Rep: OEB Doc: 12RXJ Rev: 0 ONTARIO ENERGY BOARD Volume: 4 4 SEPTEMBER 2003 BEFORE: R. BETTS PRESIDING MEMBER G. DOMINY MEMBER 1 RP-2003-0048 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, transmission and storage of gas commencing October 1, 2003. 3 RP-2003-0048 4 4 SEPTEMBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel PAT MORAN Board Counsel COLIN SCHUCH Board Staff CHRIS MACKIE Board Staff FRED CASS Enbridge Gas Distribution JAY SHEPHERD OPSBA 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [21] DECISION: [24] 10 EXHIBITS 11 12 UNDERTAKINGS 13 14 --- Upon commencing at 2:05 p.m. 15 MR. BETTS: Thank you, everybody. 16 Please be seated. Good afternoon, everybody. It is afternoon. 17 The Board is sitting to deliver an oral decision with respect to application RP-2003-0048. 18 Before we begin, are there any preliminary matters? Mr. Cass? 19 MR. CASS: Yes, thank you, Mr. Chairman. I have just one matter to address very briefly if I may. 20 MR. BETTS: Please. 21 PRELIMINARY MATTERS: 22 MR. CASS: During the course of argument, Mr. Chairman, a statement was made by Mr. Warren to the effect that Ms. Duguay was a very competent witness. This was a kind and I believe accurate statement by Mr. Warren and I just wanted to be sure on the public record that it's clear that nothing else that was said on the subject, and most certainly nothing that was said by me, was intended to detract from Mr. Warren's statement about Ms. Duguay. I just appreciate the opportunity to clarify that on the public record. 23 MR. BETTS: Thank you, Mr. Cass. From my recollection of it, certainly the Board didn't take anything in that light, but we're happy to have your clarification. 24 DECISION: 25 MR. BETTS: Enbridge Gas Distribution Inc., referred to as EGDI after this, filed an application dated April 2, 2003 with the Ontario Energy Board under section 36 of the Ontario Energy Board Act, 1998, for an order approving or fixing just and reasonable rates and other charges for the sale, distribution, transmission and storage of gas for the company's 2004 fiscal year. The Board assigned file number RP-2003-0048 to the application. 26 In its application, EGDI applied for a rate increase on the basis of an adjustment factor equal to 90 percent of the forecast 2004 Ontario Consumer Price Index, or CPI, to be applied to a base equal to the adjusted fiscal 2003 distribution revenues. 27 On April 28, 2003, the Board issued a Notice of Application which was published in newspapers across EGDI's service territory. There were 21 interventions filed but not all the intervenors were active throughout the proceeding. 28 On June 12, 2003, the Board issued Procedural Order No. 1 which set out dates for an issues and stakeholders' conference and an issues day, and a schedule for the filing of evidence and an interrogatory process. 29 Following the issues and stakeholders' conference which was held on June 23rd, 2003, the parties to the proceeding filed a proposed issues list with the Board, and on June 24, 2003, the Board heard argument regarding contested issues. On the same day, the Board gave an oral decision establishing the issues list for the proceeding. The approved issues list was provided to all parties in Procedural Order No. 2, which was issued on June 27, 2003. 30 Twelve parties, as well as EGDI and Board Staff, participated in the settlement conference which was held over the period August 5th, 2003 to August 12th, 2003. A settlement proposal was filed with the Board on August 13, 2003. On August 25, 2003, the settlement proposal was formally presented to the Board and the Board's questions were answered. 31 The company and intervenors were able to achieve a settlement on the follow issues: 32 Issue 1.1, inflation forecast of 2 percent for 2004; 33 Issue 2, forecast of 2003 deferral account balances and disposition; 34 Issue 3, Proposed variance and deferral accounts for 2004; 35 Issue 4, revisions to rate 6; 36 And Issue 6, parameters for the fully allocated cost studies ordered by the Board in RP-2001-0032. 37 Issue 5, DSM volume target and O&M budget for 2004, was deferred in the main settlement proposal to await the release of the Board's RP-2003-0133 decision with reasons with respect to the DSM issues. That decision was issued on August 22nd, 2003, and the settlement conference on DSM issues reconvened on August 25th, 2003. A complete settlement of this issue was also achieved, and the agreement on issue 5 was filed with and accepted by the Board on August 26, 2003. The settlement proposal was revised to reflect the agreement on DSM issues and is Exhibit B, tab 1, schedule 1 in this proceeding. 38 Issues 1.2, 1.3 and 7, which concerned the adjustment factor in its implementation, were not settled. On these issues, a partial settlement reached by all parties other than the Consumers' Association of Canada, or CAC, and the Vulnerable Energy Consumers Coalition, or VECC. These two parties took the position that there should be no adjustment factor. 39 On August 26 through 28, 2003, the Board held an oral hearing to deal with the adjustment factor issue. In support of the partial settlement, EGDI called one witness panel, consisting of Mr. R. Bourke, Ms. P. Duguay, Ms. M. Hare, Mr. T. Ladanyi, and Ms. K. Lakatos-Hayward and Mr. B. Ross. These witnesses were cross-examined by the Ontario Public School Boards Association, or OPSBA, CAC, VECC and Board Counsel. Arguments were presented orally by EGDI, the Industrial Gas Users' Association, or IGUA, Energy Probe, CAC, and OPSBA and VECC filed written submissions. 