CENTRA GAS MANITOBA INC FIXED-RATE PRIMARY GAS SERVICE

Transcription

1 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section., page Centra indicates that its proposed,, and -year fixed-rate primary gas service will initially be launched in the SGS and LGS markets, but that the company will consider offering other products (e.g. and year fixed-price service) to small-volume customers, and fixed-price products generally to the larger customer classes in the future. 0 Please confirm that the approvals sought in this proceeding would apply only to fixed- rate primary gas services with terms of,, or years offered to SGS and LGS customers. If not confirmed, please explain. Centra is not limiting the approval sought for,, and year options detailed in this Application. Centra is seeking approval of a formula to determine future fixed-rate offerings as market conditions dictate. The rates for each contract offering can be reviewed by the PUB at a subsequent GRA to ensure the formulaic approach was correctly applied. Please refer to the response to the PUB s Additional Question.

2 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section., Anticipated Customer Demand Centra indicates that demand for its proposed new services will initially be less than five percent of natural gas customers. (a) In this context does initially refer to only the initial enrolment period that is contemplated for early 00? If not, what does it refer to? 0 Initially refers to at least the first five years of Centra offering fixed-rate products. (b) Does Centra expect that demand for its fixed-rate primary gas services will increase over time, e.g. as existing long-term fixed-price contracts between customers and other marketers expire? Please provide copies of all studies, memoranda, or forecasts that discuss or indicate Centra s expectations with respect to demand for Centra s fixed-rate primary gas services in the long term, e.g. over a five-year horizon. Please refer to the responses to PUB/Centra and PUB/Centra.

3 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section.., Market Price Risk Management; Supplementary Information, Q., p.. The referenced section describes the principles and procedures that Centra says that it will apply in placing derivative transactions for fixed-rate primary gas products. 0 (a) Please describe in detail the fixed price swap transactions that are contemplated. For example, would those transactions provide for a price swap for a constant monthly volume equal to the expected annual consumption of forecast customers divided by? If not, what would the volume arrangement be? Would the bids solicited by Centra state a floating price that Centra wants to receive, and then ask bidders to state the fixed price that they would require in return? If not, please describe the price transaction. If so, what floating price would Centra want to receive? (E.g. an AECO/NIT monthly index plus an AECO/Empress differential, an Empress monthly index, the base gas price under the Nexen contract, the swing gas price under the Nexen contract, a weighted average of the two, etc.) 0 The underlying floating price index to which Centra would be exposed for its physical supply purchases under its Fixed-Rate Primary Gas Service offerings is the AECO C & NIT spot index. Therefore, Centra will seek to place over-the-counter fixed-for-floating

4 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of financial swap instruments at the outset of each offering in order to mitigate its risk exposure to changing AECO C & NIT market prices over the life of each Fixed-Rate agreement. 0 For each specific Fixed-Rate Primary Gas Service offering, Centra will prepare a schedule detailing the monthly Primary Gas volumes that it seeks to hedge on behalf of each, and -year offering. These monthly volumes will represent the accumulation of forecast monthly normal weather consumption for each SGS Residential, SGS Commercial and Large General Service customer forecast to sign on to the offering, adjusted for forecast customer conservation and forecast customer attrition during the life of each agreement. These volumes for each of the, and -year fixed-for-floating swap instruments that Centra intends to place will in turn be provided to a minimum of three derivatives hedging counterparties for their use in providing Centra with price quotes for each of the instruments in question. Centra will then proceed to entertain simultaneous price quotes from each participating counterparty for the -year swap instrument. The counterparty providing the lowest swap price quote will be awarded the business for that one instrument. The same process will then be repeated for each of the and -year instruments in succession. 0 Subsequent to the placement of each set of swap instruments as described above, as each month s AECO C & NIT One Month Spot Index Price settles, the index price will be compared to the strike price of each of Centra s existing fixed-price hedge instruments. In cases where the strike price of Centra s swap is less than the index price, the difference, multiplied by the specific volumes hedged for that instrument for the month in question, will become due and payable to Centra from its counterparty. In circumstances where the strike price of Centra s swap is greater than the index price, the difference, again multiplied

5 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of by the volumes hedged for that month, will become due and payable to the counterparty from Centra. (b) Please confirm that the base commodity cost of fixed-price offerings will be set equal to the fixed price quoted by the successful bidder(s) in a process like that described in (a)? If not confirmed, please explain. Confirmed. 0 (c) Would it be open to Centra, under the approvals that it seeks from the Board, to establish the prices for fixed-rate products based on bids obtained for fixed-price swaps, but then manage the market price risk associated with these services via other techniques (e.g. physical purchases at a fixed price, use of options, leaving the position open so that Centra takes the market price risk, etc)? When, if at all, would Centra consider using alternative approaches? Why or why not? 0 Centra is not open to managing its market price risk exposure by means other than that described in part (a) above, combined with a volumetric risk premium to manage unhedgeable risks that cannot be managed via financial instruments. For a description of the various risk management alternatives considered by Centra, along with the reasons that other alternatives were rejected, as well as why Centra s recommended approach was selected, please refer to the response to Additional Question.

