Société en commandite Gaz Métro
Establishment of a Receipt Rate for Natural Gas R-3732-2010
RECEIPT RATE FOR
NATURAL GAS
Non official translation without prejudice
Original : 2010.11.08
Gaz Métro – 4, Document 2
40 pages
Presented to the Régie de l’énergie
Application to the Régie de l’énergie
 Gaz Métro requests the Régie de l’énergie (“the Régie”) to
authorize the creation of a new natural gas receipt rate, the
terms and conditions of its application as well as methods for
establishing the prices that will apply when investment
requests are made. Gaz Métro is also requesting the Régie to
fix certain prices applicable to volumes delivered at this time.
 The natural gas receipt rate will make it possible to recover
the costs of the new investments required to extend Gaz
Métro’s gas system and share some of the present
distribution costs.
2
1
Connection and gas producing facilities
model
3
Ratemaking Process
Cost identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Receipt rate structure
and conditions of
service
Method and
establishment of initial
applicable prices
4
2
Ratemaking Process
Cost identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Receipt rate structure
and conditions of
service
Method and
establishment of initial
applicable prices
5
Cost Identification and Allocation
Respect of cost causality: Allocation of costs to those who
generate them
 Costs related to new producer customers




A – Costs related to the investments in connection pipelines
B – Costs of existing gas system
C – Distribution costs not related to the gas system
D – Additional costs of using TCPL/TQM transmission system
 Cost allocation stages
 Functionalization between services and within the distribution function
between consumer customers and producers
 Classification (direct allocation or related to volumes, number of
customers, demand and/or revenues
 Allocation using the allocation factors
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3
Cost Identification and Allocation
 Cost allocation
 Category A costs
 Initially, direct allocation among producers per receipt point
 Eventual revision of cost allocation method if consumer customers use the
pipeline
 Category D costs – direct allocation to producers of one zone and
allocation between producers according to volumes
 Categories B and C costs (common costs)
 A direct allocation of these common costs is not possible
 Functionalization of the existing distribution costs among consumer
customers only and between producers and consumer customers
 Once the cost to be shared identified, classification and existing allocation
factors related to these costs will be applied to allocate them between
consumer customers and producer customers
7
Cost Identification and Allocation
 Cost allocation recapitulation
Functionnalisation and cost allocation
Functionnalisation (Distribution service)
Allocation
Producers
Costs
Costs related to investments in connection pipelines (A costs)
Costs of existing distribution system
Costs of transmission system (B costs)
Other costs related to system (Frontage, meters, etc.)
Distribution costs not related to gas system
Costs not related to gas system to be shared (C costs)
Other costs (EEGP, EEF, FV, CDP, etc.)
Total existing distribution costs (budget 2008/2009)
Additional costs of using TCPL/TQM transmission system (D costs)
Investment request
241,8 M$
Consumers
Yes
No
Yes
Yes
Non
Yes
Yes
Non
Yes
Yes
Yes
No
48,3 M$
193,5 M$
295,2 M$
160,7 M$
134,5 M$
537, 0 M$
Investment request
8
4
Ratemaking Process
Cost identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Receipt rate structure
and conditions of
service
Method and
establishment of initial
applicable prices
9
Receipt Rate Structure and Conditions of
Service
 The established rates should recover the revenue
requirements (i.e.) total costs plus a fair return on the rate
base
 Gaz Metro aims to create a rate structure and conditions that:
 respect equity amongst customers and producers, in particular by
minimizing cross subsidization
 Also ensure that the receipt rate aims revenue stability and a certain
price stability
 are as simple as possible
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5
Receipt Rate Structure and Conditions of
Service
 Receipt rate
 Pricing at receipt point for each producer
Allows recovery of categories A and C costs, ensures price stability
and minimizes cross-subsidization amongst the producers
 Pricing at delivery points within the territory
allows recovery of category D costs
 Pricing at delivery points outside the territory
allows recovery of category B costs
11
Receipt Rate Structure and Conditions of
Service
 Example of receipt rate schedule
Receipt Rate Schedule
Receipt Points
Name
MDO
price
(¢/m³/day)
RP-1
RP-2
RP-3
RP-4
RP-5
1,40
0,50
0,74
0,77
0,29
Delivery Points
Outside
franchise
Inside franchise
vol. injected
Consumption
Unit price
Unit price
(¢/m³)
zones
vol. delivered vol. delivered
(¢/m³)
(¢/m³)
0,11
Consumption zone 1