40 The Board accepted the settlement proposal on the completely settled issues, and found that it formed an acceptable base for fixing just and reasonable rates with respect to those issues. The Board will now deliver its decision with respect to the issues which were not completely settled in the settlement proposals. 41 What is put forward in the partial settlement for the Board's approval is a proposal for setting rates for 2004 which relies neither on a cost-of-service review, nor on a PBR formula. The proposal contains three financial elements: 42 First, a base equal to the adjusted fiscal 2003 distribution revenues; second, an adjustment mechanism that would reduce the base in the event of over-earnings in 2003; and, third, an adjustment factor set at 90 percent of the forecast 2004 Ontario CPI to be applied to the base, in order to generate rates for fiscal 2004. 43 It was argued by the company, and others supporting this approach, that if the Board is satisfied that these two elements are in themselves reasonable, that the rates resulting from the proposed calculation will be just and reasonable. 44 EGDI argued that the legislation governing rate-making for gas utilities gives the Board broad discretion as to the methodology it uses to set rates. Section 36(3) of the Ontario Energy Board Act reads: 45 "In approving or fixing just and reasonable rates, the Board may adopt any method or technique that it considers appropriate." 46 The Board agrees with EGDI that a detailed cost-of-service review is not necessarily a prerequisite to setting rates for gas utilities. However, the Board also notes that OPSBA and Energy Probe, among others, have stated that while they support the partial settlement, they are not abandoning their general preference for rigorous regulatory oversight involving a detailed examination of utility costs. 47 EGDI and the parties supporting the partial settlement all emphasized in their submissions the need for the company to "get back on track" with its regulatory timetable, and avoid retroactive rates. 48 The Board, in paragraph 2.14.4 of its RP-2001-0032 decision, directed the company to devise a proposal that would allow for prospective rather than retroactive rate-making. The evidence in this case is that the need to get back on a prospective regulatory rate-making schedule and the associated objective of avoiding rate retroactivity were a major consideration in the company's development of the proposal before us. 49 A significant advantage of the proposal, it was argued, is that it removes the necessity for a detailed review of costs, and the consequent lengthy hearing process such an examination involves. As a result of the partial settlement, there is additional protection for the ratepayers which EGDI also points to as a significant advantage. For parties such as IGUA, the OPSBA and Energy Probe, these advantages were a significant factor in their decision to accept the proposal of the company. 50 The Board agrees that a pragmatic approach was necessary for setting rates for the company in 2004. A cost-of-service application filed in April, with pre-filed evidence not available until after the completion of the 2003 hearing, would probably have resulted in the 2004 rates being finalized no sooner than July 2004, nine months after the 2004 fiscal year began. 51 The Board accepts the submissions of the company and others that the need to return to a prospective regulatory schedule is a consideration in determining whether the proposal of the company is justified. However, the Board wishes to emphasize that a need for expediency in rate-setting is not by itself a reason to accept the "shortcut" proposed by the company. The Board will not accept proposed rates unless it is satisfied, on all of the evidence, that those rates are just and reasonable. Further, the burden of satisfying the Board that the proposed rates are just and reasonable rests on the applicant. 52 Mr. Dominy will assist in the delivery of the decision at this point. 53 MR. DOMINY: This raises the question: Has the applicant met that burden? 54 CAC and VECC have argued that the company has failed to provide any evidence to justify any rate increase. They do not accept the company's proposal as being just and reasonable, as no increase has been shown to be necessary. There is no evidence, it is argued, that the company could not manage under existing rates. 55 The Board does not agree that there is no evidence of a need for an increase. The company has produced evidence that increases in distribution costs are correlated historically with increases in the Ontario CPI, and that rate increases have historically exceeded increases in the Ontario CPI. However, the Board acknowledges that this evidence is not overwhelming. The Board's concern with the sufficiency of the evidence in this proceeding is reflected in its overall disposition on this application. 56 As indicated earlier in this decision, the partial settlement consists of three components. First, the base upon which the 2004 rates are to be set is the adjusted distribution revenues for fiscal 2003. That base is then to be adjusted as described in section 1.2 of the settlement proposal, in the event that there are over-earnings in fiscal 2003. Finally, the base is to be adjusted by an adjustment factor set at 90 percent of the forecast 2004 Ontario CPI, to generate rates for fiscal 2004. The Board finds that these three elements provide a reasonably sound basis from which to derive 2004 rates, for two reasons. 