6 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Application, Tab ; Supplementary Information, Q., p. ; PUB/Centra (d); 0 Tab describes the principles and procedures that Centra says that it will apply in managing risk associated with the provision of fixed-rate primary gas products. Centra indicates in the Supplementary Information that it will physically source supply for these products through its existing gas supply arrangements, including the current Nexen contract. In PUB/Centra (d) the Board has asked Centra to describe how it will hold system and marketer customers harmless from any losses that may be incurred in the fixed-price program. 0 (a) Given that Centra intends to source physical supply for fixed-rate services through its existing gas supply portfolio, and manage risks associated with the program through hedging activities, please provide a detailed explanation of how volumes and prices associated with fixed-rate services and system supply services will be accounted for so as to ensure that system customers will not bear any of the gains or losses associated with providing fixed-rate services. For example, without limiting the generality of this request, for PGVA purposes will Centra deduct from the gas cost balances that would otherwise be recovered through system rates the costs associated with the volumes that are purchased for fixed-rate customers? If not, please explain. If so, how and when will Centra determine what volumes are

7 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of purchased for or are attributable to fixed-rate customers (e.g. is there an annual true-up? Quarterly?) And how will the costs of those volumes be determined? (E.g. average base Nexen price for a whole year? Average Nexen swing price? A weighted average? Or will prices be measured independently over the year to reflect consumption?) Please discuss with particular reference to how the accounting method will handle market price variances (i.e. differences between actual system supply purchase prices and the floating price for which swaps were obtained) and volume variances (i.e. differences between fixed-rate volumes actually purchased and sold, forecast fixed-rate volumes, and volumes for which swaps are put in place. 0 (b) Please also discuss whether and how the overall design of the program and the proposed accounting methodology will ensure that system customers will not be adversely affected by the program in relation to unit storage costs that are ultimately recovered from them or the pattern of gas purchases (e.g. between base and swing volumes under the Nexen contract) that Centra makes for system customers. Response to (a) & (b): 0 Quarterly Primary Gas Rate customers will not be adversely affected by the introduction of Fixed-Rate Primary Gas Service. Centra s physical operation of the system will be indifferent to whether the gas purchased is for customers of its default offering or its fixedrate offerings. Each fixed-rate offering will be: Credited with the actual revenues collected from the customers on that agreement on the basis of: (actual volumes consumed x actual Primary Gas billing percentage x Fixed-Rate Primary Gas Service Contract Billed Rate).

8 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of Then be debited with the actual cost of the underlying physical Primary Gas supply consumed by the customers on that agreement on the basis of: (actual Fixed-Rate Primary Gas Service volumes consumed x average monthly unit cost of Primary Gas supply excluding Quarterly Primary Gas derivatives hedging impacts). Netted against the above two quantities will be the settled hedging impacts attributable to the hedges placed on behalf of the customers associated with each discrete Fixed-Rate Primary Gas Service contract on the basis of: ((Hedge Strike Price Actual AECO C & NIT Monthly Index Price) x forecast Primary Gas consumption volumes determined at the time of hedge placement). 0 The net of the above-noted three quantities will constitute the net profit or loss on each Fixed-Rate Primary Gas Service contract each month. Centra will take such short-term profits or losses into retained earnings with the objective of offsetting profits and losses over the long term. It should also be noted that Primary Gas volumes hedged for Fixed- Rate Primary Gas Service based on forecasts at the time of hedge placement will inevitably be different than the Primary Gas volumes consumed on an actual basis; however, actual revenues will be netted against actual costs. 0 Thus, Quarterly Primary Gas Rate customers will be held harmless from any Fixed-Rate Primary Gas Service impacts. All customers will pay the same average inventory cost of storage volumes, based on their actual volumes consumed. Centra s pattern of gas purchases will be indifferent to Fixed-Rate Primary Gas Service. Gas purchases under Centra s existing contract with Nexen Marketing, whether BASE or SWING volumes, will be made in aggregate and not on the basis of whether the customers being served are availing themselves of Centra s Quarterly Primary Gas Rate or Fixed-Rate Primary Gas Service offerings.

