OMD requested that the method of measuring gas change from Mcf to GJ so that customers could better understand and compare their bills to offerings from other utilities. Typically the Board would be responsive to a request to change the method of measure. However, the Board notes that the GRA filings, variable delivery charge, current rate rider, and proposed rate rider are all expressed in $/Mcf. The Board considers that approving such a change would create further confusion among customers, as the various rates and charges would need to be recalculated on the new standard. Therefore, the Board considers that it would not be appropriate to change the unit of measure at this point in time. Given that the Board does not consider it appropriate to change the unit of measure at this point in time, the Board recognizes that it must deal with the proposed gas rate of $1.54/GJ. Based on the information provided by OMD the Board has calculated the equivalent rate to be $1.60/Mcf. The Board will approve this amount as the gas cost for October, and directs OMD to provide on the monthly billing statement the monthly gas cost in both $/GJ and $/Mcf so that customers can compare their gas costs to those of other utilities. The Board has reviewed the monthly gas cost methodology proposed by OMD, and notes that customers will receive their gas at market prices without a mark-up. The Board notes that OMD recovers its costs of providing service through the fixed and variable charges. Therefore, the Board considers that it would be appropriate to approve OMD s methodology for calculating gas prices on a monthly basis. Given these approvals, the Board notes that OMD should file its forecast gas costs for the month of November sometime during the November 3 to November 7, 2003 time frame. However, due to timing issues associated with this Decision, the Board will grant OMD an extension until November 12, 2003 to file November s gas prices. The Board also directs OMD that in future filings of the MGC table, only six months of information needs to be provided, including the estimated month. The Board notes the concern that if the system was extended to meet new developments, current customers could experience higher gas prices. The Board also notes that during the hearing there was evidence, which indicated that this situation would not likely occur. The Board considers that any increase in rates would be determined partly to the extent that OMD charges new customers to connect to the system. Further, the Board notes that utilities have a requirement to provide service, and as a result there may be an increase in rates if consumption consistently 4 EUB Decision (November 4, 2003)

9 exceeds the amount produced from OMD gas wells. However, the Board notes that new customers on OMD s system are required to pay the rider charges, which relate to past consumption, which would offset charges for current customers. 2.3 Rate Rider OMD advised the Board that as a result of purchasing gas supply from Forty Mile Gas Co-op over the period of November 7, 2002 to September 30, 2003, a shortfall of $19, has developed. The shortfall occurred due to the fact that the cost of gas purchased from Forty Mile Gas Co-Op was priced higher than what OMD was allowed to recover in their rates. OMD proposed that this amount be collected as a rate rider over a one-year period. Based on using three years of consumption data, OMD determined that the average consumption over a one-year period was 16,368 Mcf. Collecting the shortfall amount on consumption over the proposed period would result in a rate rider of $1.21/Mcf. Views of the Intervenors Interested parties expressed general concerns about the use of rate riders. Parties also expressed concerns with OMD s management practices and suggested that this was the reason why the rate rider was necessary. Further, management practices at OMD should be improved so that these situations do not occur again in the future. Views of the Board The Board notes the concerns about utilities collecting past costs through rate riders. Riders are generally used as a regulatory tool to protect both customers and the utility from costs that are difficult to forecast. In this case the proposed rate rider arises as a result of gas purchases. Given the volatility of natural gas prices both customers and the utility are potentially at risk if gas costs are collected based on a forecast. As a result utilities are allowed, in appropriate cases, to collect any variances from actual gas purchased costs from customers through a rate rider. The Board considers that it is appropriate to allow OMD the opportunity to recover the costs it expended to provide natural gas to consumers. The Board considers that OMD has made a sound management decision to adjust natural gas prices on a monthly basis, and considers that in the future the same difficulties should not occur which gave rise to the proposed rate rider. The Board has reviewed the calculation of the outstanding amount, the average consumption, and the proposed rate rider amount. The Board accepts the calculations as proposed by OMD and approves the collection of $19, with a rate rider of $1.21/Mcf. In Decision dated December 23, 2002 the Board approved a rate rider of $1.22/Mcf on consumption from January 1, 2003 to collect a shortfall of $17, During the hearing, OMD indicated that it was possible that this rider could be fully collected by the end of November or December, and that any over collection as a result of this rider would be returned to customers. The Board considers that it would be inappropriate to allow the collection of both riders to overlap, as this would create an unnecessary burden for customers. Therefore the Board will allow OMD to begin collecting the new $1.21/Mcf rate rider after the existing $1.22/Mcf rate rider is fully collected. The Board also directs OMD to credit any over collection associated with EUB Decision (November 4, 2003) 5