0,027
0,70
0,03
Consumption zone 1
0,027
0,70
0,02
Consumption zone 1
0,027
0,70
0,14
Consumption zone 2
0,70
0,02
Consumption zone 2
0,70
Unit price
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6
Receipt Rate Structure and Conditions of
Service
 Application provisions of the receipt rate
 Revision of Maximum Contractual Capacity (MCC)
 Treatment of Maximum Contractual Capacity (MCC) overruns
 Treatment of differences between injected volumes and nominations
 Tolerance margin of 2% daily and 4% on a cumulative basis
 Fees for daily differences over 2%
 Fees when the daily balance of the cumulative account is over 4%




Contract term, renewal and indemnity
Composition of natural gas and calorific content
Pressure
Interruptions and curtailment of receipt of natural gas
 Changes to Conditions of Natural Gas Service and Tariff
13
Receipt Rate Structure and Conditions of
Service
The proposed pricing principles limit the risk of new assets
related to the receipt of natural gas
 To ensure that each party bears a portion of the risk, Gaz Metro
proposes the following conditions, including:







10 year contract period without any price reduction
Compensation allowing the recovery of costs
Applicable conditions to reducing of the CMC during the contract
Establishment of 95% fixed revenue
Possibility of a deposit requirement during the contract
Deposit based on 12 months of service
A retention period of 60 consecutive months
 Moreover, the receipt rate will benefit to all existing customers as a
share of current costs will now be assumed by producers
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7
Receipt Rate Structure and Conditions of
Service
 Gaz Métro requests that the Régie approve the structure of
the new receipt of natural gas rate
 Gaz Métro requests that the Régie approve changes to
Conditions of Natural Gas Service and Tariff, including the
text of the receipt rate
15
Ratemaking process
Cost identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Receipt rate structure
and conditions of
service
Method and
establishment of initial
applicable prices
16
8
Method and Establishment of Initial
Applicable Prices
 Objectives
 Recovery of costs
 Importance of precise determination of initial prices
 Minimization of cross-subsidisation
 Minimization of potential price instability
 Challenges
 Category A and D costs will be known only when applying for an
investment request
 Category B and C costs are existing costs but predictive allocation to
producers is developed by making assumptions and approximations
since producers are not yet part of the customer base
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Method and Establishment of Initial
Applicable Prices
Initial prices applicable to receipt points
 Revenues associated to category A costs
 Method based on a calculation of revenue requirement
 Category A costs known at the moment of the investment request
 Proposal of an initial amortization period of 20 years (expected useful
life of the assets)
 Weighted cost of capital used will be that which is used to fix current
distribution rates
 Setting of initial price allowing to recover the costs (amortization,
income taxes, return, etc.) over the amortization period
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9
Method and Establishment of Initial
Applicable Prices
Initial prices applicable to receipt points
 Revenues associated to category C costs
 Prices set to generate revenues to allow recovery of costs allocated to
each producer
 Predictive allocation to producers is developed by making assumptions
and approximations since producers are not yet part of the customer
base
 Gaz Metro requests the Régie to approve a ratio of 4% applicable on
investments to allow the determination of an initial price by receipt
point
 This method could be modified in subsequent rate cases according to
the evolution of costs and adjustments to the allocation methods
19
Method and Establishment of Initial
Applicable Prices
 Cost of service and revenues from rates
$
Cost of service
(A + C costs )
Revenues from rates
(recovery of A + C costs )
Amortization period
= Producer’s
injection period
Years
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10
Method and Establishment of Initial
Applicable Prices
Initial prices applicable to receipt points
 Price example
 The global initial price of 1.50¢/m³ is split between:
 The initial MDO price fixed at 1.43¢/m³
 The initial unit price by volume injected fixed at 0.07¢/m³
 The global initial price of 1.50¢/m³ consists of:
 0.36¢/m³ ($1.8M/ 500Mm³) for revenues associated to C costs
 1.14¢/m³ for revenues associated to A costs
 Gaz Métro requests that the Régie approve the method for
the establishment of prices at receipt points which will be
applied in the case of an investment project
21
Method and Establishment of Initial
Applicable Prices
Initial prices applicable to delivery points within the territory to
allow recovery of category D costs
