Rep: OEB Doc: 12RWX Rev: 0 ONTARIO ENERGY BOARD Volume: 3 12 JUNE 2003 BEFORE: R. BETTS PRESIDING MEMBER G. DOMINY MEMBER 1 EB-2003-0126 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF an application by Enbridge Gas Distribution Inc. for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution and transmission and storage of gas as of July 1, 2003; AND IN THE MATTER OF the Quarterly Rate Adjustment Mechanism approved by the Ontario Energy Board. 3 EB-2003-0126 4 12 JUNE 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 TURGOT HASSAN Board Staff CHRIS MACKIE Board Staff JERRY FARRELL EGD 8 TABLE OF CONTENTS 9 DECISION: [21] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 10:47 a.m. 15 MR. BETTS: Good morning, everybody, and welcome back to the day three of this hearing of application EB-2003-0126. 16 The Board has made a decision in this matter and is about to present it orally. 17 Before we do, are there any preliminary matters? 18 MR. FARRELL: No, thank you. 19 MR. BETTS: Thank you. 20 Mr. Dominy and myself will share the reading of this, as it is a wordy decision. 21 DECISION: 22 MR. BETTS: As a preliminary matter, the Board wants to address the issue that several parties have raised with respect to EGDI's decision to add issues that parties feel are outside the stated scope of the QRAM methodology. 23 As a general principle, EGDI should restrict its QRAM applications to matters that are within the scope of the QRAM methodology. The QRAM is intended to be a mechanistic approach to dealing with the PGVA so that the impact of clearing the PGVA balance is mitigated by allowing for quarterly rate adjustments for pass-through gas costs instead of a single annual adjustment. EGDI should recognize that issues that are outside of the scope of the QRAM process should not be included in a QRAM application. QRAM applications deal with the interim clearance of the PGVA and the Board does not require general public notice to be given. Notice is restricted to intervenors of record in the most recent rate case. Issues that fall outside the scope of the QRAM process should be addressed on the basis of proper notice being given to potentially affected parties. EGDI is always free to apply at any time for modifications to its rates and should recognize that there may be a need to give broader public notice than is normally the case in the QRAM proceeding. When EGDI adds additional issues to a QRAM application, the Board must consider whether any parties would be prejudiced by processing the issue within the streamlined QRAM methodology and whether the issue is of sufficient importance and urgency to the ratepayer to justify expedited handling. Based on this analysis, the Board may provide for broader notice before proceeding with the application or it may sever the extra issues and address them in a separate proceeding. 24 In the current application, EGDI has added two issues that are unrelated to the QRAM, the unauthorized overrun gas, or UOG penalty, and the under-recovery of distribution revenue issues, that fall outside of the scope of the QRAM methodology. These issues do not appear to be particularly controversial and so the Board is prepared to deal with them at this time. EGDI has also proposed a change to the timing of the treatment of load-balancing costs within QRAM. The Board is of the view that this proposed change relates to timing and does not involve a fundamental change to the methodology underlying the QRAM. It raises an important issue relating to potential impacts to ratepayers that is of sufficient importance and urgency to warrant addressing it now. The Board has an overriding responsibility to act in the public interest. In discharging that duty, the Board cannot be confined to a methodology that would limit the Board's ability to act in the public interest. 25 EGDI's QRAM application raises three issues: 26 1, the under-recovery of distribution revenue; 27 2, the UOG penalty; and 28 3, the quarterly clearance of the PGVA. 29 On the first issue, the under-recovery of distribution income, EGDI has confirmed that this issue will be dealt with in the main rates case, and so the Board will leave the issue to be addressed there. EGDI simply proposes to continue to record the described under-recovery in the 2003 deferred rebate account and this is acceptable to the Board. 30 On the second issue, the UOG penalty, EGDI is proposing a change to the current penalty. EGDI proposes a more stringent penalty to prevent the gaming it detected in January and February this year. Unauthorized overruns occur when direct-purchase customers fail to deliver their required mean daily volume of gas or when interruptible customers fail to curtail consumption when required to do so. EGDI is concerned that when the penalty is lower than the daily market price at its Niagara and Iroquois export points, customers may decide to pay the penalty instead of delivering their required volumes, and in the case of interruptible customers, decide to pay the penalty instead of curtailing consumption when required to do so. When unauthorized overruns occur, EGDI has to make up those gas volumes through purchases at the spot-market price in effect at the time, and this cost is posted to the PGVA. Currently, only the penalty revenue collected from interruptible customers who fail to deliver their mean daily volume or curtail consumption when required is posted to the PGVA. If the penalty revenue is insufficient to offset the cost of making up the required volumes, the additional cost is borne by all ratepayers instead of by the specific customers who failed to deliver or curtail. EGDI proposes a new penalty based on 150 percent of the highest daily price at the applicable export point in the applicable month. 