FortisBC Energy (Vancouver Island) Inc Revenue Requirements and Rates Application

Transcription

1 February 20, 2014 File No.: /15275 Christopher R. Bystrom Direct Facsimile BY ELECTRONIC FILING British Columbia Utilities Commission Sixth Floor, 900 Howe Street Vancouver, BC V6Z 2N3 Attention: Ms. Erica M. Hamilton, Commission Secretary Dear Sirs/Mesdames: Re: FortisBC Energy (Vancouver Island) Inc Revenue Requirements and Rates Application In accordance with the Regulatory Timetable set for this proceeding by Order G , we enclose for filing the electronic version of the Final Submission of FortisBC Energy (Vancouver Island) Inc. Twelve hard copies of the enclosed will follow by courier. Yours truly, FASKEN MARTINEAU DuMOULIN LLP [Original signed by Christopher Bystrom] Christopher Bystrom CRB/ccm Encl.

2 BRITISH COLUMBIA UTILITIES COMMISSION IN THE MATTER OF THE UTILITIES COMMISSION ACT, R.S.B.C. 1996, CHAPTER 473 (THE ACT) and RE: FORTISBC ENERGY (VANCOUVER ISLAND) INC. APPLICATION FOR 2014 REVENUE REQUIREMENTS AND RATES FINAL SUBMISSION OF FORTISBC ENERGY (VANCOUVER ISLAND) INC. February 20, 2014

3 - i - TABLE OF CONTENTS PART ONE: INTRODUCTION... 1 PART TWO: RATE FREEZE, RATE DESIGN AND PERFORMANCE BASED RATEMAKING... 3 A. Rate Freeze in the Public Interest... 3 B. Rate Design Issues are Out of Scope... 5 C. PBR is Out of Scope... 6 PART THREE: DEMAND FORECAST... 6 A. Summary... 6 B. Overview and Issues Raised... 8 (a) Residential and Commercial Use Rates... 8 (b) Residential and Commercial Customer Additions... 9 (c) Industrial Demand (d) Natural Gas for Transportation PART FOUR: COST OF GAS PART FIVE: OTHER REVENUE AND TRANSPORTATION COSTS PART SIX: OPERATIONS AND MAINTENANCE (O&M) A Forecasts and Cost Drivers B. Departmental O&M (a) Operations (b) Customer Service (c) Energy Solutions and External Relations (ES&ER) (d) Corporate C. Conclusion PART SEVEN: CAPITAL EXPENDITURES A. Sustainment Capital Expenditures (a) Budget Variances and Improvements (b) Transmission System Reinforcement, Integrity and Reliability Capital (c) Distribution System Reinforcement, Integrity and Reliability Capital (d) Distribution Mains, Service Renewals and Alterations Capital B. Growth Capital Expenditures C. Other Capital Expenditures... 36

4 - ii - D. Conclusion PART EIGHT: FINANCING, TAXES, ACCOUNTING POLICIES AND DEFERRALS PART NINE: CONCLUSION... 38

5 - 1 - PART ONE: INTRODUCTION 1. FortisBC Energy (Vancouver Island) Inc. (FEVI or the Company) is seeking the Commission s approval to maintain current rates for 2014, with the difference between the net revenues received and the actual cost of service, excluding operations and maintenance (O&M) variances from allowed, to be allocated to the Rate Stabilization Deferral Account (RSDA). 2. After filing its Application on September 24, 2013, FEVI filed an amendment to the Application on December 13, and an Evidentiary Update on January 10, Due to section 3(a) and (b) of Special Direction No. 5, FEVI amended the Application to no longer seek approval of the creation of a GGRR Compressed Natural Gas (CNG) class of service; instead FEVI included the Langford (Coldstar) CNG Pump in its natural gas class of service. FEVI also updated its 2014 forecast cost of gas to reflect the five-day average forward prices used in the FEVI 2013 Fourth Quarter Report on the Gas Cost Variance Account (GCVA) and the RSDA. Finally, FEVI made three amendments to the Application that were noted in round 1 information requests (IRs). 3 The impact of these changes was explained in the Evidentiary Update, 4 and further discussed in response to BCUC IRs Taking into account the amendments to the Application, FEVI is seeking the following approvals: (a) Approval pursuant to sections 59 to 61 of the Act and section 2.1 of the Vancouver Island Natural Gas Pipeline Agreement Special Direction 6 (Special Direction) of permanent rates for FEVI effective January 1, 2014 for Core Market Exhibit B-1-2. Exhibit B-7. Exhibit B-4, BCUC IR and ; Exhibit B-3, CEC IR Exhibit B-7. Exhibit B-10, BCUC IR , and 2.10 to 2.12 series. OIC No (Dec. 13, 1995) made pursuant to the Vancouver Island Natural Gas Pipeline Agreement Act, R.S.B.C. 1996, c. 474.

