CANADA
RÉGIE DE L’ÉNERGIE
No : R-3630-2007
GAZ MÉTRO LIMITED PARTNERSHIP, ,
a legal person duly incorporated, having its
principal place of business at 1717 du
Havre Street, in the City and District of
Montreal, Province of Quebec
(hereinafter called the « Appellant »
or « Gaz Métro »
and
INDUSTRIAL GAS USERS
ASSOCIATION (IGUA)
Intervenor
IGUA’S submission on Residential Development and Price
Forecasting Methodology for the Resale of Transportation
Tools
This report will cover two subjects: residential development and the forecast methodology for
the transportation surplus resale value.
1.
Residential development
a. Introduction
For more than seven years now, Gaz Métro has decided to devote increased efforts to the
development of the residential sector. The table on this page shows the evolution of this
growth since this new
policy.1 It is clear that Gaz
Métro has very successfully
managed
to
forge
an
important place for itself in
the development of the
residential sector, which it
had almost completely failed
to do previously.
1
Source for the table: Gaz Métro presentation, November 17, 2007, Working Group on the Profitability of the
Residential Market.
IGUA’s submission on Residential Development
and Price Forecasting Methodology for the Resale
of Transportation Tools
Page 2
This redeployment of efforts towards residential development has been supported by IGUA
over the last few years. This support was essentially based on the fact that Gaz Métro’s
development had to come from this sector, given that the development of the large industry
was slower than in previous years. IGUA considers that development of the residential sector
continues to be a logical choice to this day in the framework of Gaz Métro’s activities.
However, IGUA has always been concerned about this sector’s profitability. Profitability
studies of the past few years demonstrate that IGUA’s concerns were well-founded.
Gaz Métro proposes to introduce solutions this year purporting to achieve reasonable levels of
profitability and rate break-even point. IGUA considers that Gaz Métro’s proposal goes in the
right direction but that other more interesting options were left aside and more generic
possibilities were not retained. These elements are discussed below.
b. The Desired Level of Profitability
Gaz Métro has already faced a profitability crisis in the development of its distribution
system.2 At that time, Gaz Métro had committed itself to respecting a certain number of
criteria in its profitability analysis. Though a rate break-even point within a maximum of five
years has not been necessary in order for a project to be approved by the Régie, it became a
guide for Gaz Métro in its future investment projects.
When residential development was relaunched, IGUA accepted that the criterion of a rate
break-even point of five years not be respected. This position taken by IGUA was based on
the fact that residential customers are considered more captive than other kinds of customers,
which normally allows their long-term risk to be reduced. However, the reality of the last few
years has shown that there was a non-captive portion of this clientele resulting from the new
reality, i.e. a marked increase in the price of natural gas at the beginning of the decade starting
in 2000, leading to a temporary deterioration of the competitive situation of this clientele, as
well as an increased general interest in energy efficiency. Furthermore, following a great
improvement in public opinion with respect to natural gas, there is today a greater demand for
the hook-up of equipment other than heating (fireplaces, stoves, etc.), leading to lower
consumption levels for certain residential customers.3
Combined with the fact that costs for new customer hook-ups proved much higher than
previously estimated (+62% and + 74% for new construction and conversions respectively)
and that the volumes previously estimated (maturation) did not materialize, this new reality
justifies putting in question the principle of the captive nature of residential customers. Gaz
Métro’s residential development must therefore offer sufficient profitability both in the short
and long term. To allow for long-term profitability, the profitability analysis must offer a
more interesting TRI (“Taux de rendement interne” or Internal Rate of Return) and rate breakeven point than that offered by Gaz Métro in the first years of its residential development
(then calculated with data which underestimated the costs and overestimated the volumes).
Gaz Métro therefore proposes this year to return to a profitability level similar to that at the
start of redeployment (minimum 9.5% of TRI and a maximum of 11 years rate break-even
point).4
2
R-3371-97, D-97-25.
Gaz Métro-2, Document 7.17.
4
Gaz Métro-2, Document 7.19.
3
2
IGUA’s submission on Residential Development
and Price Forecasting Methodology for the Resale
of Transportation Tools
Page 3
For IGUA, this proposal would be a step in the right direction. However, the experience of the
last few years demonstrates that the profitability level expected in the long term is risky, since
there is little space to meet all aspects which could reduce profitability (decrease in volumes,
increased costs (or expected reductions in costs not realized), need for network reinforcement
due to increases of load, etc.).
c. The Choice of Solutions for New Customers
Two major proposals have been put forward by Gaz Métro: a $300 contribution for new
customers and a readjustment of the demand charge.