9 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section.., Volumetric Risk Management; Supplemental Information, Response to Q.. See also PUB/Centra. 0 The referenced section of the Application discusses volumetric risks faced by Centra as a provider of fixed-rate primary gas service and indicates that Centra proposes to address those risks by adding a volumetric risk premium of between % and % to hedged prices. In the response to Q. in the Supplemental Information Centra provides further detail on the results of the analysis that supports the requested volumetric risk premium range, but CAC/MSOS would like further information on the analysis that was conducted and the results of it. 0

10 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of (a) Please provide, for at least the SGS Residential, SGS Commercial, and LGS customer classes, the workpapers, spreadsheets, analyses, graphs, charts, and other explanatory documents that show the derivation of the results shown in the table on page of Q. in the Supplemental Information, together with sufficient explanatory or documentary material to allow parties to fully understand the calculations that were performed and the data that underlay Centra s analysis. 0 Centra is unable to provide the requested information as to do would disclose Centra s proprietary model. Centra therefore respectfully declines to provide the requested information. (b) Please provide a detailed qualitative and quantitative description of how Centra will establish the volumetric risk premium for each service offering. Please include a discussion of what factors other than the term of the service offering are relevant and why, and explain how term and those other factors will affect the calculation or determination of an appropriate volumetric risk premium. Please refer to the response to PUB/Centra 0. 0 (c) If Centra were fixing volumetric risk premiums for,, and year fixed-rate primary gas services now, what would they be? Please explain and show the derivation of the risk premium for each term of agreement. Please refer to the response to PUB/Centra 0.

11 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of 0 (d) If it is assumed that variations in market prices (e.g. fixed prices versus floating prices over the same period) and in consumption volumes relative to forecast are random, does Centra agree that, under its proposed pricing mechanism for fixedprice services, Centra would be expected, in principle, to neither make a profit nor suffer a loss on these services in the long run, so that no risk premium would be necessary? Why or why not? If Centra agrees with this proposition, in whole or in part, does Centra believe or have evidence to suggest that in the context of natural gas markets and its system such variations may not be random or may be linked in such a way that they create asymmetrical risks that require Centra to charge a risk premium in order to be kept whole on an expected basis over the long term? If so, please explain. 0 The relevant consideration in terms of risk management is whether each of these two types of risks are positively correlated with one another. Positive correlation in this case meaning when market prices rise, is there a tendency for customers consumption to be higher than normal and for consumption to be less than normal during periods of falling market prices? This is a critical consideration, because if consumption tends to be higher than forecast during periods of high prices, consumption in excess of that forecast will be fully exposed to these higher prices. Alternatively, if consumption tends to be lower than normal during periods of falling prices, fixed price hedges placed on forecast normal consumption volumes will settle out of the money, with the resulting hedge costs being spread over smaller actual consumption volumes relative to those hedged, thereby magnifying this negative cost impact. It is important to note that regardless of whether or not it is concluded that some degree of positive correlation between the two exists, no conclusions can be drawn regarding the existence or absence of any direct cause and effect relationship between the two.

12 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of 0 On the basis of its modeling of the May 000 through March 00 period, Centra cannot support the premise that Centra s volume and price risk are random and completely independent of one another such that gains and losses will cancel each other out, thereby negating the need to apply Volumetric Risk Premiums to its Fixed-Rate Primary Gas products. Centra bases this conclusion on its modeling of Fixed-Rate contract results which assumed that no Volumetric Risk Premiums were applied to hedged prices over the abovenoted eight year period. The results of these analyses indicate that without the application of any volumetric risk premiums, leaving all other elements of Centra s recommended approach and product design unchanged, the average per customer result across all completed agreements would have been a net loss for each small volume customer class and term of agreement. In addition, the majority of completed agreements would have ended in a net loss position. These results are summarized in the following table: Completed Contract 0% Volumetric Risk Premium -Year -Year -Year SGS Residential Average Gain/(Loss) Per Customer ($) ($) ($) SGS Residential % of Completed Agreements Ending in a Net Loss % % % SGS Commercial Average Gain/(Loss) Per Customer ($) ($) ($) SGS Commercial % of Completed Agreements Ending in a Net Loss % 0% % 0 LGS Average Gain/(Loss) Per Customer ($) ($) ($,) LGS % of Completed Agreements Ending in a Net Loss % 0% 00% These results indicate that some degree of positive correlation between market price and volumetric consumption variances exist in Centra s market, at least during the eight year period studied. It is therefore appropriate for customers electing Fixed-Rate Primary Gas Service to pay a Volumetric Risk Premium reflecting the cost of this asymmetric risk being assumed on their behalf by Centra.