6 - 2 - sales and transportation customers, other than customers who have specified rates in their transportation service agreements, at the same level as 2013 rates. (b) (c) (d) (e) (f) (g) (h) Approval pursuant to section 2.10(a)(i) of the Special Direction of FEVI s forecast Cost of Service for 2014 as set out in Attachment 1 of Exhibit B-7 and amended to $195,348 million in the response to BCUC IR Approval pursuant to section 2.10(a)(i) of the Special Direction of FEVI s forecast capital expenditures for 2014, as set out in Section B5 of the Application. Approval pursuant to section 2.10(a)(ii) of the Special Direction of FEVI s forecast revenue for 2014, based on its proposed rates, as set out in Attachment 1 of Exhibit B-7. Approval of the forecast gross O&M expenditures for 2014 of $ million, subject to adjustment to the corporate and shared service allocations as may be determined by the Commission. Approval of the 2014 forecast cost of gas as set out in Table B2-1 of Exhibit B Approval for the difference between the net revenues received and the actual cost of service, excluding O&M variances from allowed, to be allocated to the RSDA. Approval pursuant to sections 59 to 61 of the Act of the discontinuance, modification, and creation of deferral accounts, and the amortization and disposition of balances of deferral accounts, for FEVI as set out in Section C4 and Appendices E4 and E5 of the Application. 7 Exhibit B-1-2, Exhibit B-1, Application Amendment, Updated Table B2-1: Vancouver Island Cost of Gas Excluding GCVA Impacts.

7 - 3 - (i) (j) Approvals pursuant to sections of the Act of changes to accounting policies to be used in the determination of revenue requirements for FEVI effective January 1, Approval of the allocation of costs for corporate services between FortisBC Holdings Inc. and FEVI and for Shared Services as between FortisBC Energy Inc. (FEI) and FEVI in accordance with the Commission s Decision on these allocations in FEI s PBR Application proceeding. 4. An updated list of the approvals sought by FEVI and a draft Order have been provided in response to BCUC IR FEVI submits that the evidence in this proceeding, demonstrates that its proposed rates are just and reasonable and should be approved. 5. In the following sections, FEVI summarizes the main components of the Application and discusses the issues raised, with an emphasis on the topics pursued in the second round of IRs. PART TWO: RATE FREEZE, RATE DESIGN AND PERFORMANCE BASED RATEMAKING 6. In this Part, FEVI begins by addressing why a rate freeze is in the public interest and the most reasonable option for FEVI. FEVI then briefly addresses why rate design issues and the potential for Performance Based Ratemaking (PBR) are out of scope for A. Rate Freeze in the Public Interest 7. FEVI is operating under unique circumstances which make a rate freeze the most reasonable option and in the public interest for FEVI has been operating under the Special Direction 9 since The Special Direction has permitted FEVI s rates to be set below and then above the cost of service of the 8 Exhibit B-10, Attachment 16.3.

8 - 4 - utility. 10 The Special Direction created the Revenue Deficiency Deferral Account (the RDDA), which held annual revenue shortfalls (referred to as the Accumulated Revenue Deficiency) through Thereafter rates were set so as to permit the recovery of the Accumulated Revenue Deficiency within the RDDA over the shortest period reasonably possible. The RDDA balance was fully eliminated by the end of 2009 and beginning in 2010, FEVI was forecasting revenue surpluses to continue through As the royalty revenues that have historically been provided to FEVI were discontinued at the end of 2011, rates will eventually need to rise. Rather than have rates decrease, only to rise again, the Commission approved a rate freeze for core market customers for 2010 and 2011 as part of the Negotiated Settlement Agreement for those years. The surplus revenue that has resulted from the 2010 and 2011 rate freeze has been captured in the RSDA. The accumulated revenue in the RSDA was to be used to offset the loss of royalty revenues and mitigate the impact of forecasted rate increases. 11 As such, the rate freeze was approved again for 2012 and 2013 after an oral public hearing, whereby the accumulated balance in the RSDA was used to offset the forecast net revenue deficiency for 2012 and The forecast 2013 closing RSDA balance is $98,492 thousand, before tax. 12 FEVI is proposing to maintain the rate freeze for 2014 and use the balance in the RSDA to offset the forecast revenue deficiency, according to its intended purpose. 9. Maintaining the status quo for FEVI is appropriate given the FortisBC Energy Utilities (the FEU) 13 Reconsideration Application regarding amalgamating and implementing common rates for the FEU that is currently before the Commission. Amalgamation and common rates are FEVI s preferred long-term solution to the challenges facing FEVI. If amalgamation and common rates are approved, then FEVI would in effect be rolled in to FEI s PBR Plan which is also currently before the Commission. If amalgamation and common rates OIC No (Dec. 13, 1995) made pursuant to the Vancouver Island Natural Gas Pipeline Agreement Act, R.S.B.C. 1996, c See, e.g., Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 2. Exhibit B-7, p. 3, Table 2. The FEU consists of FEI, FEVI and FortisBC (Whistler) Inc.

9 - 5 - are not approved, then FEVI will have to consider alternative solutions, which would be addressed in a future revenue requirements and rate design application A continued rate freeze at this time is also the most reasonable option for 2014 as unfreezing rates requires an updated cost of service allocation (COSA) study. 15 FEVI is concerned that the possibility of unfreezing rates continued to be a topic of Commission IRs in the second round. FEVI has not conducted the required COSA and other studies required to make this change. Without a rate design or analysis, setting rates to recover the cost of service may not result in rates that would be just and reasonable. Shifting to cost of service rates also does not address the outstanding balance in the RSDA or the competitive issues facing FEVI In summary, FEVI has a unique history and legislative regime that govern its rates. In the circumstances, the rate freeze from has ensured continued rate stability for Vancouver Island customers. A continued rate freeze will maintain rate stability in the short-term and is appropriate given the unique operating circumstances of FEVI. B. Rate Design Issues are Out of Scope 12. A number of IRs explored rate design issues to which FEVI has fully responded. 17 This Application is not a rate design application. The necessary COSA and other studies that are required to properly consider rate design issues have not been conducted. As stated by FEVI in response to BCUC IR : 18 In order to determine if there is any undue cross subsidization embedded in the current rates, a full Rate Design study would need to be conducted which would include a fully embedded cost of service study to determine the cost to serve the various customer classes/groups and to compare the allocated cost to the revenue from each of the customer classes. Also, the utility would need to Exhibit B-4, BCUC IR Exhibit B-4, BCUC IR 1.4.1; Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR E.g., Exhibit B-10, BCUC IR 2.5.1, and Exhibit B-10.