 Category D costs known at the moment of the investment request
 Need to contract TCPL/TQM transportation evaluated according to
total volumes injected in a consumption zone having the territory as
delivery point
 Annual costs of TCPL/TQM additional transportation capacities
divided by volumes injected in the consumption zone and deemed to
be delivered within the territory
 Unit price applicable to this consumption zone
 Price billed for all volumes actually injected and having the territory as
delivery point
 For example, the initial price could be 0.027¢/m³ for a given
consumption zone
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11
Method and Establishment of Initial
Applicable Prices
Initial prices applicable to delivery points within the territory to
allow recovery of category D costs
 Gaz Métro requests that the Régie approve the method for the
establishment of prices at delivery points within the territory which will
be applied in the case of an investment project
23
Method and Establishment of Initial
Applicable Prices
Establishment of the initial price applicable to the delivery point
outside the territory allowing to recover B costs
 Prices must generate revenues allowing to recover B costs allocated
to producers
 Predictive allocation to producers is developed by making assumptions
and approximations since producers are not yet part of the customer
base
 Price applicable to volumes delivered outside the territory
 Gaz Métro requests that the Régie establish the applicable price of
0.70 ¢/m³ to volumes delivered outside the territory and this, in the
course of the present application
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12
Method and Establishment of Initial
Applicable Prices
 Summary of initial prices applicable to receipt points and to
delivery points
Receipt rate
Rate schedule
Initial applicable prices
(¢/m³)
Receipt point - RPx
A costs
C costs
Total
Delivery point
Within territory (D costs)
Outside territory (B costs)
1.14
0.36
1.50
MDO price
Unit price
1.43
0.07
0.027
0.700
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Method and Establishment of Initial
Applicable Prices
Establishment of prices applicable to differences between
injected volumes and nominated volumes
 The applicable prices below were calculated according to TCPL’s tolls
in effect January 1, 2010
Prices Applicable to Daily Imbalances
Difference
Less than 2%
2% to 4%
4% to 8%
8% to 10%
Over 10%
Price ($/GJ)
0.000
0.328
0.819
1.229
1.638
Price (¢/m³)
0.000
1.241
3.103
4.655
6.207
Prices Applicable to Cumulative Differences
Balance
Less than 4%
4% to 6%
Over 6%
Price ($/GJ)
0.000
0.246
0.411
Price (¢/m³)
0.000
0.931
1.552
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13
Method and Establishment of Initial
Applicable Prices
Establishment of prices applicable to differences between
injected volumes and nominated volumes
 Gaz Métro requests that the Régie approve the method for the
establishment of prices applicable to daily and cumulative imbalances
as well as to establish these prices according to TCPL’s tolls
applicable at the moment when the decision is issued
27
Ratemaking Process
Costs identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Receipt rate structure
and service
conditions
Method and
establishment of initial
applicable prices
28
14
Annual Rate Reassessment
(Pricing Strategy)
 The prices applicable to all rates are reviewed annually in
order to recover the required revenues
Ratemaking strategy
 The ratemaking strategy applicable to producers must take
into account the two following elements:
 Maintaining cross-subsidizing at its minimum: an annual review of
the prices may be proposed according to the evolution of costs and
results of the cost allocation study
 Stability of prices: the determination of an initial price as precise as
possible allows to reduce potential rate variations in the case where
an subsequent allocation of costs would result in prices significantly
different from the prices initially established
29
Annual Rate Reassessment
(Pricing Strategy)
 Prices at receipt points
 […] The prices could then be modified in subsequent rate cases
depending on the evolution of costs (rate of return, income taxes, etc.)
 Prices at delivery points – within the territory
 […] Those prices could be modified in subsequent rates cases
depending on the evolution of the TCPL/TQM transportation needs
 Prices at delivery points – outside the territory
 […] The price could be updated in subsequent rate cases
30
15
Annual Rate Reassessment
(Pricing Strategy)
Receipt Rate
Pricing Strategy - Example of Price Evolution
Establishment of
prices
Rate Case 2014
Applicable
prices
(RC2013 Ass. =
initial prices)
Initial applicable
prices
Applicable
prices
(RC 2014)
(¢/m3)
(¢/m³)
Receipt point
A costs
C costs
Total
Delivery point
Within territory (D costs)
Outside territory (B costs)
Cost allocation results
(example)
1.14
0.36
1.50
1.14
0.36
1.50
1.05
0.30
1.35
?
