B.C. Utilities Commission File No.: 4.2.7(2013) 6th Floor Howe Street Vancouver, BC V6Z 2N3

Transcription

1 Janet P. Kennedy Vice President, Regulatory Affairs & Gas Supply Pacific Northern Gas Ltd. Suite West Georgia Street Vancouver, BC V6E 4E6 Tel: (604) Fax: (604) Via and Courier B.C. Utilities Commission File No.: 4.2.7(2013) 6th Floor Howe Street Vancouver, BC V6Z 2N3 Attention: Erica M. Hamilton Commission Secretary Dear Ms. Hamilton: Re: Pacific Northern Gas Ltd. PNG-West 2013 Revenue Requirements Application Applicant s Reply Argument Accompanying, please find a copy of the above referenced written argument which was uploaded by PNG to the Commission website earlier today. Hard copies of the document will be couriered out on the afternoon of Tuesday, May 14, 2013, including 14 copies to the Commission s office and one copy to each of the parties noted below who registered as interveners into the 2013 application. Please direct any questions regarding the application to my attention. Yours truly, J.P. Kennedy cc. Eugene Kung (BCPIAC) BCPSO James Wightman (Econalysis Consulting) BCPSO Carolyn MacEachern (Young Anderson) Peace River Regional District

2 PACIFIC NORTHERN GAS LTD. APPLICATION to the B.C. UTILITIES COMMISSION FOR APPROVAL OF PNG WEST DIVISION 2013 REVENUE REQUIREMENTS APPLICANT S REPLY ARGUMENT

3 Page 1 REPLY ARGUMENT OF PACIFIC NORTHERN GAS LTD. 1. The following are the reply submissions of Pacific Northern Gas Ltd. ( PNG ) with respect to the Final Submission of the B.C. Pensioners and Seniors Organization et al. ( BCPSO ) in this proceeding, dated May 6, REPLY TO BCPSO Economies as a result of the acquisition of PNG by AltaGas 2. BCPSO states that there was an expectation of a decrease in the overall revenue requirement as economies of scale would materialize as a result of the acquisition of PNG by AltaGas 1. PNG submits that these economies of scale did materialize and have been submitted into evidence as noted in paragraph 19 of PNG s Final Argument. These costs reductions are reflected in the Cost of Service for both 2012 and The reductions realized in the 2012 Cost of Service include the elimination of costs associated with being a public company, the elimination of one senior executive in the management team, and reductions in audit, legal, and consulting fees. Further reductions are expected to be realized in 2013 including the reduction in insurance costs and in some employee benefit administration programs. PNG expects to realize even further savings as it expects to participate in future AltaGas procurement activities and other programs such as the intercompany debt application filed with the Commission on May 6, Higher charges from AltaGas 3. BCPSO states that there has been insufficient evidence to approve the adequacy of the overall size of the AltaGas cost pool. PNG submits that it has provided a breakdown of the total AltaGas 2013 forecast costs and has also emphasized that costs that do not benefit PNG or its rate payers, including corporate advertising, promotions, charitable donations and corporate development functions relating to corporate mergers, acquisitions and divestments, 1 BCPSO Final Submission, paragraph 6

4 Page 2 are excluded from these cost pools 2. The cost pools used to allocate corporate services costs to PNG are the same cost pools used to allocate corporate services costs to all other AltaGas utility entities including AltaGas Utilities Inc., Heritage Gas, SEMCO Energy Gas and ENSTAR to ensure there is no cross-subsidization between one utility versus another. 4. BCPSO notes in paragraph 13 of its final submission that it is concerned about the efficacy of the MMF methodology. PNG notes that the Massachusetts Formula, including modified versions thereof such as the MMF proposed by PNG, is well-understood and widely accepted by utility regulators to be a reasonable cost allocation method. PNG s understanding is that the Massachusetts Formula is also used by Fortis Inc. to allocate corporate services charges to its various utility subsidiaries, including the Fortis Energy Utilities group of companies under the Commission s jurisdiction. PNG disagrees with BCPSO s assertion that cross subsidization is occurring. The average standalone costs for PNG for the previous 3 years of self providing these services was $815,000 while the 2013 requested recovery is $750, On the inter-affiliate charges from AltaGas, PNG has submitted sufficient evidence and stands by its position that the $750,000 proposed charge is a fair and reasonable amount to be recovered for the services PNG and its customers receive from PNG s parent company and from the economies of scale PNG is able to lever from this association. PNG would like to reiterate that the full value from this association will be realized in the upcoming years as PNG strives to once again fill its pipeline to maximum capacity and further expand the pipeline system to the benefit of all its customers in the near future. These undertakings will require PNG to reliably and successfully access multiple capital markets at favourable and reasonable costs via its well-known public parent company. This would not have been achievable when PNG was a stand-alone public company. 6. PNG also disagrees with BCPSO s exclusion of the mark-to-market valuation and notional dividends associated with PNG s DSU expenses for comparison purposes. PNG stands by its position that the total directors compensation needs to be included in a comparative analysis of public company costs. The provision of a DSU program by PNG to its board of directors when it was a public company was an integral part of directors 2 Exhibit B-3, BCUC IR and Exhibit B-9, BCUC IR