10 - 6 - determine the appropriate rate structures and rates to achieve various rate design objectives which would include a consideration of many factors, such as provincial government energy policies, the ability to generate revenues to meet total cost to serve (i.e. the class revenue requirement), and to accomplish predictability and stability of revenues and rate levels. 13. In short, there is no evidentiary basis to change the rate design for FEVI in C. PBR is Out of Scope 14. FEVI does not propose to adopt a PBR for Nonetheless, a number of IRs explored issues related to a PBR. 20 A PBR plan requires significant study and consideration, which has not been undertaken for FEVI. Further, the Special Direction is complex and does not permit the full adoption of PBR. There is no proposal for PBR in this proceeding that the Commission could approve for PART THREE: DEMAND FORECAST A. Summary 15. The forecast of demand for natural gas is derived from: the forecast number of customers and customer additions by customer class; the forecast average Use Per Customer (UPC) by customer class; and the demand from Industrial customer classes as determined by their annual contracts. 21 FEVI s total forecast energy demand for 2014 is 34 PJ. 22 The demand forecast for FEVI s customers classes can be summarized as follows: Exhibit B-1, Application, p. 3. E.g., Exhibit B-4, BCUC IR 1.1.4; Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 11 Exhibit. B-10, BCUC IR This total takes into account the increase in industrial demand of 0.62 PJ included in the Evidentiary Update, Exhibit B-7.

11 - 7 - The growth in residential customers has not offset the decline in average residential UPC, which has resulted in an overall continued decline in residential normalized energy demand to 4.3 PJs in Demand in rate schedules SCS 1 and SCS 2 is forecast to remain stable at approximately 0.5 PJs each. 24 Demand in rate schedules LCS 1 and LCS 2 is forecast to decline very gradually to 1.28PJs and 1.25PJs, respectively. Demand from the larger LCS 3 rate schedule is continuing the decline that started in 2007 and is forecast at approximately 1.76 PJs for Demand from the Industrial customers is forecast to remain at approximately 23.2 PJs based on current contracts A forecast of revenues and margins has been developed by considering the total energy forecast applied at existing 2013 approved rates, and then subtracting from that the forecast cost of natural gas. 27 Tables showing the updated forecast sales and revenues at existing rates are provided in response to BCUC IR FEVI submits that the forecast natural gas demand and revenues are reasonable and should be accepted for the purposes of 2014 delivery rates. 17. The following sections provide an overview of the key inputs to the demand forecast and respond to the issues raised in the proceeding Exhibit B-1, Application, pp ; Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 27. Exhibit B-1, Application, p. 28; updated in Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 28, updated in Exhibit B-10, BCUC IR Exhibit B-1, Application, Section B1.5. Exhibit B-10.

12 - 8 - B. Overview and Issues Raised (a) Residential and Commercial Use Rates 18. The forecast UPC rate is the first key input into both the residential and commercial demand forecast. Consistent with past practice and industry standards, FEVI bases the UPC forecast on an analysis of weather-normalized consumption data. 29 FEVI uses a regression based forecast if a significant trend exists, and in the absence of such a trend, FEVI uses a three-year average. The forecast of average UPC for residential and commercial rate classes is consistent with the trend of historical values. 30 The 2014 residential UPC is forecast to decline by approximately 1.8 GJ per customer compared to 2013 Projection Information requests queried whether FEVI s use per customer forecast methodology was biased. 32 The evidence does not support this suggestion. There are too few data points to run a valid inferential statistics test and FEVI s small sample runs test were inconclusive. FEVI s forecast methodology is based on an historical trend analysis or a threeyear average. 33 There is little opportunity in this method for the introduction of any systematic bias. Furthermore, the historical annual variance of 3.5% for FEVI s residential customer class is reasonable. Finally, as stated by FEVI in BCUC IR 2.6.1: due to the existence of the RSDA, there is no reason for FEVI to be either optimistic or pessimistic in its forecast. FEVI does not benefit in any way by either over or under forecasting. This statement is true whether or not a statistical bias in historical forecast variance can be determined when utilizing different tests. 34 There is therefore no reasonable basis to conclude that there is any bias in FEVI s forecasting method Exhibit B-1, Application, p. 17. Exhibit B-1, Application, pp The one time increases seen from 2011 to 2012 in most rate schedules are a result of the customer count adjustment in the CIS. The volumes did not change, but the customer account totals were smaller, so the UPC rates appear higher. Exhibit B-1, Application, p. 20. Exhibit B-10, BCUC IR Exhibit B-4, BCUC IR Exhibit B-10, BCUC IR and