13 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section.., page at line ; Response to Q. in Supplementary Information. Centra suggests that longer contract terms imply lower volumetric risk premiums, basically on the ground that with a longer term agreement there is a greater likelihood that positive and negative volumetric effects will cancel each other out. 0 (a) Does Centra agree that if its short term (e.g. year) fixed-rate primary gas offerings remain a viable business then over a series of such agreements, even with different customers, positive and negative market price and volumetric effects will tend to cancel each other out so that the required risk premium for the business of providing -year services (as opposed to individual -year services) will be similar to the premium required for, e.g. -year agreements? Why or why not? 0 A critical factor influencing the absolute level of gain or loss on -year Fixed-Rate agreements over time is the mix of customers signing up for each discrete -year product offering through time. For example, if 0,000 customers sign onto a single -year Fixed- Rate offering that generates a significant loss on a per customer basis, the absolute amount of financial loss on that agreement will be much greater when multiplied by 0,000 customers than it would have been had only,000 or 00 customers signed on to the

14 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of agreement. Should customer demand for subsequent -year offerings that generate net gains on a per customer basis never approach the level of customer demand for the offering that generated material overall losses, many years may have to elapse before the small absolute gains of the lesser subscribed subsequent -year offerings offset and exceed the previous losses, if ever. 0 Having stated the foregoing, it is Centra s intention in most circumstances to apply the same % Volumetric Risk Premium to -year product offerings as to and -year offerings as a matter of course. A % Volumetric Risk Premium is expected to be adequate in reducing the likelihood of circumstances developing like as described in the previous paragraph above. (b) For the hypothetical historical -year contracts examined in the study described in Q. of the Supplementary material, please provide, with supporting calculations and workpapers, the risk premium that would have been required to meet the three risk hurdles described for the study on the assumption that profits and losses associated with all of the -year contracts were aggregated for analytical purposes as suggested in (a). 0 Due to significant differences in annual consumption and financial results under different Volumetric Risk Premiums, contract financial results are not additive, or blendable on a per customer basis. In any effort to blend results across classes of customers, one again encounters the dilemma of assumed -year term customer mix between customer class and historical time period. If one were to model an essentially infinite combination of customer mix scenarios, the volumetric risk premiums required to achieve Centra s risk hurdles for -year agreements across all three blended small volume customer classes

15 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of would be identical to the risk premiums noted in Centra s response to Additional Question.

16 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section.., Program Costs; Supplementary Information, Q., p., Program Budget. In the Supplementary Information, Q., Centra presents a detailed breakdown of the program budget over a five-year horizon. 0 (a) Please indicate Centra s current expectations with respect to the periods that will constitute the Program Years - referred to in the table, e.g. do these periods coincide with Centra s rate years, and if not what periods are contemplated? What period will constitute the first Program Year? The program years in the table in the response to Additional Question correspond to Centra s fiscal years which run from April st to March st of the subsequent year. The first program year represents the three month period from January, 00 to March, (b) Based on the forecast growth in ABC Fees over the period it appears that the Program Budget contemplates growth in customers and volumes over the forecast period. Please provide, for each of the program years, the total budgeted customer numbers (by customer class, i.e. SGS Residential, SGS Commercial, and LGS), and per-customer and aggregate (by class) annual volumes (cubic meters). Please

17 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of include a brief explanation of the basis on which the customer number and volume forecasts have been made. Please also show, based on these numbers, the calculation of the ABC Fee for each of the program years. Please refer to the responses to PUB/Centra and PUB/Centra. The following table provides a calculation of the ABC Fees: Number of new contracts signed in Program Year Number of active contracts flowing in Program Year ABC Fees Year 0 $0 Year,, $, Year,, $,0 Year,, $,00 Year,,0 $0, Total, $, $,00 Average Annual ABC Fee (rounded) 0 (c) Please explain in more detail what costs are included in the $, Program Start up Costs and explain how the total was calculated. The following table contains the components of the program start up costs: Labour Marketing Specialist $,0 Contract Administrator $,0 Business Communications $,00 Staff Training (Call Centre, District etc.) $,00 Overhead $, Total Labour $, Non-Labour Marketing $ 0,000 Total Non-Labour $ 0,000 Total Program Start Up $,

18 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of (d) Please describe the IT start up costs of $0,000 that are presented, and explain why those costs are forecast to be incurred in the second program year. Given that the first Program Year is a partial year (from January to March, 00) and the relative number of applications that are forecast to occur for that time period, a simple database or spreadsheet would be used to initially record contract administration information. Centra is planning to undertake more significant system development during the second program year. 0 (e) Please explain what is meant by % Full Time EFT, what the stated percentages represent, and how they were calculated. Please also describe how those percentages were applied to generate the corresponding annual dollar amounts in each category for the five program years. 0 The acronym EFT refers to an Equivalent Full Time employee position. Thus, % Full Time EFT refers to a fraction of a full time equivalent position. The amounts were calculated by estimating the amount of time an employee would need to work on the specific functions of the program and this amount was divided by the available annual hours. Each annual labour time estimate was multiplied by the labour activity rate for that position to determine the projected annual labour cost.