1. The demand charge
IGUA supports a readjustment of the demand charge. This will have two positive effects. On
the one hand, it will make it possible to make small amounts of consumption more profitable.
On the other hand, it will reduce the business risk for Gaz Métro with respect to distribution
revenues from the residential sector.
IGUA wishes to note that VGE customers (Vente grandes entreprises, Sales to major
companies) face long term obligations (a five year contract) ensuring long term revenues for
Gaz Métro, and this even if there is no consumption. The strategy of the last few years of
reducing the daily rate D1 demand charge runs contrary to Gaz Métro’s objectives of
stabilizing its revenues and ensuring the profitability of its additional loads. Reducing the
demand charge to covering costs is completely acceptable, both from the point of view of cost
causation and from an environmental point of view.
With respect to cost causation, the cost/rate balance has the effect of ensuring that all users
and the Distributor will retrieve all of the fixed costs directly tied to a consumer. This fixed
cost is minimal, since it does not take into account several upstream and downstream costs
(the latter including only the costs of hook-up and meters).
From an environmental point of view, while it would be preferable if all of the distribution
rates were variable for the user (thus facilitating gains in energy efficiency), it must not be
forgotten that other effects come from the giving the wrong price signal. For example (in an
exaggerated fashion for the purposes of illustration), if there were no fixed and hook-up costs,
it would be of interest for all consumers to have a gas line, whether they planned to use it or
not. This would lead to producing and burying pipes uselessly, which is hardly a desirable
proposition from an environmental point of view.
As IGUA sees it, it is necessary to send a good price signal in order to improve energy
efficiency, but it must not be done to the detriment of other factors, either economic or
environmental.
3
IGUA’s submission on Residential Development
and Price Forecasting Methodology for the Resale
of Transportation Tools
Page 4
2. The $300 Contribution
IGUA has made representations in the working group on residential development with respect
to the strategy which it considers most efficient in order to achieve the following objective:
enabling residential development to continue in a profitable way for the future.
To the extent that Gaz Métro must continue to offer subsidies (PRC) for hooking up new
customers, it would seem to us counterproductive to require also an entrance fee from the
customer.5 In fact, subsidies are offered because, without them, customers (or builders) would
prefer another energy source. The entry barrier for the customer to this energy source is thus
lowered in order to make the installation costs more competitive with other energy sources
(mainly electricity). Thus, requiring an initial contribution has the effect of partially
countering the objective of the subsidy which is to lower the entry barrier.
It would appear to us that a better alternative would have been to propose setting up a
temporary fee for a predetermined period (five years, for example) for all new customers in
the first tier of rate D1 (small business and residential). The revenues generated by this
temporary fee would be directly affected to the reduction of the rate base, the same treatment
which the $300 contribution proposed by Gaz Métro would receive. Thus, both options would
have the same effect, increasing the project’s TRI and reducing the duration of the rate breakeven point.
For IGUA, a rate of approximately 25¢/day (or $91.25/year) extra would be adequate to meet
or even surpass, for now, the effect of the $300 contribution proposed by Gaz Métro.
Furthermore, this solution would not add another entry barrier as would the solution put
forward by Gaz Métro. To the extent that this solution would be contemplated by the Régie,
we consider that it would be important to apply an annual indexation to this rate. To do this,
we would propose the use of an annual rate index tied to inflation approved in the rate case.
Furthermore, a debate was held within the task force with respect to the principle of equity
between customers (two rates for the same service). IGUA considers that this proposition
(adding a daily basic fee for new customers for a limited period) is meant to be fully adapted
to residential users in order to maximize the addition of new customers offering a sufficient
level of profitability. Moreover, until last year, daily fixed charges were different and
effective in the same rate class, i.e. rate D1. This practice lasted many years and was
authorized every year by the Régie.
Subsidiarily, if the Régie considers this proposal to be inequitable between customers of a
same rate class, IGUA considers that the current situation of non profitability of the
residential sector still requires the application of the contribution ($300) in order to assure the
profitability of the residential development.
d. Cross-subsidization adjustment – both past and future
The situation of cross-subsidization is of great concern for the residential sector. The
cross-subsidization levels, as high as 90%, bring us to conclude that it is time to revise the rate
strategy leading to such levels of cross-subsidization at Gaz Métro for many years now.6
5
Gaz Métro-2, Document 7.21.
6
Gaz Métro-13, Document 12, page 1.