13 - 9 - (b) Residential and Commercial Customer Additions 20. Residential and commercial customer additions and the existing residential and commercial customer totals are the second key input in the residential and commercial demand forecast. 21. FEVI s established methodology for forecasting residential customer additions is based on housing starts, which show a high (90%) statistical correlation with FEU customer additions. 35 FEVI continues to use the housing starts forecasts from the Conference Board of Canada (CBOC). The CBOC forecast provides separate single family and multi-family residential estimates. Consistent with the RRA, the residential net customer addition forecast consists of both single and multi-family dwelling forecasts. These two forecasts are based on FEVI s existing customer mix for these dwellings as well as the CBOC forecast for growth in these two housing segments. Once the separate forecasts are completed, the two housing type accounts are combined and become the RGS residential accounts forecast. 36 Residential net additions continued to decline through 2013, but based on a positive CBOC outlook are forecast to rebound in The forecast of commercial customer additions is based upon the historical average of actual net additions in the latest three years. Where the three-year average is negative, zero is used in the forecast. 38 As a result of the relatively small number of customers in each of the commercial rate classes, the net commercial customer additions have been relatively inconsistent since The Company expects to add an additional 76 customers to the commercial rate classes for Exhibit B-1, Application, p. 19; Exhibit B-9, CEC IR Exhibit B-1, Application, p. 18 Exhibit B-1, Application, p. 25. Exhibit B-1, Application, p. 19; Exhibit B-9, CEC IR 2.12 series.. Exhibit B-1, Application, p. 26.

14 The CEC questioned the exclusion of trends in customer losses. FEVI calculated the forecast if negative three-year averages were taken into account and determined that the impact to the forecast would be immaterial. However, FEVI agreed that this issue warrants further investigation and agreed to make changes if required to its forecasting methodology as a result of such investigation prior to its next forecast. 40 (c) Industrial Demand 24. For 2014, FEVI assumes no customer growth for the Industrial customers. 41 Demand from the Industrial rate classes is forecast to remain at approximately 23.2 PJs based on current contracts. 42 The forecast accuracy of FEVI s industrial demand is reviewed in response to BCUC IR , which shows a high level of accuracy in most years. FEVI will review the methodology for its industrial demand forecast in its next rate design. 43 (d) Natural Gas for Transportation 25. All of the NGT volume is from new customers (vehicles), therefore the NGT forecast is based on the NGT vehicles expected to be on the road for BC Transit, Coldstar and the City of Victoria. 44 The 2013 projected and 2014 forecast demand was revised as noted in response to CEC IR and in the Evidentiary Update. The 18,750 GJ forecast demand from BC Transit is a conservative forecast based on the 25 CNG buses that BC Transit will have in operation in March The 15,000 GJ demand from Coldstar is based on a contractual take or pay commitment Exhibit B-9, CEC IR 2.12 series. Exhibit B-1, Application, p. 24. Exhibit B-1, Application, p. 28, updated in Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 29 and Exhibit B-9, CEC IR Exhibit B-3, CEC IR ; Exhibit B-10, BCUC IR

15 PART FOUR: COST OF GAS 26. Vancouver Island s cost of gas reflects the costs related to commodity, transportation, storage resources, and the impacts of the hedging program. The cost of gas also includes unaccounted for gas, company use gas, and the gas supply management costs. 27. The forecast gas costs included in the Application for 2014 are based on the NYMEX natural gas futures five-day average forward prices at November 8, 11, 12, 13 and 14 (the November 14, 2013 Five Day Average Forward Prices). The November 14, 2013 Five-Day Average Forward Prices align with the commodity forward prices used in the FEVI 2013 Fourth Quarter Report on the Gas Cost Variance Account (GCVA) and the RSDA, submitted to the Commission on November 20, FEVI is seeking approval of the forecast 2014 cost of gas in order to establish the approved forecast unit cost of gas for Variances between the actual incurred unit cost of gas and the approved forecast unit cost of gas are captured in the GCVA for amortization through future rates. Other variances in cost of gas flow through the RSDA. 47 FEVI will continue to file its quarterly gas reports with the Commission The issues raised related to the cost of gas are briefly discussed below: Commodity, Transportation and Storage costs are largely beyond the Company s control. The reasons for increases in these costs have been explained in response to IRs. 49 Hedging costs are the result of transactions that were entered into for the period in accordance with FEVI s approved Price Risk Exhibit B-1-2, Application Amendment. Exhibit B-1, Application, p. 32. Exhibit B-4, BCUC IR Exhibit B-4, BCUC IR 1.14 and Exhibit B-10, BCUC IR 2.13.

16 Management Plan. No hedging transactions have been entered into since the Commission denied the FEU s hedging program in July FEVI s gas supply management costs are a 10% allocation of FEI s consolidated Core Market Administration Expense (CMAE) budget. The Commission is reviewing the CMAE budget in a separate proceeding. 51 FEVI s UAF as a percentage of sales is well within the range experienced by other utilities. 52 UAF is caused by many factors, which FEVI does not fully control. The most significant contributor to UAF is measurement inaccuracy. While FEVI calibrates and maintains its equipment to Measurement Canada standards, meters are not capable of registering zero absolute error in actual operating conditions. 53 FEVI does, however, have the appropriate programs in place to help reduce UAF, including leak survey programs and the BC One Call Program and Call Before You Dig communications to reduce third-party damage to the system. 54 Given the uncontrollable nature of UAF and wide variations from yearto-year, FEVI s method of forecasting UAF based on a five-year average is reasonable FEVI submits that it is has addressed the issues raised in the proceeding and that its forecast cost of gas should be approved as filed. PART FIVE: OTHER REVENUE AND TRANSPORTATION COSTS 31. As described in the Application, FEVI is forecasting Other Revenues and Transportation Costs at a similar level as that approved for 2012 and FEVI amended the Exhibit B-4, BCUC IR Exhibit B-4, BCUC IR Exhibit B-10, BCUC IR and Exhibit B-10, BCUC IR Exhibit B-9, CEC IR Exhibit B-10, BCUC IR 2.15.