19 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of (f) Why is the total annual amount for Gas Supply the same for year as for the remaining years, while in each other category the annual amounts are lower for year? 0 The vast majority of the work to be performed by Gas Supply in support of these offerings is not proportional to the number of customers electing Fixed-Rate Primary Gas Service. The most significant effort expended by Gas Supply will be related to the ongoing management and assessment of the Fixed-Rate Primary Gas Service risk management program after the initial placement of hedges for each product offering. As a result, annual Gas Supply costs in support of these products are expected to similar regardless of the level of customer participation. In preparing this response, it is noted that the costs for Gas Supply in Year should be reduced to $, to reflect the fact that Year is a partial year. (g) Why do the ratios between the amounts for year and the amounts for the remaining years appear to differ amongst the labour categories other than Gas Supply? 0 Since the program is planned to be launched in January, 00, there is only % of a year to be included in the first program year. Please refer to the response to part (f). (h) Assuming that customer numbers and total annual volumes are forecast to be growing, the program budget appears to show that labour costs do not vary with customer numbers/volumes while new and renewal contract administration and associated overheads do. Please confirm and explain the basis for this forecast and

20 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of how the contract administration costs are calculated from customer numbers/volumes figures. Some labour costs, such as Business Communications, do not vary greatly with the number of customers that may elect to participate in the Fixed-Rate Primary Gas Service. On the other hand, labour costs for load forecasting, Contact Centre, and contract administration functions will vary with the number of contracts offered or with the number of customers that elect to switch to the Fixed-Rate Primary Gas Service. 0 The contract administration function includes contract renewal, termination, and data management of new and renewed contracts. It is estimated that new contracts will require 0. hours each to process, while renewal contracts will require 0. hours of total administration time per contract. These rates are multiplied by expected contract activity then multiplied by the labour activity rate for that function to determine annual labour cost for contract administration. 0 (i) (j) Please confirm that the costs shown for new and renewal contract administration and associated overheads are not duplicative of any of the forecast costs shown in the labour category. Confirmed. Centra has indicated that it will administer the program using existing resources. Please confirm that the services in the various categories under the heading labour and the services in the new and renewal contract administration (and associated overheads) categories are all assumed to be provided using existing

21 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of resources, while the costs listed under the category Marketing are assumed to be incremental. If not confirmed, please explain. Confirmed, the costs under Marketing are non-labour costs which have been budgeted for the development of marketing and promotional materials.

22 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section.., Program Costs; Supplementary Information, Q., p.. In the Supplementary Information, Q., Centra indicates that the remainder of the costs identified in the table [apparently referring to costs other than advertising and promotional items] are already embedded in Centra s distribution rate... 0 (a) Does Centra agree that it is not appropriate for it to recover through its fixed-rate contracts costs that are already embedded in Centra s distribution rate? If not, why not? If so, does Centra intend to eliminate costs that are associated with providing fixed-rate services, and that will be recovered through the prices charged for fixed-rate services, from its distribution rates for future periods? Why or why not? 0 Centra seeks to implement Fixed-Rate Primary Gas Service early in 00, but the timing of this introduction will predate a future General Rate Application in which all rates would be reviewed and adjusted. In future General Rate Applications, it is expected that costs associated with providing fixed-rate services would be embedded in the Fixed-Rate Primary Gas Service Program Cost Rate and would not be allocated to either distribution rates or system supply Primary Gas overhead rates.

23 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of Centra envisions an interim solution that results in the development of a reasonable Fixed- Rate Primary Gas Service Program Rate that reflects the forecast cost of providing that service to customers. Centra accepts that some of the costs to be incorporated into the Program Rate may be currently embedded in previously approved distribution rates. Depending upon the materiality of such costs, which will be determined in part by the overall rate of uptake of the Fixed-Rate Primary Gas Service, Centra will propose a treatment of those costs. 0 (b) To the extent that the first program year for fixed-rate services overlaps with a period for which Centra s distribution rates have already been determined on a final basis, would Centra agree to refund costs that will be collected twice (i.e. once through distribution rates and once from fixed-rate customers) to ratepayers, e.g. through a one-time credit for the first test year after the currently-approved distribution rates expire? Why or why not? As noted in the response to part (a) above, Centra will propose an appropriate treatment for the amount of Program Cost that may be embedded in currently approved rates, and cannot speculate as to the possible disposition of any costs until the full extent and materiality of the cost recovery is known.