5 Page 3 compensation package and enabled PNG to engage external directors at lower compensation rates as noted by market comparables 3. Increased A&G costs 7. PNG has provided a substantial amount of information in the filed Exhibits in support of its budgeted 2013 cost of service, including the increase in A&G costs of $328 thousand in PNG submits that the two new manager level hires included in 2013 are required as evidenced by the workload and unprecedented level of activity now being experienced at PNG. The Manager, Commercial Development & Financial Planning was hired in January 2013 and has been working full time on the various tasks noted in the position s job description including financial planning and modeling, commercial development activities related to a number of new customers and associated contracts and various treasury related activities. This individual has also been instrumental in the negotiations and contracting on PNG s expansion project. The second manager is necessary in order to alleviate the inordinate amount of overtime hours currently being worked by a number of employees in both the Regulatory and Finance groups in order to comply with the increased level of regulatory requests as well as financial reporting and disclosure requirements. Without these resources it is clear PNG would not be able to provide a reasonable level of service in responding to the requests from new customers for service from PNG and would have difficulty complying with its required regulatory and financial reporting obligations. 9. PNG has submitted sufficient evidence (Exhibit B-9, BCUC IR No. 2 Q 36.3 & 36.5) that with the inclusion of the MTIP PNG s compensation is appropriate for the marketplace within which it competes for resources. As such these legitimate and prudently incurred costs should be recovered from customers. 10. The remaining increase of $150 thousand in A&G costs pertain to consulting costs required to enable PNG to file PNG West s 2013 Resource Plan and a Consolidated (West and NE regions) Evaluation of Demand Side Management initiatives. The latter was further 3 Exhibit B-3, BCUC IR and

6 Page 4 directed by the Commission following PNG(N.E.) s Resource Plan Decision under Commission Order G BCPSO states that PNG s controllable costs, in particular wages, have increased significantly since the acquisition by AltaGas 4. PNG submits that this analysis is not correct as it does not take into account a number of external contractors who were previously engaged by PNG to perform numerous tasks that are now performed by PNG employees. The decrease in contractor expenses was noted in the response to Exhibit B-9, BCUC IR No Labour costs have increased due to a higher necessary headcount required to undertake various tasks (with internal resources on a go-forward basis), including studies and projects such as IFRS and US GAAP accounting conversions, depreciation studies, overhead capitalization reviews, fixed assets cleanup, shared services cost allocation studies, as well as to address overall increased levels of activity throughout the organization in general as a result of the economic growth in the PNG s service territories. PNG continues to strive to operate as efficiently as possible with a limited number of resources. Shared Services Cost Recovery 12. As BCPSO has noted, PNG has applied to change its method of allocating shared service costs among PNG and the divisions of Pacific Northern Gas (N.E.) Ltd. ( PNG(N.E.) ), with resultant adverse impacts on all of the affected PNG(N.E.) divisions. PNG notes that it was directed by the Commission to undertake this review following the 2011 Negotiated Settlement Process, and that the methodology put forth is based on a comprehensive evaluation and analysis of underlying costs and allocators, including a Commission-directed updated time study. 13. PNG would like to clarify that it is proposing a shared services cost recovery ( SSCR ) of $3.141 million from PNG(N.E.) for 2013 (subject to adjustments and corrections identified through the information request process), up from $2.377 million in In its Final Submission, BCPSO identifies the overall size of cost pools as its primary 4 BCPSO Final Submission, paragraphs 22 and 23 5 Exhibit B-12, page 4, Table 2.1-2