17 forecast other revenues in its Evidentiary Update, Exhibit B-7, due to the inclusion of NGT within the natural gas class of service. An updated Table B3-1 showing Other Operating Revenue has been provided in response to BCUC IR While no major variations are expected to the levels of Other Revenue and Transportation Costs for 2014, any variations that do occur will be captured in the RSDA for future refund to or recovery from customers. 32. No issues were raised with respect to Other Revenue and Transportation Costs. FEVI submits that they should be approved as filed. PART SIX: OPERATIONS AND MAINTENANCE (O&M) A Forecasts and Cost Drivers 33. Based on the detailed O&M budgets prepared for each department, FEVI s total 2014 Forecast O&M is $36,643 thousand. 56 This forecast represents an increase of $459 thousand over 2013 Approved amounts, and $2,815 thousand over 2013 Actual amounts. 57 This increase is due to accounting changes and other cost drivers as discussed below. FEVI s departmental forecasts are discussed in the following section. 34. Approximately $442 thousand of the increase in O&M is due to PST and pension adjustments, which represent costs that are outside of FEVI s control (e.g. PST) or accounting changes that adjust the allocation of costs between O&M and capital. 58 These changes are briefly described as follows: (a) PST (full year): PST was re-introduced in BC effective April 1, 2013 and in 2014, FEVI anticipates incurring $82 thousand of PST related to O&M Exhibit B-10, Tables B4-1 and B4-2 in response to BCUC IR FEVI updated its O&M forecast in its Evidentiary Update filed January 10, 2014 and again in response to BCUC IR with the benefit of 2013 Actual information (Exhibit B-7 and B-10, respectively). The amended 2014 Forecast value is $122 thousand lower than filed in the Exhibit B-1, Application. 57 Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 38 and ; Exhibit B-10, BCUC IR Exhibit B-1, Application, pp and Exhibit B-10, BCUC IR

18 (b) Pension/OPEB: A total of $1,729 thousand will be captured in the Pension and OPEB Variance deferral account in This represents the difference between the Pension and OPEB Expense included in the 2013 Approved and the actual expense. Of this amount, $946 thousand is related to O&M and $783 thousand is related to capital. This amount has been added to the 2013 Actuals to reflect a base amount of pension/opeb expense in the 2014 Forecast. 60 (c) Pension/Retiree: This reflects an accounting change that FEVI proposes be effective 2014 for the allocation of retiree pensions and OPEBs. This adjustment serves to reallocate $386 thousand of costs from O&M to capital. 61 (d) Capitalization Software Costs: This reflects an accounting change that FEVI proposes be effective 2014 to capitalize the upgrade capability portion of annual software costs. This adjustment serves to reallocate $200 thousand of costs from O&M to capital In addition to the above adjustments, O&M expenditures in 2014 are influenced by five broad-based business drivers: inflation, customer focus, productivity, demographics, and system reliability and safety. 63 FEVI discusses its productivity focus further below. 36. Improving productivity and realizing efficiencies in its operations is a priority for the Company and its employees. 64 To demonstrate this focus, FEVI has identified all productivity improvements as permanent savings of approximately $1,516 thousand in its Exhibit B-1, Application, p. 40 and Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 40 and Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 40 and Exhibit B-10, BCUC IR Exhibit B-1, Application, pp Exhibit B-1, Application, p. 42.

19 Application : FEVI s focus on productivity was described as follows in response to BCUC IR Employees are encouraged to assess work, ensure it is required and that it is being performed as efficiently and productively as possible. Additionally, departments have a requirement to maintain or increase the outputs and activity levels while keeping cost increases below inflation on a per customer basis. To help ensure this, departments are accountable for achieving productivity opportunities. Departments identify and reflect achievable productivity opportunities in their budget requirements when preparing budgets for the year with sustainable savings reflected in future budget requirements. Proposed departmental budgets are validated by comparing to both the approved level of funding and to the most recent year s spending. This approach helps to ensure a continued focus on productivity over the long term and that rates are being managed effectively for our customers. 37. Since 2010, FEVI s productivity focus has kept O&M increases in line with inflation in spite of different cost pressures that have arisen. More specifically, excluding increased O&M due to the construction of the Mt. Hayes facility, FEVI s productivity focus has kept O&M increases within 3.5% in the context of annual inflation of 1.4% and a customer annual growth rate within 2.1% Productivity improvement is measured at the total O&M spending of the Company, which provides each department with flexibility with respect to how efficiencies are achieved. 67 Efficiencies and productivity improvements are thus achieved by the departments through a number of different ways, such as by streamlining processes, leveraging technology and optimizing opportunities for integration with the other gas utilities. 68 Productivity improvements have been described in the Application and responses to IRs. For example: Exhibit B-10, BCUC IR (total sustainable savings from 2012 and 2013, including customer service deferral). Exhibit B-4, BCUC IR and Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR Exhibit B-4, BCUC IR

