C-1-5 ACIG/IGUA RESPONSE TO
IR No. 1 from Gaz Métro
(ENGLISH TRANSLATION)
October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 1 of 10 R-3732-2010
ACIG’S RESPONSE TO THE REQUEST FOR INFORMATION NO 1 FROM THE GAZ METRO LIMITED PARTNERSHIP (GAZ METRO) 1. References: (I) ACIG’s Report , page 4 (II) Gaz Metro‐1, Document 1, page 14, pipes 5 to 8 (III) Gaz Metro‐1, Document 1.6, pages 3 and 4 in response to question 6.3 of the Energy Board Preamble: (I) "Currently, new customers must choose a distribution schedule and pay the rate applicable to this schedule. Their price is not based on the specific cost of their connection, but the cost allocated to the schedule. A customer with a level of zero cross‐financing therefore pays, through his schedule, his share of the Class "C" costs allocated to his schedule as well as his share of the costs of distribution network assets ("other costs") allocated to his schedule. (II) "Gaz Metro asked the Board to approve the establishment of a schedule for reception of natural gas which will recover in time all the costs incurred for the new investments required to expand the network and share some current distribution costs. "(Emphasis added) (III) "In the case of the reception schedule, Gaz Metro wanted to ensure that the incremental costs, such as costs of connecting pipes, are recovered and paid by producers. This is the pricing at reception points. [...] In addition, when setting rates at points of reception, Gaz Metro is proposing to add distribution costs unrelated to the existing gas network set at 4% of investments. Given that producers will bear their fair share of the costs incurred for services to all existing customers, this will result in lower prices for consumer customers. [...] For these last costs, related to the transportation function of the existing distribution network, Gaz Metro proposes to recover them through pricing at delivery points not through pricing at reception points. Indeed, we must not lose sight that the reception schedule is made up of pricing at points of reception and pricing at points of delivery.” October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 2 of 10 Requests: 1.1 Please confirm that the reception schedule is not based solely on the connecting pipes but on all costs, which include the connecting pipes and meters (marginal costs) but also the costs of existing distribution (B and C). If not, please explain. Answer: The ACIG understands that Gaz Metro’ proposal of a reception schedule includes incremental costs (cost of "A" and "D" categories) as well as existing costs (cost of categories "B" and "C"). 1.2 Once the reception schedule has been established to recover the costs allocated to producers, please explain how the proposal of Gaz Metro differs from situation described in the preamble (i) for customers ‐consumers. Response: Gaz Metro’ proposal for customers‐producers differs from the existing situation for customers‐consumers in that the customers‐consumer schedule is not based on the marginal investment required to connect them while the customer‐producer schedule is. After 20 years, the costs of category "A" allocated to customer‐ producers will be reduced to zero, whereas customers‐consumers will continue to pay the cost allotted for as long as they remain customers. October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 3 of 10 2. Reference: ACIG’s report, page 4 Preamble: "In this scenario, there are obvious benefits to other customers who see the new customer help pay for assets that were already in place before his arrival in addition to providing his fair share of " C "category costs. Request: 2.1 Is the term "assets" equivalent to category B costs, those being the costs of the existing
gas network? Otherwise, please define what ACIG understands by “assets.”
Answer: ACIG confirms that the term "assets" refers to the category "B" costs. 2.2 Please confirm that when volumes are to be delivered outside the territory of Gaz Metro,
the producers, like the "new client" will contribute to the "payment of assets" which are
already in place (category B costs)? If not, please explain.