24 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Tab, section., Regulatory Process; Supplementary Information, Q.. Centra was asked to provide particulars of the statutory and legal framework supporting Centra s proposed methodology for rate setting. 0 At page of the response, final paragraph, Centra refers to the Board s ability to refrain from exercising its rate-setting powers where the Board finds as a question of fact that there is sufficient competition to preserve the public interest. Please confirm that Centra has not presented evidence in this case or in the Competitive Landscape Proceeding that was intended to persuade the Board that Centra faces sufficient competition in the supply of any of its services that regulation of the prices of those services is not required under the sections of the PUB Act that are referred to. If not confirmed, please explain. Centra has not filed evidence in this proceeding relating to the state of the competitive market in Manitoba.

25 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA 0 Reference: Tab, section., Regulatory Process, page. Centra indicates that it expects the Board to undertake a review of its rate-setting for fixed-price primary gas service on a post facto basis through the next regulatory proceeding and suggest that this type of review will provide assurance that the rates were calculated in accordance with the approved framework. 0 (a) Does Centra believe that the reasonableness of the volumetric risk premiums fixed by Centra would be subject to review by the Board in its post facto reviews? If not, why not? If so, what remedy would be available to customers if the rates set by Centra were found not to be just and reasonable? 0 Centra is proposing a risk premium range of between % and % as a reasonable range within which it would be authorized to operate in the rate formulation of each successive fixed-rate offering. Company management will exercise judgment in the selection, within that range, of the level of risk premium to be incorporated into each offering based upon the circumstances at that time. Any retrospective review of the appropriateness of the level of risk premium should be confined to ensuring that the risk premium selected did not deviate outside of the proposed range of % to %. If the Company determines that a

26 CAC/MSOS/CENTRA 0 October, Fixed-Rate Primary Gas Service Page of more appropriate range of premium should be applied to future contracts it will bring this matter before the PUB for review. Further, should the PUB desire to review the range of premiums to be applied to future contracts, it is within the PUB s jurisdiction to require the Company to review and/or change such rates. 0 (b) When, and in what form, will Centra advise the Board and interested parties of the financial results of the fixed-rate primary gas program, in order that the Board and interested parties will be able to satisfy themselves that Centra is neither making a profit nor incurring a loss on the program over the long term, as indicated at Tab, page, line? As noted in the response to PUB/Centra 0, Centra intends to provide information to the PUB in the course of either a Cost of Gas Application or a General Rate Application.

27 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: PUB/Centra - In the referenced Information Request the Board asks Centra to indicate any reservations it may have about the Board making use of Centra s evidence in its most recent GRA and the Competitive Landscape Proceeding. 0 Please indicate whether Centra would object to parties relying in their written submissions in this case on evidence in either the most recent GRA or, in particular, the Competitive Landscape Proceeding. If and to the extent that Centra has concerns about that, please discuss the nature and basis of those concerns and the extent to which, or the conditions under which, Centra considers that it would be appropriate and fair for parties to rely on that evidence. 0 Centra, in the response to PUB/Centra, notes that issues of the natural gas market in Manitoba were widely canvassed in the course of the Competitive Landscape Hearing and the Board has enunciated its decisions on those matters in its Order No. 0/0. Centra emphasizes that its current application is a direct outcome of Board Order 0/0 and responds to a directive requesting an application for a fixed-rate offerings. Centra understands that no interveners have requested to file intervener evidence, and the process approved by the PUB for consideration of this Application does not include time for filing and testing of Intervener

28 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of evidence. Therefore, Centra does not support the unrestricted incorporation of prior evidence into this proceeding. However, intervenors and the PUB are free to pose additional information requests to Centra in the next round in which specific pieces of evidence may be identified or requested. Centra reserves the right to assess the nature of such an information request and provide its most appropriate response in light of the differences in scope between this Application and those prior proceedings.

29 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Response to CAC/MSOS-Centra The question was intended to explore the scope of the approvals being sought by Centra in this case. The response appears to indicate that the approvals sought by Centra would authorize it to provide fixed-rate services to customers in all customer classes for any term from one to five years. 0 (a) Please confirm that the approvals sought by Centra would authorize the provision of two and four year fixed-price services to SGS and LGS customers. Confirmed. (b) Please confirm that the approvals sought by Centra would authorize the provision of fixed-price services for terms of from one to five years for all larger customer classes. Confirmed.