20 Operations achieved savings due to a reduction in IBEW training costs through the implementation of a Training Competency model and the leveraging of technology through the use of a tracking system for training activities. 69 Through integration of activities amongst the gas utilities, Operations was able to achieve savings by eliminating a management position. 70 Customer Service achieved savings due to lower labour costs and reduced bill print, postage and bank fees from contact centre and billing operations. 71 Operations Support improved productivity for the operation and maintenance of the FEVI cathodic protection system by installing remote monitors at selected locations, which allow Corrosion Control technicians to monitor key indicators of system function and performance without travelling to field sites. 72 FEVI is optimizing crew travel time in the Capital Region District by stocking materials at a location in Victoria s downtown core in order to reduce travel times from the main Langford muster to the Victoria downtown core, thereby effectively increasing crew productivity As noted above, the productivity improvements realized in 2012 and 2013 have been identified in the Application and responses to IRs as permanent savings, with all permanent savings having been incorporated into the 2014 Forecasts. FEVI s evidence demonstrates that its focus on productivity, as supported by appropriate budgeting and employee incentives, has resulted in productivity improvements and the management of upward pressures on O&M costs Exhibit B-1, Application, p. 47; Exhibit B-4, BCUC IR Exhibit B-1, Application, p. 47. Exhibit B-1, Application, p. 49; Exhibit B-4, BCUC IR Exhibit B-1, Application, p. 53; Exhibit B-3, CEC IR Exhibit B-10, BCUC IR

21 B. Departmental O&M 40. The Application provides a department-by-department review of FEVI s O&M forecast. The Operations, Customer Service, ES&ER and Corporate departments constitute the vast majority of FEVI s O&M requirements and are addressed in the sections below. The 2014 Forecasts in the other 7 departments include minor increases over 2013 that are primarily related to inflation, pension-related adjustments and one-time adjustments as discussed in the Application and the responses to IRs. 74 These are briefly summarized below. FEVI notes that for these departments it has generally compared the 2014 Forecast to the 2013 Projection as reflected in the Application, where variances between 2013 Actuals and Projected were not significant. Energy Supply and Resource Development. The 2014 Forecast increases of $2 thousand over 2013 Projection are due to inflation. 75 Information Technology. The 2014 Forecast increases of $26 thousand over 2013 Projection are due to pension-related adjustments 76 and inflation. 77 Engineering Services and Project Management. Of the $36 thousand 2014 Forecast increase over the 2013 Projection, $28 thousand is due to the PST and pension-related adjustments and $8 thousand is due to inflation Actuals were $111 thousand higher than 2013 Projected due to a one-time write-off associated with the cancellation of a pipeline relocation project required by third party activities Exhibit B-1, Application, Section 4.5 and p. 39, Table B4-2 as updated in Exhibit B-10, BCUC IR and IR Exhibit B-1, Application, p. 44; Exhibit B-3, CEC IR Actuals were $6 thousand less than 2013 Projection (Exhibit B-10, BCUC IR ). Exhibit B-1, Application, p. 39, Table B4-2. Exhibit B-1, Application, p. 44; Exhibit B-3, CEC IR ; Exhibit B-10, BCUC IR 2.21 series Actuals were $34 thousand less than 2013 Projection (Exhibit B-10, BCUC IR ). Exhibit B-1, Application, p ; Exhibit B-4, BCUC IR and ; Exhibit B-3, CEC IR and Exhibit B-10, BCUC IR

22 Operations Support. Operations Support expenditures over the period were $53 thousand greater than approved due to the cost of leasing repeater sites for the mobile radio network deployment approved in the RRA. 80 The 2014 Forecast is $103 thousand higher than the 2013 Projection due to: PST and pension-related adjustments of $12 thousand; inflation of $5 thousand; and the continuation of radio network upgrades requiring $86 thousand for the lease of radio network sites. 81 Facilities. The Facilities department Actual spending in 2012 and 2013 has been consistent with Approved amounts for those years, with a significant reduction in 2013 due to the end of the lease for the Victoria Regional Office. The 2014 Forecast is less than 2013 Approved. An increase of $43 thousand over the 2013 Projection/Actual is due to: a $3 thousand increase as a result of the PST and pension-related adjustments; a $10 thousand increase due to inflation; and a $30 thousand increase in non-labour costs driven by lease and service contracts. 82 Finance and Regulatory Affairs. While FEVI was forecasting an increase of $11 thousand in 2014 over 2013 Projection, primarily due to inflation of $8 thousand Actuals were $32 thousand more than 2013 Projection. 83 As a result, the 2014 Forecast is lower than the 2013 Actuals and within $1 thousand of the 2013 Approved. Governance. Increases in 2014 over 2013 Projection are due to inflation of $1 thousand and a $185 thousand increase in insurance premiums. 84 Insurance expenses are primarily influenced by factors outside FEVI s control and are accordingly subject to deferral account treatment for variances from the forecast Exhibit B-1, Application, p. 55, Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 55; Exhibit B-4, BCUC IR 1.30 series Actuals were $20 thousand less than 2013 Project (Exhibit B-10, BCUC IR ). Exhibit B-1, Application, p. 56; Exhibit B-3, CEC IR ; Exhibit B-4, BCUC IR to ; Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 44; Exhibit B-3, CEC ; Exhibit B-10, BCUC IR Exhibit B-1, Exhibit B-1, Application, p. 44. Actuals were $91 thousand less than 2013 Projection (Exhibit B-10, BCUC IR ). Exhibit B-10, BCUC IR 2.22 series; Exhibit B-9, CEC IR 2.22 series.