31 CAC and VECC support the proposed new penalty. No other parties oppose the proposed new penalty. CAC and IGUA argue that if the Board approves the new penalty, it should also require EGDI to provide notice of the new penalty to all potentially affected customers. IGUA also argues that the new penalty should not be applied retroactively. 32 Board findings: 33 The Board approves the new penalty, as proposed by EGDI. The Board is of the view that the penalty should be high enough to deter any customer from choosing not to curtail when required to or choosing not to deliver any volume required by contract. 34 The Board is also of the view that all penalty revenue should be credited to the PGVA. If EGDI is of the view that specific penalty revenue should not be credited to the PGVA because of the specific circumstances of the penalty, EGDI should raise the issue if and when it occurs. Finally, the Board agrees that the new penalty should not be applied retroactively and should only come into effect on July 1st, 2003. The Board also requires EGDI to provide notice of the new penalty structure forthwith to all potentially affected customers. 35 Mr. Dominy. 36 MR. DOMINY: On the third issue, the quarterly clearance of the PGVA, EGDI proposes to clear a total balance of $172.1 million. EGDI proposes to clear the commodity component of the PGVA to system-sales customers, and the load-balancing component of the PGVA to all customers. This would be achieved by applying a rate rider to both system-sales customers and direct-purchase customers. The load-balancing component is $150.1 million. Of this amount, $88 million is allocated to direct-purchase customers, and the balance to system-sales customers. EGDI's proposal represents a change in the timing but not the methodology that applies to load-balancing costs. 37 Normally, under the QRAM guidelines, all of the PGVA balance would be cleared to system-sales customers. Allocation of the load-balancing component would not occur until the final clearance of the PGVA as part of the true-up process. However, EGDI wishes to advance the timing of the clearance of the load-balancing component because of the size of that component. EGDI says that it does not make sense to clear the entire PGVA balance, including the load-balancing component, to system-sales customers now and to make adjustments for the load-balancing component at the time of true-up. To do so would mean that system-sales customers would see a very large immediate increase in their bills, followed by a large refund in October. The high PGVA balance came about as the result of a combination of colder-than-usual weather coinciding with high gas prices. This meant that more gas had to be purchased to meet the higher-than-forecast needs of system-sales customers and the higher-than-forecast load-balancing requirements that occurred in the first quarter of 2003. 38 SEM, OESC and Union Energy, collectively the marketers, argue that EGDI's proposal is a deviation from the QRAM methodology and that no rate rider should be applied to direct-purchase customers. The marketers are concerned that confusion will be created for their customers if a rate rider is imposed on direct-purchase customers. 39 IGUA argues that rate classes 110, 115, 135, 145 and 170 should be exempt from the rate-rider proposal on the basis that the customers in those rate classes do their planning on the expectation that there will be a one-time adjustment in relation to load balancing at the time of the final clearance to have PGVA. IGUA also argues that EGDI must establish that it will suffer irreparable harm unless it recovers the load-balancing component of the PGVA as proposed. The two Schools intervenors, CAC and VECC support EGDI's proposal to advance the timing of the clearance of the load-balancing component to all customers. In supporting the proposal, CAC and others argue that the Board should consider a number of principles in disposing of QRAM applications, including the avoidance of rate retroactivity, the principle of cost causality, and fairness to all ratepayers. CAC also submits that the QRAM should be applied flexibly. CAC is of the view that EGDI's proposal addresses these principles appropriately. They also submit that no party would be prejudiced by EGDI's proposal since all parties would have the opportunity to examine the prudence and allocation of the load-balancing charges. 40 Board findings: 41 EGDI's proposal for clearing the PGVA balance raises two questions: 42 1, Is it appropriate to advance the timing of the clearing of the load balancing component of the PGVA to all ratepayers? 43 2, if so, what is the appropriate approach to collecting the PGVA balance from ratepayers? 44 Turning to the first question: 45 Is it appropriate to advance the timing of the clearing of the load-balancing component of the PGVA to all ratepayers? 46 The Board is of the view that EGDI's proposal to advance the timing of the clearing of the load-balancing component of the PGVA to all ratepayers is appropriate under the circumstances. A strict application of the QRAM guidelines would lead to, as Mr. Shepherd aptly describes it, a wrong answer. Without the QRAM, ratepayers would be subject to potentially large adjustments at the end of each fiscal year, when the PGVA is cleared. The QRAM is intended to mitigate this problem by allowing for quarterly adjustments instead of a single annual adjustment. The QRAM methodology requires all of the PGVA balance to be cleared to system-sales customers, with a one-time adjustment for load balancing to take place at the final clearance of the PGVA. This worked in the past because the load-balancing component of the PGVA was not large. However, in the current application, the load-balancing component is very large. A strict application of the QRAM methodology would mean that system-sales customers would face a very large increase in their bills, only to be refunded a large portion of that increase at the time of the final clearance of the PGVA as a result of the one-time adjustment for load balancing. 