7 Page 5 concern with the SSCR for 2013, specifically noting increases to the Terrace Management and the Vancouver Administration cost pools. PNG would like to clarify that the Terrace Management cost pool is increasing by $305,019 (from $698,627 in Decision 2012 to $1,003,946 in 2013) and the Vancouver Administration cost pool is increasing by $824,270 (from $3,878,506 in Decision 2012 to $4,702,776 in 2013) In paragraph 28 of its Final Submission, BCPSO states its belief that no new costs, of 10% at the most, can be justified in the present case for either of these cost pools. In arriving at this conclusion, BCPSO submits that a more efficient utility can perform with the same expected reliability, customer service, and operational efficiency at a lower cost that the same less efficient utility performed these tasks in the past. 16. PNG takes offence to the aspersion that these cost pool increases are due to inefficiencies. As described in the Shared Services Study 6, the proposed cost pools resulted from: i) a rationalization of historic cost pools, ii) an examination of costs historically included in cost pools, and iii) a review of all costs historically excluded from cost pools, all to identify costs that are appropriate to include in the SSCR pools. PNG submits that the majority of these costs had always been incurred by PNG; however they were not included in the SCCR pools when the historic cost allocation methodology was implemented. This implies that based on the new allocation methodology PNG West customers have been crosssubsidizing PNG(N.E.) s customers in the past. 17. As described in detail in the Application and in response to a number of information requests, the $305,019 increase in the Terrace Management cost pool can be attributed to $112,717 in costs transferred from the historic Terrace Engineering cost pool, with the remaining $192,302 increase representing costs historically excluded from a cost pool (labour, Marketing & Lands and Safety & Training costs). 18. As described in detail in the Application and in response to information requests, the $824,270 increase in the Vancouver Administration cost pool can primarily be attributed to increases in underlying cost pool elements including: increased benefit load costs due to pension and non-pension post retirement costs increases; increased labour costs due to staff 6 Exhibit B-1, Tab 6, Appendix B,

8 Page 6 additions to address commercial and business development for regulated utility activities; new incentive program costs and inflationary salary increases. 19. PNG reiterates and submits that the increases in the Terrace Management and Vancouver Administration cost pools are not due to inefficiencies, but rather to a variety of factors, including: (i) the underlying review and validation of cost pool elements; (ii) inflationary increases to labour and benefit costs; and (iii) staff additions to focus on development of regulated utility activities. Further, PNG urges the Commission to disregard the notion put forth by BCPSO that cost pool changes be disallowed or restricted to an increase of 10%, specifically in consideration of the above factors. 20. Based on the comprehensive review and analysis of underlying costs, PNG submits that the cost pools and the underlying cost elements are fair and reasonable and are appropriately classified as shared service costs for purposes of the SSCR. 21. BCPSO has noted a lesser concern regarding the proposed methodology for allocating the cost pools among the constituent divisions of PNG(N.E.). Without identifying specific elements of concern in the proposed methodology, the BCPSO urges the Commission to consider the widely varying impacts on the constituent divisions of PNG(N.E.) before approving the proposed methodology. 22. PNG concedes that the proposed methodology and increased SSCR from PNG(N.E.) has an adverse impact on each of the constituent divisions. However, as noted in its Final Argument, PNG submits that the increased SSCR from the PNG(N.E.) divisions primarily reflects increased activity in these divisions, requiring an increased investment of employee and other resources to support these divisions since the last update to the cost allocation methodology in PNG urges the Commission to consider the comprehensive review and analysis of underlying costs and cost allocators that went into developing what is considered a rational cost allocation methodology, and reiterates the submission made in PNG s Final Argument that the proposed methodology provides a systematic basis for the fair and reasonable allocation of shared service costs.

9 Page 7 Amortization of LNG Partners option fees 24. BCPSO submits in paragraph 5 of its argument that the higher amortization of the LNG Partners option fees results only in temporary relief for ratepayers and that a largerthan otherwise rate increase will be recovered from ratepayers when these credits are exhausted. PNG submits that it has worked diligently with its limited resources on a plan to have the pipeline at full capacity in the near future (currently expected in 2015) which will result in significant decreases in customer rates. As such, the proposal to amortize these credits in the interim period serves to maintain current customer rates at reasonable levels. Conclusion 25. The Commission has a statutory obligation to fix rates that permit PNG the opportunity to recover all of its costs of providing service, including the fair rate of return on common equity already approved for PNG by the Commission. 26. PNG recognizes that increases in the delivered cost of gas impacts its customers. However, PNG has responded by taking all reasonable and prudent measures to control its costs, including the amortization of the LNG Partners option fees and the drawdown of deferred income taxes. There are no unnecessary, unreasonable or excessive costs in PNG s applied-for 2013 cost of service. 27. PNG submits that the requested amount of inter-affiliate charges from its parent company to be recovered in 2013 and the increased A&G costs are prudently incurred, normal course business expenses that should be fully recoverable from ratepayers as no provision has been made in the setting of PNG s rate of return on common equity to account for the disallowance of such costs. 28. PNG further submits that the proposed shared services cost recovery costs pools and methodology which was based on a comprehensive review and analysis undertaken by PNG and reviewed by an external consultant results in a fair and reasonable recovery of shared services costs from PNG(N.E.).

10 Page PNG requests that the Commission approve PNG s 2013 revenue requirements application, as updated on March 4, 2013 and as set out in PNG s April 22, 2013 Final Argument in this proceeding. All of which is respectfully submitted. Dated at Vancouver, British Columbia this 13 th day of May PACIFIC NORTHERN GAS LTD. J.P. Kennedy Vice President, Regulatory Affairs and Gas Supply