23 The remaining four departmental O&M activities are discussed below. (a) Operations 42. The Operations department represents the largest portion of FEVI O&M costs and the evidence demonstrates that FEVI has been appropriately managing these costs. FEVI s commitment to productivity is demonstrated by the fact that the 2014 Forecast for Operations of $14,006 thousand incorporates $880 thousand in permanent savings realized over the period. 86 Further, the increase over 2013 Actual spending of $1,021 thousand is attributable to PST, pension-related adjustments and inflation, as discussed further below. FEVI submits that the evidence demonstrates that its 2014 Forecast for Operations is reasonable and should be approved as filed. 43. The Operations department is responsible for installing, operating and maintaining the gas distribution and transmission (pipelines) systems and plant assets in order to provide safe, reliable and cost effective service to customers. 87 The Operations department consists of three major groups: Distribution, Transmission (Pipelines) and Plant Operations The Operations group is projecting 2013 savings from the Approved in the amount of $880 thousand or 7 percent. Of the total variance between the 2013 Projection and the 2013 Approved, $597 thousand is in Distribution, $167 thousand is in Transmission, and $116 thousand is in Plant Operations. The Distribution savings is a continuation of reductions in IBEW training costs and the elimination of one manager position from The Transmission savings were realized partially in pipeline operations and partially in measurement control. In Plant Operations, the savings were due to the elimination of a management position as a result of organizational changes across Transmission/Plant Operations Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 45. Exhibit B-1, Application, pp Exhibit B-1, Application, p. 47.

24 The increase in Operations from 2013 Actuals to 2014 Forecast is $1.565 million. 90 Of this amount, $1.260 million is due to PST and pension-related adjustments and $293 thousand is due to inflation. 91 The remaining variance of $12 thousand is due to forecasted increases of $109 thousand in standby, industrial meter exchange and meter set repairs, 92 offset by a net reduction in field operating activities An IR queried whether the 2014 Forecast should be reduced due to historical average variances in Operations costs. 94 However, the fact that there has been an historical variance does not mean that there will be a variance in the future. FEVI has shown that there are real cost pressures due to pension related adjustments and an increase in forecast work as described above. After accounting for these pressures, the 2014 Forecast is line with 2013 Actuals plus inflation. In determining its O&M spending requirements, FEVI undertakes significant effort to put forward realistic and appropriate budgets. The foundation of this approach is zero based budgeting, with the use of trending and other analysis where appropriate. 95 FEVI forecast is therefore preferable to, and more reasonable than, an arbitrary reduction based on historical variances. 47. As discussed above, the 2014 Forecast costs for Operations incorporates significant savings over 2012 and 2013 and the forecast has been well-substantiated. FEVI therefore submits that the 2014 Forecast for Operations should be approved as filed. (b) Customer Service 48. The 2014 Forecast Customer Service O&M of $4,586 thousand is in line with 2012 and 2013 Actuals of $4,541 thousand and $4,154 thousand, respectively. The increase Exhibit B-10, BCUC IR and Exhibit B-1, Application, p. 47; Exhibit B-10, BCUC IR Exhibit B-1, Application, p. 47; Exhibit B-3, CEC IR , and Exhibit B-4, BCUC IR and Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR Exhibit B-10, BCUC IRs and

25 from 2013 Actuals represents increases for factors such as inflation and postage stamp costs, and varying activity levels by year, as described further below. 49. The control of the Customer Service O&M costs resides within FEI. The Customer Service department includes contact centre and billing activities expenditures which are direct costs to FEVI based on the customer count allocation, as well as non-labour related costs for customer initiatives, research, and bad debt. Any labour related costs for customer initiatives, research, construction services, as well as executive management costs are covered through shared services agreements; these costs are included in the Corporate department FEVI s operating costs have been lower than forecast for the first two years of the insourced customer service operation (2012 and 2013), with the majority of these variances being captured in the Customer Service Variance deferral account as approved by the Commission Customer Service O&M costs were forecast to increase in 2014 over 2013 Projection due to inflation of $85 thousand and incremental increases in postage stamp costs of $13 thousand. 98 As updated in the second round of IRs, 2013 Actuals were $498 thousand less than Projected due to a reduction in mass market bad debt, reduction in repeat call volumes, cost savings in bill printing and postage, as well as fewer meter reads. Of this, $164 thousand is sustainable and expected to be a permanent variance, and FEVI has adjusted its 2014 Forecast accordingly. $334 thousand of the variance between Projection and Actual is temporary as Customer Service is expecting an increase in outbound call volumes, increased postage costs and to meet meter reading service levels for regular and special reads Overall, the 2014 Forecast Customer Service O&M of $4,586 thousand is in line with recent actual costs, with variances due to factors such as inflation, postage stamp costs Exhibit B-1, Application, p. 48; Exhibit B-3, BCUC IR ; Exhibit B-10, BCUC IR Exhibit B-1, Application, pp ; Exhibit B-3, CEC IR ; Exhibit B-9, CEC IR and Exhibit B-1, Application, p. 49. Exhibit B-10, BCUC IR and