10 the $1.22/Mcf rate rider against the outstanding 2003 shortfall amount of $19, The Board recognizes that if the $1.22/Mcf rate rider results in an over collection which is then applied against the 2003 shortfall, this should reduce the time period required to collect the outstanding amount. The Board also directs OMD to file a reconciliation of both the $1.22/Mcf rate rider and the $1.21/Mcf rate rider, after each outstanding shortfall amount is collected. OMD should also indicate in the reconciliation the over collections if any associated with each rider. Given that the Board has approved the collection of the outstanding amount via a rate rider, the Board directs OMD to include a separate line in the Monthly Gas Cost table for October showing a credit of $19, and indicate that this amount will be collected via a rate rider. The Board considers that as a result of this addition, balancing of monthly gas costs will commence in October ORDER IT IS HEREBY ORDERED THAT: (1) Orr Mineral Developments Ltd. is allowed to increase its variable delivery charge from $1.60/Mcf to $2.70/Mcf effective on consumption commencing October (2) The Monthly Gas Cost methodology as proposed by Orr Mineral Developments Ltd. and discussed in this Decision be approved, and that Orr Mineral Developments Ltd. shall charge gas costs on a $/Mcf basis and provide customers with the conversion to $/GJ on a monthly basis. (3) The monthly gas cost rate for customers on Orr Mineral Developments Ltd. utility system for October 2003 consumption shall be set at $1.60/Mcf. The monthly gas cost rate shall change on a monthly basis as outlined in this Decision (4) A rate rider of $1.21/Mcf is approved to collect a shortfall of $19, And that this rate rider shall be effective on consumption the following month after the current rate rider of $1.22/Mcf is collected (5) Orr Mineral Developments Ltd. file a reconciliation of both rate riders as directed in this Decision and that any over collections associated with the $1.22/Mcf rate rider be credit to the outstanding amount of $19, EUB Decision (November 4, 2003)

11 Dated in Calgary, Alberta on November 4, ALBERTA ENERGY AND UTILITIES BOARD (original signed by) Gordon J. Miller Presiding Member (original signed by) T. McGee Member (original signed by) R. D. Heggie Acting Member EUB Decision (November 4, 2003) 7

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13 APPENDIX A HEARING PARTICIPANTS Principals and Representatives (Abbreviations used in Report) Orr Mineral Developments Ltd. (OMD) R. E. Orr Interested Parties D. Duckmanton W. Gariepy B. Guy J. Hehr / E. MacDonald T. Hunt D. Clarkson and M. Larmour K. Maki D. G. Mast I. and V. McLaren / K. Merritt G. Miller B. Parnell and R. Parnell R. Zonneveld CFB Suffield C. Dueck / M. Simon Board Panel G. J. Miller, Presiding Member T. McGee, Member R. D. Heggie, Acting Member Alberta Energy and Utilities Board staff R. Marx, Board Counsel C. Burt DRAFT November 4, 2003 EUB Decision (November 4, 2003) 9

14 APPENDIX B ORR MINERAL DEVELOPMENTS LTD. APPROVED RATES Orr Mineral Developments Ltd. Natural Gas Service Rates (Effective on consumption beginning October 1, 2003) Residential and Commercial Customers Fixed Charge Variable Delivery Charge Natural Gas Charges 2 $14.00/Month $2.70/Mcf $Variable/Mcf Rate Riders (Applicable to both Residential and Commercial Customers) 2002 Rate Rider 3 $1.22/Mcf 2003 Rate Rider 4 $1.21/Mcf Note: Collection of the 2003 Rate Rider will begin the following month after the 2002 Rate Rider is fully collected As per the methodology approved in this decision: Decision Orr Mineral Developments Ltd General Rate Application, approved on November 4, Approved in Decision Orr Mineral Developments Ltd. Interim Rate Rider and General Rate Application, approved on December 23, 2002 to collect a shortfall of $17, Approved in this decision: Decision Orr Mineral Developments Ltd General Rate Application, approved on November 4, To collect a shortfall of $19,843.58, as a result of gas purchases being higher than approved gas cost collections. 10 EUB Decision (November 4, 2003)