30 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Response to CAC/MSOS-Centra (a), page, first full paragraph The question asked for a description of the swap transactions that Centra contemplates using to mitigate market price risk. CAC/MSOS understand the answer to say that, for any one service offering that is being hedged, the monthly volume for which prices are being swapped will vary over the year, presumably in a way that reflects varying consumption or purchases over the year. 0 (a) Please confirm that CAC/MSOS understanding is correct. If unable to confirm, please explain. Confirmed. (b) If the answer to (a) is confirmed, will monthly swapped volumes follow the forecast monthly consumption by fixed-rate customers, forecast Empress delivery requirements, or some other pattern? Please explain. 0 Monthly swapped volumes will be the forecast normal weather monthly consumption for fixed-rate customers, adjusted each month for forecast customer attrition and customer conservation.

31 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Response to CAC/MSOS-Centra ; Response to CAC/MSOS-Centra (a) and (b); Response to PUB-Centra (c). The response to CAC/MSOS-Centra says that for each service offering Centra will track by month (a) actual revenues from fix-price service customers, minus (b) actual cost of gas sold under fixed-price contracts based on the actual monthly cost of Primary Gas purchased by Centra (i.e. under the Nexen contract currently), netted against (c) hedging gains and losses for the service offering. 0 Based on the response to CAC/MSOS-Centra it appears to CAC/MSOS that the price charged to fixed-price customers will equal the sum of (a) a fixed AECO/NIT swap price, (b) a program cost rate, and (c) a risk premium to account for the risk associated with volume variances relative to forecast. 0 Based on the response to CAC/MSOS it appears to CAC/MSOS that the prices charged to fixed-price customers will not include any explicit component to account for the cost of transportation (or, equivalently, market price differentials) between AECO/NIT and Empress even though, for the purposes of calculating the cost of providing fixed-price service, that transportation component (as well as some small flexibility premiums) is included through their inclusion in the Nexen price(s). The result would appear to be

32 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of that, ignoring the risk premium and the unexpected volume variances it is supposed to compensate for, Centra will systematically under-recover its costs by some amount that reflects the average AECO/NIT-Empress cost differential and average flexibility premiums (e.g. $0./GJ in total). (a) Please indicate whether, in Centra s view, CAC/MSOS understanding of this matter is correct. If not, please explain. 0 The stated understanding is incorrect. Please see the response to PUB/Centra (b) and (c). (b) If CAC/MSOS understanding is correct, is it Centra s position or intention that any under-recovery will be recovered through the risk premium? Please see the response to part (a) above. 0 (c) Does Centra agree that $0./GJ is a reasonable estimate of the difference between the base cost of fixed-price supply (i.e. the AECO/NIT fixed swap price) and the expected cost of gas under the Nexen contract, having regard to NGTL s FT-D toll and the terms of the Nexen contract? Why or why not? If not, what would Centra consider to be a reasonable estimate of that cost differential? It is difficult to estimate the difference between the AECO/NIT fixed swap price and the cost of gas under the Nexen contract, including the AECO/Empress basis differential and transportation tolls. These costs have displayed significant variability with the transportation toll on NOVA as varying between $0./GJ to $0./GJ in recent years and the

33 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of AECO/Empress Differential varying even more broadly from negative $0.0/GJ to a positive $0./GJ. Given that these costs are recovered in the Volumetric Risk Premium it is not necessary to separate and track these items. (d) Would Centra consider including an explicit AECO/Empress price differential component in the formula for prices under fixed-price contracts (e.g. at $0./GJ or some other estimate Centra may favour)? No, for the reasons cited in part (c) above. 0 (e) If Centra were to include an AECO/Empress price differential component in the formula, does Centra agree that it would not require as large a risk premium as it now proposes? Why or why not? The question assumes that the combined transportation toll and basis differential is fixed for the entire duration of the contract, this is not the case as it is subject to variability and forecasting error. Centra is of the view that given the variable nature of these cost components that they are more appropriately embedded in the Volumetric Risk Premium. 0 (f) Please confirm that the first table in the response to PUB-Centra (c) Schedule reproduces the first half of the table presented at page of the response to Additional Question. If not confirmed, how do they differ? Confirmed.

