Pacific Northern Gas Ltd. and Pacific Northern Gas (N.E.) Ltd. ( PNG ) 2012 Pension and Non-Pension Benefits Application. Final Submission of

Transcription

1 Pacific Northern Gas Ltd. and Pacific Northern Gas (N.E.) Ltd. ( PNG ) 2012 Pension and Non-Pension Benefits Application Final Submission of British Columbia Pensioners and Seniors Organization, Active Support Against Poverty, BC Coalition of People with Disabilities, Counsel of Senior Citizens Organizations of BC, and the Tenant Resource and Advisory Centre ( BCPSO et al ) April 30, 2013

2 Introduction On November 30, 2012, Pacific Northern Gas Ltd. and Pacific Northern Gas (N.E.) Ltd. ( PNG Consolidated or PNG ) applied to the BCUC for regulatory changes to the treatment of its Pension and Non-Pension Post-Retirement Benefits ( NPPRB ). At a high level, PNG is seeking rate base treatment of the after-tax value of PNG s pension asset and recovery of the historically unrecovered NPPRB expense. 1 The following are the submissions of BCPSO. For clarity and to focus on the principles underlying the Application, unless otherwise noted, all references in the foregoing refer to PNG s Argument-In-Chief ( AIC ), submitted on April 18, PNG s Pension Asset Submissions BCPSO understands the issues surrounding the pension plan relate to the registered defined benefit plan, which covers all bargaining unit employees plus any other employees who made a one-time election of joining the defined benefits plan. 2 BCPSO further understands that for such defined benefit plans, an actuarial estimate of the discounted present value of future pension obligation is relied upon to determine the funded status of the plan, which in turn drives the legislatively required pension sponsor contributions to the plan. 3 PNG makes cash contributions to the plan according to legislated requirements. The amounts recovered in rates do not correspond to the cash funding requirements but, rather, are equal to the annual pension expense recognized in the utility s financial statements. This expense may differ from the cash funding mentioned above due to differing assumptions made pursuant to applicable accounting standards and changes thereto. But, even absent changes in accounting standards, differences between the cash contributions made and the annual pension expenses recognized may also arise when the funded status is re-evaluated. 4 Therefore, there may arise a material difference between the amounts PNG actually makes and the amounts recovered in rates, and the differences may accumulate over time. Should the cumulative cash contributions exceed the cumulative pension expenses recognized, PNG submits that a Net Pension Asset ( NPA ) is created; should the cumulative pension expenses exceed the cumulative cash contributions, a Net Pension Liability ( NPL ) is created. 1 B-2, slide 4 2 Exhibit B-2, slide 5 3 AIC, para Ibid.

3 Prior to 2008, the cumulative difference between the amounts PNG actually contributed and the amounts recovered in rates was immaterial. However, in each year thereafter, the NPA has grown, driven by lower discount rates and lower returns on pension plan assets. 5 The fact that actual cash contributions made by PNG have exceeded the recorded pension expenses recovered in rates since 2008 has meant that PNG has had to contribute capital to the pension plan on which it has not earned any return (carrying cost): the cumulative difference between contributions and expenses recognized (i.e., recovered), the NPA was $3.9M at the end of 2012 and is expected to increase to $5.4M by the end of Due to the income tax deductibility of defined pension contributions, the net after-tax amounts, for which PNG seeks regulatory remedy, are $2.8M and $3.9M, respectively. 6 PNG is seeking rate base treatment of the NPA and has stated that disallowance of the inclusion of the NPA in rate base in 2013 would result in lowering PNG s 2013 RoE by 30 basis points. 7 Furthermore, PNG submits that [t]he Commission has approved allowing other utilities under its jurisdiction to earn a rate of return on their after-tax pension assets, including the FortisBC group of utilities and, to the best of PNG s understanding, BC Hydro. 8 PNG adds that it does not get any risk premium that compensates it for the fact that it earns no return on its NPA; further, PNG questions the fairness of the BCUC allowing FortisBC Energy utilities to earn a rate base return on its pension assets while denying the same treatment to PNG. 9 PNG notes that should discount rates and returns on pension plan assets increase, the NPA could become a NPL which would result in a ratepayer credit to rate base. In terms of an appropriate return on the NPA, while acknowledging that FortisBC (electric) and BC Hydro (to the best of PNG s knowledge) receive a weighted average cost of debt on their pension assets, Fortis BC utilities (gas) include their pension assets in rate base. In this respect PNG submitted: PNG submits that inclusion in rate base is the appropriate treatment for its Aftertax Pension Asset, given the long-term nature of the asset which has been material for over 4 years. Given that PNG would not be able to find a source of 5 AIC, paras 14 and 15 6 AIC, para 17 7 B-4, BCUC IR and AIC para 18 b) 8 AIC, para 18 c) 9 AIC, paras 18 d) and e)