57 Firstly, as pointed out by EGDI, OPSBA and Energy Probe the 2003 rates proceeding for EGDI involved an extensive review of the company's costs and revenues and has resulted in the issuance of a rate order. The partial settlement relies on rates that have been found by the Board to be just and reasonable, subject only to any adjustment that may be necessary as a result of the issues that remain outstanding in that proceeding. 58 Secondly, the proposal involves what has been termed a "ratepayer safeguard" which will reduce rates, or provide a one-time credit to customers, if the company's weather normalized return on equity is more than 25 basis points above the Board- approved return on equity of 9.69 percent for 2003. 59 The Board agrees with IGUA and others that this safeguard is a necessary part of the rate proposal. The company does not yet know what its total earnings will be at the end of fiscal 2003. The possibility of significant over-earning in 2003 cannot be ignored at this time. The Board notes that the adjustment is asymmetrical; that is, if the company under-earns, no increase in rates or debit to ratepayers is contemplated. The Board finds that the ratepayer safeguard provides the Board with additional assurance that the base to which the index is applied will not be excessive. The Board finds that the 2003 distribution revenues, adjusted in the manner described in the settlement proposal, provides an acceptable basis for the setting of 2004 rates. 60 EGDI proposes to increase its rates for fiscal 2004 by applying an adjustment factor of 1.8 percent to the adjusted 2003 distribution revenues. 61 EGDI has argued, based on evidence provided by Mr. Ladanyi, that some increase in rates is necessary to enable the company to run its business effectively and to provide a fair return to its shareholder. EGDI has argued that the company is growing, and will continue to require capital investment to serve new customers. 62 The company's evidence is that a factor based on the forecast 2004 Ontario CPI is a reasonable approach for determining the appropriate level of increase. A study undertaken by the company and filed as Exhibit A, tab 5, schedule 1, demonstrates that there is a good correlation between the cost pressures faced by the company and the Ontario CPI. In the company's view, this correlation suggests that a good balance between protecting the interests of ratepayers and shareholders would result from the application of the Ontario CPI to the 2003 distribution revenues. 63 No party to the hearing, including those who did not accept the partial settlement, argued that 2.0 percent was not a reasonable forecast of inflation for fiscal 2004, based on a consensus forecast of Ontario CPI. EGDI submitted that the company was willing to accept 0.9 of the inflation forecast as the index to be applied to the adjusted 2003 distribution revenues. The other parties to the partial settlement agree that this is reasonable, and join the company in submitting to the Board that a 1.8 percent index, applied to adjusted 2003 distribution revenues, is a reasonable approach for the Board to adopt in setting 2004 rates. 64 The Board accepts the evidence that the company will likely face some increased costs in 2004 over 2003. As the rates for 2004 are being set prospectively, the Board cannot know the magnitude of this increase. However, the evidence does suggest that, in the circumstances of this case, a factor based on inflation is a reasonable proxy for the cost increase. The Board accepts that an index of 1.8 percent applied to the adjusted 2003 distribution revenues, is appropriate for setting rates for 2004. In reaching this decision, the Board has noted the evidence at Exhibit A, tab 5, schedule 1, page 2, that historically, the rate increases for Enbridge have exceeded the Ontario CPI. 65 The Board accepts the partial settlement but remains concerned about the potential for over-earnings in 2004. While the Board finds that the company has produced some evidence to justify a rate increase, it is not clear that an increase of 1.8 percent will avoid the possibility of over-earning by the company. The Board is influenced by the submissions of CAC that the company has provided insufficient evidence of the relationship between the proposed increase and costs. As pointed out in the argument by VECC, an historical correlation between distribution revenues and CPI over a ten-year period does not guarantee that a good match will occur in any one year. The Board believes that, given the nature of the evidence on which the increase is based, additional protection for ratepayers is warranted. 66 The Board therefore accepts the suggestion put forward as an alternative by CAC, that an earnings sharing mechanism be added to the 2004 rate year. However, the Board does not agree that a fair balance between the interests of ratepayers and the company's shareholder will be achieved if all over-earnings are returned to the ratepayers. 67 The Board finds that an appropriate earnings sharing mechanism in this case would be asymmetric; that is, ratepayers will not be called upon to make up under-earnings but over-earnings will be shared equally by the company and the ratepayers. Over-earnings will be those earnings over and above the Board-approved ROE, based on the actual, unnormalized fiscal 2004 earnings. 