Taux d'interfinancement du secteur résidentiel pour
la portion distribution
1.1a
1.1b
1.1c
1.1d
[0 - 365]
0,101
[365 - 1 095]
0,348
[1 095 - 3 650]
0,543
[3 650 - 10 950]
0,831
4
IGUA’s submission on Residential Development
and Price Forecasting Methodology for the Resale
of Transportation Tools
Page 5
These cross-subsidization levels indicate that residential customers do not, on average, pay the
costs associated with their use of the distribution network. To the extent that an important part
of the growth of the franchise is dedicated to this sector for the next years, it appears clear to
IGUA that this situation must be corrected, without which the risks of it getting out of hand
will only be greater.
Inside the table: Residential sector cross-subsidization rate for the distribution portion
The task force proposes to the Régie to set up a committee to deal with the correction to crosssubsidization. IGUA supports this proposal in order to evaluate the setting up of a correction
strategy for cross-subsidization starting with the 2009 rate case. Regarding this, several
options could be evaluated and contemplated. The group proposes two meetings. If additional
meetings prove necessary to find a reasonable solution to this objective, IGUA submits that
the Régie should allow work to continue, without affecting the objective of bringing into
effect the first adjustments as of 2009.
e. Monitoring
According to IGUA, the subject of profitability of residential development is of great
importance for the future development of the franchise and the rate level of both current and
future customers.
IGUA thus asks the Régie to set up annual monitoring for an indeterminate period. This could
be revoked in a few years if the situation is corrected.
Within the framework of this monitoring, Gaz Métro should produce the following (some
elements are already presented in the rate cases and closure cases):
- Forecasts and actual results of previous years for the number of new hook-ups in the
residential sector (distinguishing between conversions and new constructions) ;
- Revise the actual results using actual data, notably costs and volumes using the
SAP (Service Access Point) system.
- Forecasts for the current year, distinguishing between conversions and new
constructions. These forecasts should be accompanied by explanations on market
penetration, what kind of new customers are being hooked up (peripheral and/or
heating), etc.
- An update on volumes maturation, efforts to increase natural gas penetration in already
hooked-up residences (additions of peripherals or heating equipment);
- An update on hook-up costs.
Furthermore, for the next year, IGUA requests that Gaz Métro conduct an analysis of the
effect of residential development on costs to the rest of the system (reinforcement, customer
service, storage, etc.) Indeed, as cross-subsidization is very high for the residential sector in
distribution and the profitability Gaz Métro is seeking for this sector is low (9.5%), the
addition of costs downstream from the hook-up would inevitably increase rates for all
customers. This analysis should notably allow for more rigorous analysis of the extent of
profitability which should be targeted for the residential sector in the future. This work will
notably have an effect on the extent of the correction of cross-subsidization which could be
required. The results of this analysis could be filed within the framework of a task force or in
5
IGUA’s submission on Residential Development
and Price Forecasting Methodology for the Resale
of Transportation Tools
Page 6
the next rate case as a follow-up (dealt with through a hearing). IGUA does not suggest the
choice of the appropriate process.
2.
Forecast Methodology for the Transportation Surplus Resale Value
In decision D-2006-140, the Régie requested Gaz Métro to set up a formula allowing the
transportation surplus resale value of FTLH (Firm Transportation Long Haul) and FTSH
(Firm Transportation Short Haul) to be calculated.
With respect to FTLH, Gaz Métro proposes using the least of the following resale values:
- Futures
- Real market value
- Average sales price of Gaz Métro
- TCPL (Trans Canada PipeLines Limited) rate
For this year, Gaz Métro would use the projected Futures value, or $0.57/GJ.
IGUA is uncomfortable with the proposed methodology, particularly with respect to
establishing Futures. Obtaining information solely through a sole supplier does not appear to
us very reassuring in terms of the latter’s independence.7
However, IGUA members who negotiate transportation on the markets have indicated to us
that this rate of $0.57/GJ is reasonable.
Given this situation, IGUA supports Gaz Métro’s proposal to use a rate of $0.57/GJ for this
year, drawn from the minimum Futures value for the summer of 2008. IGUA continues,
however, to be concerned about Futures methodology in the coming years. Furthermore, it is
possible for us to validate the projection’s reasonableness and we plan to do so in future years.
With respect to the general methodology, IGUA supports Gaz Métro’s proposal. IGUA
expects, however, to obtain a monitoring of it in the course of the next few years. This
monitoring will permit the evaluation of the methodology and the making of necessary
adjustments.
This monitoring should include the projected price table for each year staring in 2008 (the
same as that proposed in exhibit Gaz Métro-3, Document 7, page 10 of 14) as well as the
actual corresponding result.
THE WHOLE RESPECTFULLY SUBMITTED.
MONTREAL, July 6, 2007
HEENAN BLAIKIE LLP
Attorneys for IGUA
7
Gaz Métro-3, Document 1.6.
6