4 debt to finance 100 percent of any long-term asset and the characteristics of its After-tax Pension Asset are very similar to other long-term working capital assets such as line pack, PNG submits that rate base treatment is warranted. 10 PNG concludes its submissions on the NPA by submitting the following: Providing a return on its After-tax Pension Asset that is below PNG s rate of return on rate base implicitly reduces PNG s approved rate of return on common equity ( ROE ). That is, given that shareholders have to fund the After-tax Pension Asset with a portion of common equity, if that common equity is denied the opportunity to achieve a return equal to PNG s approved ROE, then the opportunity for PNG to achieve its awarded ROE is diminished. PNG submits that if the Commission intends to reduce PNG s approved ROE, it should be done explicitly and not achieved through an implicit method such as providing reduced or zero returns on long-term assets such as PNG s After-tax Pension Asset. 11 BCPSO s Pension Asset Submissions BCPSO accepts that PNG has effectively been supplying capital that attracts no carrying charges since the NPA became material and that this has occurred since And, notwithstanding that the regulatory treatment in other jurisdictions has not been unambiguous with some regulators approving effectively no carrying costs on NPAs, 12 BCPSO accepts that a return on capital required by the utility to carry out its operations is warranted. With respect to the appropriate return on the NPA, BCPSO submits the following: as acknowledged by PNG, the returns approved by the BCUC have been weighted average cost of debt or weighted average cost of capital (i.e., rate base treatment). While BCPSO does not take a strong position on what the appropriate rate of return should be on the regulatory asset, BCPSO notes that the characterization of the NPA as a long lived asset (and therefore, one that could not be 100% debt financed by outside investors) is not entirely correct. As PNG admits, the long lived asset could turn out to be short lived even becoming a liability should asset plan returns and discount rates increase. BCPSO submits that any increase in asset plan returns is likely to be correlated with an increase in discount rates. 10 AIC, para AIC, para AIC, 21, Table

5 BCPSO submits that the appropriate return is either the weighted average cost of debt or weighted average cost of capital. PNG s Non-Pension Post-Retirement Benefits ( NPPRB ) Submissions This issue is related to the costs and recovery of said costs for the provision of postretirement benefits such as dental and medical services to retirees. Unlike the pension asset issue, which is forward looking, BCPSO understands the historically unrecovered NPPRB issue to apply only to past unrecovered expenses, i.e., pre-2011, given that the BCUC approved full accrual accounting of NPPRB expenses for PNG in BCPSO understands that this issue arose as a result of moving from a pay as you go ( paygo ) approach to cost recovery to a partial accrual method in the period , and the resulting under-recovery of costs during this period. PNG notes that its approval to move from paygo was conditioned, uniquely, on creation and funding of a trust structure, a Retirement Compensation Arrangement ( RCA ). 14 PNG s evidence is that for the period up to 2011, the aggregate recoveries in respect of NPPRB have been $2.5M less than the full accrual actuarial expense. 15 Further, under USGAAP, PNG s submissions are that: Failure by PNG to obtain Commission approval to recover the Historical Unrecovered NPPPRB Expense, under an amortization method that is not backend loaded, prior to 2025 will result in a significant write-down of PNG s retained earnings. This write-down would be expected to be approximately $2.5 million. A write-down of this amount is very significant for a company of PNG s size and would represent an approximate one-third reduction in PNG s consolidated utility net income for the 2013 year. Such a write-down would reduce PNG s common equity and would severely impact PNG s ability to earn its allowed ROE. 16 Additionally, in respect of possible Commission denial of the proposal, PNG submitted: Denial by the Commission of recovery of the Historical Unrecovered NPPRB Expense infers that PNG shareholders are solely at risk for changes to recovery methodologies previously recognized and approved by the Commission. A corollary of this rationale would be the treatment of deferred income tax balances that PNG had previously recovered under the accrual method. If PNG s 13 B-2, slide 9 14 AIC, para AIC, para AIC, para 30

6 shareholders are intended to be at risk for changes to recovery methodologies previously recognized and approved by the Commission, then when PNG was ordered by the Commission to switch to the flow-through method of recovering an income tax provision in its rates, the resulting impact should have been solely to the account of PNG s shareholders. Using that allocation of risk, PNG s shareholders would have retained the deferred income taxes previously recovered from customers. 17 In materials supplied for the February 4, 2013 Workshop on these issues, PNG provided three choices (or one choice and two alternatives) for the BCUC to consider with respect to the applicant s proposal: (i) do nothing, (ii) use 2012 RRA Proposal, and (iii) Per Pension Application. 18 PNG s remarks on the referenced slide indicate that it did not find the do nothing choice acceptable. In its AIC, PNG added one alternative, proposing three alternatives acceptable to it. The first two (Methods 1 and 2) involve continuing use of the RCA, while the third choice, Method 3, would amortize the unrecovered NPPRB with an equal, offsetting, amortized draw-down of its deferred income tax balances, on the proviso that PNG would no longer have to contribute historically unrecovered NPPRB to its RCA. Further, under Method 3, PNG would credit rate base to the extent that NPPRB costs recovered in rates exceeded premium cash costs. 19 PNG submitted that, in BCPSO s words, funds put into an RCA trust were a bad deal for ratepayers, given that 50% of the funds put into such a trust effectively earned no return at all. 20 BCPSO s Non-Pension Post-Retirement Benefits ( NPPRB ) Submissions BCPSO supports PNG s submissions that it is appropriate for PNG to recover historically unrecovered NPPRB expenses. BCPSO does, however, submit that the analogy between NPPRB recovery and the drawdown of deferred income taxes 21 is flawed: for utilities, the deferred tax issue arises because the utility is collecting amounts from ratepayers in respect of income taxes that may never, and in the case of a utility with increasing rate base will likely never, be paid 17 AIC, para B-2, slide AIC, para 34 c) 20 AIC, para AIC, para 33

7 by the utility. On the contrary, NPPRB will certainly be paid. Therefore, BCPSO, rejects this analogy. Notwithstanding the preceding, BCPSO is persuaded of the inefficiency associated with funds put into the RCA and therefore supports Method 3 as outlined in paragraph 34 c) of PNG s argument as an appropriate method for recovering the $2.5M of NPPRB at issue. All of which is respectfully submitted. Sincerely, BC Public Interest Advocacy Centre Original signed by: Eugene Kung Barrister & Solicitor Counsel for BCPSO et al.