HomeMy WebLinkAboutINS-13-022 - Natural Gas Rates
REPORT TO:
Finance and Corporate Services Committee
DATE OF MEETING:
May 27, 2013
SUBMITTED BY:
Pauline Houston, Deputy CAO, 4646
PREPARED BY:
Loraine Baillargeon, Manager Asset Optimization, 4532,
Jim Gruenbauer, Manager Regulatory Affairs &Supply,
4255
WARD(S) INVOLVED:
All
DATE OF REPORT:
May 17, 2013
REPORT NO.:
INS-13-022
SUBJECT:
NATURAL GAS RATES
RECOMMENDATION:
That the supply component of the natural gas rates be decreased to 16.5 cents per cubic
meter from 17.5 cents per cubic meter for system gas customers of the City of Kitchener
effective July 1, 2013; and,
That the transportation component of the natural gas rate no longer bebased on TCPL
tolls as approved by the NEB and instead reflect the average forecast cost of
transportation andbe decreased to 4.0 cents per cubic meter from 6.182 cents per cubic
meter effective July 1, 2013 to phase-in the new rate-setting approach; and further,
That the delivery components of the natural gas rates no longer be based on Union Gas
base rates as approved by the OEB and instead reflect a modified cost-of-service
approach to fully recover all utility costs, including earnings and a fixed dividend to the
City, with changes as proposed in INS-13-022 - Appendix A for all Kitchener delivery
customers effective July 1, 2013 to phase-in the new rate-setting approach.
BACKGROUND:
Kitchener Utilities (KU) began a natural gas supply program in April 1998 to arrange supply for
KU customers who did not choose to buy from a gas marketer. The program was initiated to
mitigate the volatility of natural gas prices and eliminate retroactive billing that had become
commonplace with past provider, Union Gas.
system gas program uses a disciplined approach to secure gas contracts in a diversified
portfolio to strive for a low risk, reasonable cost alternative to the current retail offerings. The
supply program is a cost-based service and does not cross-subsidize with other KU profits.
Since the beginning of the supply program, KU has met its and more
predictable prices [refer to Appendix B]. KU continues to mitigate price volatility and risk
through active management of the portfolio of supply contracts.
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REPORT:
Gas rates are changed, at least annually, driven by various events. The gas rates have three
components, Gas Supply, Gas Transportation and Gas Delivery.
is the charge for the natural gas commodity, fuel and administration. The
Gas Supply rate is determined based on committed and planned purchases, forecast
consumption, overhead and inventory carryover. The total dollar value is divided by the forecast
consumption to determine the rate needed to recover the costs. The 2013 operating budget will
be affected in that the budget rate is slightly higher than the proposed rate. The expiry of some
higher priced supply contracts and lower market prices has permitted this reduction.
is the rate charged to bring gas to the Ontario border via pipeline.
historical practice set the transportation component of its natural gas rates by using
toll for TransCanada Pipelines firm
transportation service. As set out in INS-12-065 (Gas Rates Redesign Delivery &
Transportation), effective November 1, 2012, KU no longer holds any TCPL contracts to
transport gas from Alberta to Ontario. Accordingly, the rate for gas transportation approved by
Council should no longer be based on TCPL tolls as set by the NEB.
Similar to the supply of gas, the transportation of gas must be operated on a not-for-profit basis
to align with Ontario Energy B approved rate-making principles. Therefore, the
surplus of gas transportation revenues over costs on a planned basis must be eliminated.Staff
is proposing to reduce the transportation rate to one that is more reflective of actual costs.
The budget assumed a phased-in reduction in the transportation rate to better align it with
costs and OEB approved rate-making principles. The proposed rate is identical to the budget
rate.
meter. This includes transmission within Ontario (pipeline border to Kitchener, storage costs),
pipeline infrastructure and maintenance (within Kitchener), meter reading and bill processing.
delivery rates approved
by the OEB for use by Union Gas in the Southern delivery area. For budget purposes using this
approach, the delivery rates are an external input which constrains revenues and cost recovery.
There are two components to the delivery rate: a daily fixed charge and a variable rate that is
charged for the actual or estimated volumes consumed in a particular billing period.
As set out in INS-12-065, under a modified OEB-style cost of service approach to rate-setting,
are a controllable output of the budget process and, for 2013, must
increase. This will preserve overall utility revenues and fully recover KU costs of service,
including earnings and a fixed dividend to the City.The proposed delivery rates reflect this
increase, including an increase of 1 cent per m3 in the variable rate to fund approved capital
projects for the municipal gas utility, including work related to the LRT.
The budget may be impacted by consumption variances from forecast. The budget assumed a
phased-in implementation of the shift in rate-making methodologies from matching TCPL and
Union Gas rates to a methodology
for reinvestment and a fixed dividend to the City.
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Supply Program Fix Future Prices or Buy at Spot Price?
KU buys gas supplies for future consumption by its system customers using a combination of
fixed and spot (floating) prices. Staff closely monitors and actively manages the portfolio of
supply contracts and its average price for planned purchases (based on normal weather) up to
five years into the future. As mandated by the OEB, Union Gas passively manages its supply
program and relies solely on spot and short-term purchases of gas.
Similar to Union Gas, supply program is not for profit and serves the majority of
However, there are risks /
benefits and trade-offs between the two approaches to buying the natural gas commodity. The
approaches are fundamentally different.
Some residents in Kitchener have questioned the Mayor and members of Council about the gap
between the gas supply rates of Union Gas and KU. These inquiries have only arisen in the past
conditions.The lower gas supply rate in adjacent municipalities such as Waterloo has raised
relative
passive supply program.