47 The Board is of the view that it was appropriate for EGDI to propose a deviation from the normal QRAM methodology to take this problem into account. The QRAM methodology is based on a number of principles, and EGDI's proposal is consistent with these principles. The Board is of the view that the principles are the key part of the methodology, and to the extent that adherence to these principles may require a departure from the methodology, the principles are more important than the methodology. 48 IGUA has raised concerns about whether the allocation of the load-balancing component is appropriate. EGDI's proposed rate rider does not change the allocation methodology that has been used for load balancing in the past. The Board also notes that there will be an opportunity for any party to address the appropriateness of the allocation when the final clearance of the PGVA is addressed in the 2004 rates case. 49 Turning to the second question: 50 What is the appropriate approach to collecting the PGVA balance from ratepayers? 51 EGDI proposes to recover the PGVA balance through a rate rider applied for a six-month period. System-sales customers would be required to pay a rate rider for six months that would recover the commodity component of the PGVA along with that part of the load-balancing component that is allocated to system-sales customers. This rate rider would supercede the rate rider currently in place. Direct-purchase customers would be required to pay a rate rider for six months that would recover that part of the load-balancing component of the PGVA that is allocated to direct-purchase customers. Direct-purchase customers would not be required to pay anything in relation to the commodity component of the PGVA. 52 The marketers, in an alternative argument, support a rate rider over three months, instead of six months. This approach is also supported by VECC and OPSBA. EGDI submits that the six-month period was more appropriate because it takes into account the impact on different types of ratepayers within rate classes -- those who have a heating load and those who have a process load. CAC also supports the six-month period. 53 Board findings: 54 The controversial of EGDI's proposal is the proposed rate rider to be applied to direct-purchase customers to recover load-balancing costs. Load balancing is part of the distribution service provided by EGDI to all customers, regardless of whether they are system-sales customers or direct-purchase customers. Direct-purchase customers enter into agreements with marketers for the commodity, but they still have to pay for distribution services, including load balancing. This obligation is quite separate from the commodity contracts that direct-purchase customers have entered into with marketers. To the extent that the load balancing costs actually incurred exceed the forecast costs, all customers will bear this additional cost, which is tracked in the PGVA. Since these are distribution-service costs, they are separate from the commodity contracts entered into by direct-purchase customers. 55 The Board is of the view that the concerns raised by the marketers can be addressed through appropriate communication with direct-purchase customers. The company will work with Board staff to ensure that the customer notices that will be provided to direct-purchase customers explain the reason for the rate rider properly. 56 The Board is of the view that the rate rider should apply to all ratepayers, applied over a six-month period. The Board has considered all of the arguments of the parties with respect to who should pay the rate rider and for how long. The Board accepts EGDI's submission that the six-month rider applied to all ratepayers is the most equitable approach to take. It appropriately balances the competing interests of various ratepayer groups within and amongst rate classes and it is consistent with the ADR agreement reached by the parties. 57 EGDI's proposal was not put forward as a permanent change to the QRAM methodology. The Board is of the view that it would be appropriate for the parties to consider changes to the QRAM methodology to address the collection of the load-balancing component of the PGVA. The Board directs EGDI to bring forward a proposal to address the collection of the load-balancing component of the PGVA no later than the 2005 rates application. The proposal should minimize the possibility of large one-time adjustments, rate retroactivity and unclear market price signals. 58 Questions were also raised with respect to the appropriate benchmark to use for the calculation of the load-balancing component of the PGVA. Ms. Duguay testified that the use of the Western buy/sell benchmark may be out of date and that it may be appropriate to consider a different benchmark. The Board directs EGDI to bring forward a proposal to address this issue no later than the 2005 rates application. 59 MR. BETTS: That is the Board's decision on this matter. 60 Are there any questions? 61 MR. FARRELL: No. Thank you very much, Mr. Chair. 62 MR. BETTS: Thank you, Mr. Farrell. 63 MR. FARRELL: Your decision was very clear. 64 MR. BETTS: Thank you. 65 With that, I believe we are ready to adjourn this hearing and all matters related to this application. 66 The order will be issued shortly, as soon as possible, and obviously within the time requirements to have this matter dealt with as scheduled. 67 Thank you all for your participation, and we will adjourn. 68 --- Whereupon the hearing adjourned at 11:10 a.m.