26 and varying activity levels by year. FEVI submits that these O&M costs are reasonable and should be approved. (c) Energy Solutions and External Relations (ES&ER) 53. FEVI s ES&ER department is forecasting an increase over 2013 Projection/Actuals due to PST and pension-related adjustments and inflation and also due to activities designed to increase demand for natural gas. As discussed below, FEVI submits that these activities are beneficial for customers and the expenditures supporting them should be approved as filed. 54. The ES&ER department is divided into the following primary functions and responsibilities: (a) Energy Solutions: The group is responsible for managing key customer accounts, developing and implementing activities to add new customers and natural gas load, identifying and assisting in developing service enhancements for existing customers, and communicating with customers regarding service options and available programs. 100 (b) Energy Efficiency and Conservation (EEC): This group is responsible for the development of programs designed to conserve energy, promote energy efficiency or reduce customers energy demand. The expenditures for the high carbon fuel switching (HCFS) program, which is managed by this group, are included in O&M. This approach is consistent with the RRA Decision. 101 (c) Communications and External Relations: This function is comprised of two groups, Communications and External Relations. The responsibilities of the Communications group include the development and execution of both internal and external communications. The External Relations group is responsible for 100 Exhibit B-1, Application, p Exhibit B-1, Application, p. 50.

27 building and fostering relationships with communities, First Nations, key government ministries, and business associations in order to engage these key stakeholders in the Company s various projects and initiatives In 2012 the ES&ER department s expenditure was lower than the 2012 approved amount by $224 thousand due to vacancies which have since been filled, and due to a temporary period of lower cross charges from FEI. 103 The increase in the 2013 projected expenditure over the 2013 Approved O&M was due to 2013 enhancements to the high carbon fuel switching program to increase customer uptake by way of more focused education and communication efforts to both contractors and customers. 104 The HCFS program is discussed further below. 56. The 2014 Forecast is $465 thousand more than the 2013 Projection (or $411 thousand more than 2013 Actuals). 105 This $465 thousand increase over 2013 Projection is due to the following: (a) A $164 thousand increase resulting from the PST and pension-related adjustments, and a $51 thousand increase due to inflation. 106 (b) A $200 thousand increase relating to increasing preferences and demand for natural gas products by way of creating awareness of the benefits of natural gas use, through comprehensive customer education and outreach programs. 107 (c) A $50 thousand increase relating to incentive programs required to improve the price competitiveness of natural gas appliances and to help offset the higher upfront capital costs of the equipment and installation Exhibit B-1, Application, p Exhibit B-1, p. 52, Exhibit B-3, CEC IR and Exhibit B-20, BCUC IR Exhibit B-1, Application, p Exhibit B-10, BCUC IR Exhibit B-1, Application, p Exhibit B-1, Application, p. 52.

28 Information requests focused on FEVI s expenditures on customer education and outreach programs and the HCFS Program, each of which is discussed below. Customer Education and Outreach 58. While customer education and outreach has appeared to attract attention in this proceeding, FEVI has, for the life of the utility, always engaged in customer education and outreach programs to increase preferences and demand for natural gas. This engagement has taken many forms over the years including, but not limited to, direct sales force efforts, participation in industry trade events, municipal and provincial relations, promotion, direct display of natural gas products and direct incentive programs. In 2013, FEVI allocated $133 thousand in additional funds to these activities to support a natural gas heating awareness initiative. This includes the use of various additional communication channels to educate customers on the benefits of natural gas for their space heating needs In 2014, these activities will be increased by an additional $200 thousand for further engagement with existing and potential customers regarding the benefits of natural gas for heating and outdoor living. The increased expenditure in 2014 relates to non-labour dollars as FEVI will manage this initiative with existing staffing levels. 110 The specific planned expenditure includes print, radio and digital media along with evaluation of the results. This plan entails a spring and fall awareness initiative with a focus on educating customers on the benefits of natural gas by way of tailored messaging based on customer segmentation. Maintaining this activity is required as a long-term and sustained effort is required to increase demand and preferences for natural gas products Exhibit B-1, Application, p Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR Exhibit B-10, BCUC IR

29 HCFS Program 60. The HCFS program helps potential customers commit to the financial investment involved in switching from a high carbon fuel to natural gas. The benefits for the customer are reduced energy costs and the superior characteristics of natural gas appliances. Customer satisfaction with the program is high. 112 The benefit for the utility arises from the addition of more customers to the distribution system, thereby managing overall system costs per customer. The benefit to society is reduced GHG emissions, 113 as well as minimizing environmental hazards associated with oil storage tanks, decreasing the need to import propane and heating oil fuel, and improving overall air quality The enhancements FEVI has made to the HCFS Program in 2013 include a more focused marketing effort to both contractors and customers. In 2013 FEVI added a $50 contractor incentive, since contractors provide an effective means for customers to learn about the program. FEVI also added tools such as the online Home Energy Calculator that inform customers about the monetary savings and other benefits of switching from oil to natural gas. Spring and fall marketing campaigns were undertaken to promote the program. 115 Increased participation in response to program enhancements warranted an additional $150 thousand to accommodate the additional interested participants, with an associated increase in annual natural gas throughput of 29,700 GJs over the lifetime of these additional customers FEVI has detailed its expenditures on the HCFS program from 2010 to 2014 Forecast, including the number of customers added and the corresponding additional annual throughput and the additional lifetime throughput. 117 The HCFS program is successful as 112 Exhibit B-10, BCUC IR Exhibit B-4, BCUC IR Exhibit B-1, Application, p Exhibit B-4, BCUC IR Exhibit B-4, BCUC IR and BCUC IR Exhibit B-4, BCUC IR