Answer: ACIG confirms this statement. The ACIG specifies that the scenario that is mentioned in the preamble refers to cases where a client‐consumer, in addition to having always paid for his fair share of the cost of joint distribution pipes (e.g. the sets of network assets excluding assets that are specific to a particular customer), being the equivalent of category "B" costs for a client‐consumer, and category "C" costs would have paid more than the marginal cost of his connection (the equivalent category "A" costs for a customer‐producer). This scenario differs from the first one where a client‐consumer, although he has always paid for his fair share of the cost of joint distribution pipes (e.g. excluding assets that are specific to a particular customer), the equivalent of cost category "B" for a client‐consumer, and category "C" costs, would have paid less than the marginal cost of his connection (the equivalent category "A" costs for a customer‐producer). October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 4 of 10 In addition, the AGIC recalls that it does not question the fairness of Gaz Metro’s proposal for category "B" costs. The comparison made by the ACIG between client‐consumers and producers is simply to highlight the asymmetry of the proposed treatment of category "A" costs among customers and producers. Either some customers‐producers may pay less than their category "A" costs (in case of bankruptcy), but none can cover more than his category "A" cost. If a customer‐producer goes bankrupt before all his category "A" cost has been recovered in the schedule, the shortfall must be recovered from customers‐
consumers which necessarily results in cross‐financing of customers‐producers by customers‐consumers (assuming that everyone pays his fair share of all other costs). See also the answers to questions 4.1 and 4.4 of Gaz Metro. 2.3 Please confirm that under the proposal of Gaz Metro, producers will also pay a share of
the existing costs of distribution not related to the gas network (category C costs). If not,
please explain.
Response 2.2: ACIG confirms this statement. October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 5 of 10 3. References:
(i) ACIG’s report, page 8
(ii) ACIG’s report, page 9 (iii) Gaz Metro‐1, Document 1, page 34, lines 5 to 7 Preamble: (i) "However, Gaz Metro does not apply inflation, so the income required from years 2 to 20 is also
set at $ 1.8 million (in current dollars)."
(ii) "An alternative would be to reassess these costs each year at the time of the update of the pricing at reception points. (iii) "It should be noted that rates could be changed later at the time of adjustments in schedules based on cost trends (rate of return, taxes, etc...).”(Emphasis added) Request: 3.1 Please confirm that, based on the understanding of ACIG, the pricing at reception points
could be adjusted at the time of the annual adjustment of schedules, to reflect real costs
allocated to these reception points, thus making it possible to take account of inflation as
suggested in the preamble (ii). If not, please explain. Answer: The Understanding of ACIG is that the annual revision of the reception schedule will not take inflation into account for category "C" costs. This understanding is based on the proposal of Gaz Metro ‐‐ the category "C" costs will be based on a percentage of the initial category "A" cost. Since the schedule is fixed in time and so are category "A" costs, ACIG concludes that the annual review will not take inflation into account for category "C" costs October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 6 of 10 4. References:
(i) ACIG’s report, page 5
(ii) ACIG’s report, page 5 (iii) Gaz Metro‐1, Document 1, pages 31 and 32 and Gaz Metro‐1, Document 1.10 in response to Question 10.2 of the Board, Excel file attached titled Tables III and IV (iv) Gaz Metro‐1, Document 1.6 in answer to question 6.3 of the Energy Board Preamble: (i) "In summary, under the current system, connecting a new client involves a risk (first scenario),
but also compensation for this risk (second scenario). What Gaz Metro offers for customers and
producers represents a significant paradigm shift in that the first scenario is still possible (risk of
bankruptcy and non-payment of compensation), but not the second."