68 Having accepted the partial settlement, and having accepted CAC's submission that a sharing mechanism for potential over-earnings in fiscal 2004 is needed, the Board wishes to make two points about this proceeding. 69 First, the rate-setting methodology that the Board has accepted in this case is unique, and is recognized by the Board as arising from a need to get EGDI back on track with its regulatory schedule. It is not intended that the acceptance of this methodology in this proceeding should be relied upon by utility applicants as an indication that the Board will routinely accept such proposals in the future. 70 Second, EGDI experienced some difficulty in complying with an order of the Board for production of test year, actual and forecast financial results. Although that order was issued many weeks ago, EGDI did not comply until required to do so by a second order that had to be issued on August 22nd, 2003, three days before the date scheduled to address that evidence. As a result, the information was not as useful or accurate as it could have been because it was prepared in a hurry, as noted by EGDI's own witnesses. This problem would have been avoided if EGDI had complied properly with the Board's original order, because then there would have been sufficient time to prepare the evidence properly. 71 This kind of evidence has been required and filed in the past, and the company should be prepared to file such information in the future, as required by the Board. If the company currently does not have a system set up to produce reasonably reliable evidence of this nature, it should take such steps as are necessary to set up one now, as it has in the past. 72 The Board instructs EGDI to prepare a draft rate order with rate schedules consistent with this decision and file those with the Board. EGDI shall file the draft rate order with the Board and all intervenors of record by Thursday, September 11, 2003. EGDI shall file draft customer information notices explaining changes resulting from both the current rates proceeding and EGDI's October QRAM application as soon thereafter as possible. 73 The Board will approve rates on an interim basis, pending the availability of the financial results for fiscal year 2003 and the need to make any adjustment to the 2003 base as provided for in the settlement proposal. 74 The intervenors may file comments on the draft rate order by Wednesday, September the 17th, 2003. EGDI shall provide any reply comments by Friday, September 19th, 2003. The Board expects to issue the final rate order by Friday, September 26th, 2003. 75 When the financial results for fiscal year 2004 are available, EGDI shall report these results to the Board and apply for the disposition of any over-earnings, in accordance with the required sharing mechanism. 76 Given that the purpose of this application was to get EGDI back on track, the Board notes that the company has undertaken to file an application supported by full cost-of-service evidence, including a historical year, bridge year and test year for fiscal year 2005 rates. The onus is now on EGDI to stay on track. EGDI has advised that it intends to file its fiscal 2005 application by the end of December, 2003. 77 There is one housekeeping matter that arises out of the settlement proposal. At page 11 of the settlement proposal, the second paragraph states: 78 "The company agrees that the other parties have the right to ask questions and seek further direction from the Board on the attribution of load balancing costs to system gas and/or direct purchase customers, including all issues associated with the functionalization, classification, and allocation relating to such costs in the review of the Enbridge Gas Distribution's 2004 gas costs, transportation and storage evidence as part of this case." 79 The Board will issue further direction on the procedure to be followed to handle this issue in due course. 80 MR. BETTS: Thank you, Mr. Dominy. 81 Parties who wish to make a claim for costs should do so in the usual format within 15 days of this decision. 82 Are there any questions that arise from this decision? 83 There being none -- 84 MR. CASS: Sorry, Mr. Chairman, this may become apparent when we see the decision in writing. In relation to the 2004 mechanism described by Mr. Dominy, I'm just trying to be clear that that will be based on normalized results? 85 MR. BETTS: The decision -- 86 MS. LEA: Actually, that wasn't clear. I couldn't hear either whether it was not normalized -- 87 MR. DOMINY: Actual unnormalized or non-normalized. It was actual unnormalized results. 88 MR. BETTS: Any other questions? 89 With that, this decision concludes the proceeding covering this application. We wish to thank all parties as we did on our last day of the hearing process and we wish to congratulate the applicant on achieving the objective of getting back on track and coming up with a very different and effective approach in doing so. 90 Once again, thanks to all parties and certainly Board Staff for their support through the process, our court reporters as usual, all the intervenors and applicants. We have managed this process in a very effective and efficient manner. 91 Thank you all. We will now adjourn. 92 --- Whereupon the hearing adjourned at 2:32 p.m.