?
?
0.027
0.700
0.027
0.700
Reduction of TCPL cap.
0.65
0.015
?
Ratemaking Strategy Rate Case 2014
 Correction of cross-subsidization (instability issue)?
 No correction of prices in order to maintain rate stability
(cross-subsidization issue)?
 A combination of both and/or a spreading out on a few years
31
Annual Rate Reassessment
(Pricing Strategy)
Receipt Rate
Pricing Strategy - Example of Price Evolution for year 21
Establishment of
prices
Initial applicable
prices
Rate Case 2034
Applicable
prices
(RC2013 Ass. =
initial prices)
(¢/m³)
Receipt point
A costs
C costs
Total
Delivery point
Within territory (D costs)
Outside territory (B costs)
Cost allocation results
(example)
Applicable
prices
(RC 2014)
(¢/m³)
1.14
0.36
1.50
1.14
0.36
1.50
0.36
0.36
?
0.36
?
0.027
0.700
0.027
0.700
0.027
0.700
0.027
0.700
Ratemaking Strategy Rate Case 2034
 Correction of cross subsidization?
 No correction of prices (cross subsidization issues)?
32
16
Ratemaking Process
Costs identification
and allocation
Annual rate
reassessment
(Pricing strategy)
Profitability
analysis
(marginal costs)
Receipt rate structure
and service
conditions
Method and
establishment of initial
applicable prices
33
Profitability Analysis
and Impact on Rates
 At the moment, the profitability analysis allows the evaluation
of the investment’s marginal profitability as well as the impact
on rates depending on existing rates. No allocation of existing
gas system costs is included in the revenue requirements
 In the case of the receipt rate, the prices are established to
recover all the costs, i.e. the marginal costs (new costs) and
a share of the existing costs
 Once these prices established, they will allow to recover
more than the marginal costs (new costs)
 Higher IRRs than the prospective weighted cost of capital
 Reducing of rates for existing customers as soon as the first years
(example: breakeven point of 1 year)
34
17
Profitability Analysis
and Impact on Rates
 Cost of service and revenues from rates (assumption: gas
delivered within the territory)
Cost of service
(A + C costs )
Revenues from rates
(recovery of A + C costs )
$
Cost of service
(A costs + duties)
Breakeven point
Amortization period
= Producer’s
injection period
Years
35
Profitability Analysis
and Impact on Rates
 Cost of service and revenues from rates (assumption: gas
delivered within the territory)
$
Revenues from rates
(recovery of A + C costs )
Cost of service
(A costs + duties)
Decrease of rates
Breakeven point
Amortization period
= Producer’s
injection period
Years
36
18
Ratemaking Process
Costs identification
and allocation
Annual rate
reassessment
(Ratemaking strategy)
Profitability
analysis
(marginal costs)
Receipt rate structure
and service
conditions
Method and
establishment of initial
applicable prices
37
Return on Two Concerns Expressed by
the COGA
Two concerns expressed by the COGA
 Deposits
 Particularly Article 8.1.3 which gives Gaz Métro the possibility to
require a deposit during the course of a contract
 Differences between nominations and injected volumes
 Prices for daily imbalances between deliveries and nominations
 Prices applicable to cumulative differences
38
19
Article 8.1.3 « Deposits » of Conditions
of Natural Gas Service and Tariff
 Article 8.1.3 stipulates that “The distributor may require a
deposit when service is requested or during a contract from
any customer subject to the receipt rate”
 The COGA evidence stipulates that this application is unfair
 Gaz Métro’s perspective
 The requirement of a deposit must be justified in all cases (article 8.1),
including the case of article 8.1.3
 If the Régie, following the COGA’s evidence, wishes not to retain
Article 8.1.3, Gaz Métro sees no objection to producers being subject
to article 8.1.2.2
39
Differences Between Nominated Volumes
and Volumes Actually Injected
D
Producer
customers
In all cases
Commercial transaction
Carrier
Direct Purchase
Customers
Others...
Gaz Métro
A
Nominated volumes
B
Volumes actually injected
A
C
Delivery
C
If
B
A
Imbalances
If
A
D
Differences to be settled in accordance with the
commercial agreement between the parties
40
20