(ii)
"In other words, it is impossible for a customer‐producer to cross‐subsidize the rest of the clientele, but it is possible for the rest of the customers to cross‐subsidize the client‐producer. Project Assumptions Annual Volume (m3)
Total investment in capital ($) Distribution costs non related to gas network (4.0 % of investment) ($) Regulated Parameters Useful life of assets (years) Energy Board fee ($ / 103m3) Building Authority fee ($ / 103m3) Tax on public services Tax rate Debt Rate (Weighted cost) Equity rate (weighted cost of ordinary and preferred equity) Debt Percentage Percentage of assets of shareholders (ordinary and preferred) Weighted rate of capital Breakeven rate (years) 500 000 000 45 000 000 1 800 000 20 0.311486 0.411000 1.50% 26.90% 6.91% 8.55% 54% 46% 7.67% 20 October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 7 of 10 Service Cost 0 2009 in $ Distribution costs non related to gas network Tax on public services Fees Depreciation Interest cost Taxes Cost of equity Total service cost Pricing Base Equity (20 700 000) Debt (24 300 000) Costs and prices Service Costs Price Revenue Difference between cost and revenue NPV of the difference NPV cumulative of various differences 1 2010 in $ (1 800 000) (641 250) (361 243) (2 250 000) (1 636 678) (966 141) (1 725 461) (9 380 773) (20 182 500) (24 300 000) 9 380, 773 7 528 718 1 852 055 1 720 122 1 720 122 2 2011 In $ (1 800 000) 8 675 066 3 2012 In $ (1 800 000) (573 750) (361 243) (2 250 000) (1 468 814) (491 865) (1 548 491) (8 494 163) (18 112 500) (21 262 500) 8 494 163 4 2013 In $ (1 800 000) (540 000) (361 243) (2 250 000) (1 384 881) (513 660) (1 460 006) (8 309 790) (17 077 500) (20 047 500) 8 309 790 5 2014 In $ (1 800 000) (506 250) (361 243) (2 250 000) (1 300 949) (532 193) (1 371 520) (8 122 156) (16 042 500) (18 832 500) 8 122 156 7 528 718 1 146 348 7 528 718 965 445 7 528 718 781 072 988 842 2 708 964 773 470 3 482 433 581 182 4 063 615 (607 500) (361 243) (2 250 000) (1 552 746) (466 601) (1 636 976) (8 675 066) (19 147 500) (22 477 500) 10 2019 In $ (1 800 000) (337 500) (361 243) (2 250 000) (881 288) 20 2029 In $ (1 800 000) ‐ (361 243) (2 250 000) (41 966) (582 392) (929 094) (527 830) (44 243) (7 141 517) (10 867 500) (12 757 500) 7 141 517 (5 025 282) (517 500) 7 528 718 593 438 7 528 718 (387 201) 410 111 4 473 727 (184 922) 4 583 478 7 528 718 (2 503 436) (571 008) 0 (607 500) 5 025 282 Requests: 4.1 How does ACIG’s understanding of the difference between cost allocation, charges for costs and profitability
analysis differ from the explanations provided by Gaz Metro under the reference (iv) in response to an inquiry
from the Board? Response: The ACIG is broadly in agreement with the response provided by Gaz Metro to question 6.3 of the Board, subject to the third paragraph. Gaz Metro said in the first sentence of this paragraph that the proposal aims to ensure that the incremental costs such as costs of connection pipes, are collected and paid by customers‐producers. First, the ACIG feels that this sentence is confusing because the proposal of Gaz Metro seems to seek to recover marginal costs "A" and "D" costs, other costs being established not at the margin, but on the basis of cost allocation. Although ACIG agrees with Gaz Metro’ objective to recover incremental costs of category "A" producers, it feels that Gaz Metro’ proposal will not achieve this goal. This position is primarily due to the possibility that a client‐producer could go bankrupt and not be able to cover the compensation under his contract. Thus, category "A" costs would not completely be recovered from this customer‐producer. The proposed rate of Gaz Metro is such that it is impossible to recover the category "A" costs above the level of investment from a client‐producer. In these circumstances, the shortfall in category "A" costs arising from the bankruptcy of a client‐producer will necessarily be recovered from customers and consumers, which would necessarily entail cross‐subsidization of producer‐consumers by customers for category "A" costs. October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 8 of 10 Assuming that the costs of categories B, C and D are recovered without cross‐subsidization, the bankruptcy of a customer‐producer will necessarily lead to cross‐subsidization of client‐producers by clients‐consumers. 4.2 The tables below show the tables presented in the reference (iii) allowing the establishment of a schedule at the reception
point, by excluding distribution costs not related to the gas network costs (C costs in grey in the tables). This is a business
case using the same methodology used by Gaz Metro in investment projects, a cost benefit analysis including only the
marginal costs.