34 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of (g) Please reproduce all of the tables presented in the response to PUB-Centra (c) Schedule using the original input data except that the prices for fixed-rate services are assumed to also include an additional $0./GJ AECO/Empress price differential component. If the response to (c) indicates that Centra does not consider the $0./GJ estimate to be reasonable, please also provide new versions of the tables using a value that Centra considers to be appropriate. 0 As the identification of an explicit AECO/Empress price differential/transport toll component in the determination of fixed-rates would result in identical billed rates as described in part (e) above, the results would be identical to the information already provided in PUB/Centra (c).

35 CENTRA GAS MANITOBA INC. October, 00 Page of 00 FIXED-RATE PRIMARY GAS SERVICE RESPONSE TO INFORMATION REQUESTS OF CONSUMERS ASSOCIATION OF CANADA (MANITOBA) LTD. AND MANITOBA SOCIETY OF SENIORS CAC/MSOS/CENTRA Reference: Program Costs; Application Tab, page ; Response to Additional Question, page ; Responses to PUB-Centra (a) and (b); Response to PUB-Centra. 0 The Application proposes a program cost rate of $0.0/m based on program costs of $,000 and expected volumes of, 0m. The response to Additional Question shows a series of annual cost calculations for each of the first five program years, none of which appear to add up to $,000, although the average annual program costs over that period ($,,/) is approximately $,000. The response to PUB-Centra (a) says that the cost allocation model produces an allocation to fixed-price services of $,, presumably for 00/00, although that is not specified, which when divided by, 0m results in a program cost rate of $0.00/m. The response to PUB- Centra (b) shows five year average program costs by cost category, which reflect the program costs shown in the Application, revised to reflect a recalculated ABC fee amount and the addition of $,000 of indirect costs from cost allocation study, for a total of $,000. This again is said to result in a program cost rate of $0.00/m. (a) What program cost rate is Centra applying for? 0 Centra is applying for a Program Cost Rate of $0.00/m.

36 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of (b) Please confirm that the expected program volumes of, 0m were derived by summing the annual total program volumes in the right-hand column for years through in the two tables provided in response to PUB-Centra and dividing that total by. If not confirmed, please explain how the volume total was calculated. Confirmed. 0 (c) If the applied-for program cost rate is $0.00/m, based on approximately $,000 of annual program costs, what is the source for the annual cost figure, i.e. is it the annual allocated cost for 00/0 taken from the cost allocation study provided in response to PUB-Centra (a), or is it the five-year average cost shown in the response to PUB-Centra (b)? The program cost rate of $0.00/m has been derived by use of Centra s cost allocation model. 0 Centra s last approved cost allocation model was modified to add a new class for the Fixed-Rate Primary Gas Service. Then, the program budget shown in Additional Question, Page was used as the basis for determining the forecast of costs to be assigned to the new service in the cost allocation model. Recognizing that the program budget represented the annual year-over-year planned expenditures for a five year period, and given that the cost allocation model only considers one Test Year in allocating cost for rate setting purposes, it was decided that it was appropriate to average the costs over the five year period and use an average annual cost in the cost allocation model. The average annual program cost over the five year period is shown in the table in the response to PUB/Centra (b), and represents approximately $0,000 of Finance & Administration

37 CAC/MSOS/CENTRA October, Fixed-Rate Primary Gas Service Page of costs, $0,000 of Customer Service & Marketing costs, $,000 of amortized start-up costs, and $0,000 of ABC costs. These costs were directly assigned to the new Fixed- Rate Primary Gas Service in the modified cost allocation model. Furthermore, a volume forecast of, 0 m was derived as noted in part (b) above, and was incorporated into the model. A reduction of the same magnitude was made to the volume forecast for Quarterly Primary Gas Service, assuming that customers were migrating from quarterly Primary Gas Service to the new Fixed-Rate Primary Gas Service. 0 The cost allocation model calculated that $, of non-gas costs should be allocated to the Fixed-Rate Primary Gas Service. This is shown in Schedule A in the Attachment to PUB/Centra (a). This cost, recovered over a forecast volume of, 0 m, results in a Program Cost Rate of $0.00/m. (d) Please confirm that it is a coincidence that those two figures are essentially the same. If not confirmed, please explain. The cost allocation model produced an allocation of $, versus the average program budget costs of $0,000. The difference is noted in the table to the response for PUB/Centra (b) and is categorized as indirect costs from the cost allocation study. 0 (e) Is the $,000 of indirect costs from cost allocation study in the table provided in the response to PUB-Centra (b) a calculated amount designed to reconcile the cost allocation study results with the $0,000 of program costs shown in the preceding line? If the $,000 figure appears in the cost allocation study itself, please indicate where, or how it can be calculated from values that appear in the study.