Project Assumptions
Annual Volume (m3)
Total investment in capital ($)
Distribution costs non related to the gas network (4.0 % of investment) ($)
Regulated Parameters
Useful life of assets (years)
Energy Board fee ($ / 103m3)
Building Authority fee ($ / 103m3)
Ttax on public services
Taxes
Debt Rate (Weighted cost)
Rate of the equity (weighted cost of ordinary and preferred equity)
Debt Percentage
Percentage of assets of shareholders (ordinary and preferred)
Weighted rate of the capital
Breakeven rate (years)
Service Cost
0
1
2
2009 in $
2010
2011
in $
In $
Distribution costs non related to the gas network
(641 250)
(607 500)
Rate of the tax on public services
(361 243)
(361 243)
Fees
(2
250
(2 250 000)
Depreciation
000)
(1
636
678)
(966 141)
Interest cost
(1 552 746)
500 000 000
45 000 000
0
20
0.311486
0.411000
1.50%
26.90%
6.91%
8.55%
54%
46%
7.67%
1
3
2012
In $
4
2013
In $
5
2014
In $
10
2019
In $
20
2029
In $
-
-
-
-
-
(573 750)
(540 000)
(506 250)
(337 500)
-
(361 243)
(361 243)
(361 243)
(361 243)
(361 243)
(2 250 000)
(2
250
000)
(1
384
881)
(513 660)
(2 250 000)
(2 250 000)
(2 250 000)
(1 300 949)
(881 288)
(41 966)
(532 193)
(582 392)
(527 830)
(1
460
006)
(6
509
790)
(1 371 520)
(929 094)
(44 243)
(6 322 156)
(5 341 517)
(3 225 282)
(17 077
500)
(20 047
500)
(16
500)
(18
500)
(10
500)
(12
500)
867
(517 500)
757
(607 500)
6
509
790
7
528
718
6 322 156
5 341 517
3 225 282
7 528 718
7 528 718
7 528 718
(1
018
928)
(758 167)
(1 206 562)
(2 187 201)
(4 303 436)
(833 827)
(1 044 580)
(981 570)
(2 776 096)
(7 676 531)
(18
234)
(1 468 814)
(466 601)
(491 865)
(1
725
461)
(7
580
773)
(1 636 976)
(1 548 491)
(6 875 066)
(6 694 163)
(20 182
500)
(24 300
000)
(19
500)
(22
500)
147
(18 112 500)
477
(21 262 500)
7
580
773
7
528
718
6 875 066
6 694 163
7 528 718
7 528 718
Difference between cost and revenue
52 055
(653 652)
(834 555)
NPV of the difference
Cumulative NPV
differences
48 347
(563 842)
(668 607)
48 347
(515 495)
(1 184 102)
Tax
Cost of equity
Total service cost
Pricing Base
Equity
(20 700 000)
Debt
(24 300 000)
Costs and prices
Service Costs
Price Revenue
of
various
(1
942
269)
042
832
115
October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 9 of 10 Please confirm that once the schedule at the point of reception is established based on category A and C costs, the neutral rate based on the analysis of profitability is the marginal cost of one (1) year. If not, please explain. Response: ACIG confirms this statement. 4.3 Please confirm that the analysis of profitability presented to question 4.2 does offer a potential price
reduction for existing customers. If not, please explain.
Response: ACIG confirms this statement. 4.4 Please reconcile your position with the preambles (i) and (ii) depending on the business case
presented to question 4.2 and the potential lower rate presented in question 4.3.
Response: The answers to questions 4.2 and 4.3 are fully consistent with preambles (i) and (ii). ACIG recalls in this context that the concepts of profitability and subsidization are independent of each other and involve quite different issues. The first is used to establish whether it is profitable to connect a new customer. The second is used to determine if the new customer pays his fair share of costs. Profitability is a necessary condition for the connection of a client, but it is not a sufficient condition to ensure a fair price. The ACIG feels that the schedule should be set in such a way that customer‐producers defray neither more nor less than their fair share of each category of costs, including category "A" costs (e.g. no subsidization between client‐consumers and client ‐producers). The ACIG considers that the Gaz Metro proposal does not meet this criterion. October 21, 2010
File No.: R‐3732‐2010
ACIG’s response to Gaz Metro’s application for information no. 1 Page 10 of 10 5. Reference: ACIG’s report, page 9 Preamble: "The main difference between the schedule at the reception point and residential development projects is that there is no external constraint that limits the evolution of the price at the reception point from one year to another. Thus, nothing is opposed to setting the schedule at the reception point so as to accurately recover the revenue requirement, and this, every year." (Emphasis added) Request: 5.1 Please explain what ACIG understands by "external constraints". Answer: The ACIG refers to the prior existence of a schedule. HBdocs ‐ 9240243v1