Due to mandated reliance on spot and short-term purchases of gas, its system
customers are fully and promptly exposed to price volatility - benefiting during falling markets
but harmed in rising markets. Rates change quarterly.
supply program is driven by a preference for stable rates by the majority (79%) of KU
customers. This preference for stable gas rates in Kitchener is supported by continuous
customer research and surveys.KU gas rates typically change on an annual basis.
Importantly,
Customers who want rate stability when market prices are rising yet expect their rates to
decrease in lock step under a falling market misunderstand or unfairly ignore the basic trade-off
between stable and variable rates. This trade-off necessarily means giving up the chance to pay
lower prices in future in exchange for avoiding the risk of paying higher prices. This is a similar
trade-off as is made when choosing between a fixed or floating interest rate for a mortgage.
Gas customers in Kitchener as in Waterloo and elsewhere have access to competitive
supply programs from energy marketers.This provides customers with choices among fixed
and variable prices.
While a fundamental change to KU
improvements have been made to the management of commodity price risk.These
improvements better align the trade-offs between stable and variable rates in both rising and
falling markets to meet customer expectations without engaging in risky attempts to time the
market.Guidance will be given to staff to hedge (fix prices) only when necessary to protect the
rate to declining market prices while protecting against price spikes.
its managed program and instead to buy gas supply solely on a spot and short-term basis was a
case of lucky timing.Hindsight does not serve KU well when considering a basic change in its
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approach from a managed approach designed to provide rate stability and predictability to a
passive spot approach that provides fluctuating and unpredictable market prices.
Using foresight informed by a current consensus view of experts who expect market prices to
rise perhaps significantly due to increased demand for gas coupled with tighter supplies,
there is a real risk that adopting a basic change in how KU buys gas supply at this time or in the
near future could turn out as very bad timing.
In conclusion, no major change to actively managed gas supply program is recommended
as the majority of its system customers continue to prefer stable rates. Should the preference of
the majority of system customers change in favour of variable rates, or if there is significant
migration of customers to competing energy marketers, then it would make sense for KU to
adopt a passively managed supply program based on spot and short term purchases of gas.
Neither of these factors is expected to arise.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
Theme: Financial Management
Strategic Direction: - Invest and manage assets strategically;
- Ensure responsible use of public funds within a supportive policy framework;
- Maximize value through cost effective service delivery
FINANCIAL IMPLICATIONS:
The combined impact of the supply, transportation and delivery rates for the majority of
residential, commercial and industrial customers supplied by KU system gas are offsetting and
result in no impact on their annual gas bills.
The overall annual bill impact for the minority of customers supplied under direct purchase
contracts with energy marketers will vary based upon their consumption. Unlike system
customers, most direct purchase customers will not receive a reduction in their supply or
transportation rates (as billed by their energy marketer) to offset the proposed increase in
delivery rates that is necessary to fully recover costs. However, staff estimates that the overall
annual bill impact should not exceed an 11% increase for any of these affected customers and
will be less for most of them.
CONCLUSION:
KU will work with the Communications Division to ensure that media outlets are provided with a
press release to inform customers, an insert is being prepared to be distributed with utility bills in
July, and an alert will be printed on the envelopes regarding rate changes.Individual
correspondence will be sent to the largest direct purchase customers that are most impacted by
the proposed rate change.
ACKNOWLEDGED BY:
Pauline Houston,Deputy CAO
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APPENDIX A
CORPORATION OF THE CITY OF KITCHENER
NATURAL GAS
GENERAL SERVICE RATE M1
Applicability
To residential and non-contract commercial and industrial customers that consume less than 50,000 m3/year.
Rate
Daily Fixed Charge $ .69
and
VARIABLE COMMODITY & TRANSPORTATIONNET RATE
DELIVERY FUEL
RATE
3333
¢/m¢/m¢/m¢/m
3
First100m7.699216.54.028.1992
3
Next150m7.504716.54.028.0047
3
All Over250m7.044716.54.027.5477
Supplemental Service to Commercial and Industrial Customers Under Group Meters
Combination of readings from several meters may be authorized where meters are located on contiguous pieces of property
of the same owner not delivered by a public right-of-way. In such cases, an additional service charge shall be rendered each
month in the amount of $15.00 per month for each additional meter so combined. This service is to assist in the
billing
administration of the for multiple meters on the same property. It does not contemplate amalgamating the
consumption readings for the purpose of qualifying for lower delivery rates..
Meter Readings
Gas consumption by each customer under this rate schedule shall be determined by periodic meter readings, provided that in
circumstances beyond the control of the Company, such as strikes or non-access to a meter. The Company may estimate the
monthly consumption between the meter readings and render a monthly bill to the customer.
Effective
July 1, 2013
Policy Relating to Terms of Service
1)Gas purchased under this rate schedule shall not be resold, directly or indirectly by the customer, unless resold as
2)Customers who temporarily discontinue service during any twelve consecutive months without payment of the
monthly fixed charge for the months in which the gas is temporarily disconnected shall pay for disconnection and
reconnection.
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CORPORATION OF THE CITY OF KITCHENER
NATURAL GAS
GENERAL SERVICE RATE M2
Applicability
To residential and non-contract commercial and industrial customers that consume 50,000 m3 and more per year .
Rate
Daily Fixed Charge $2.30
and
VARIABLE COMMODITY & TRANSPORTATIONNET RATE
DELIVERY FUEL
RATE
3333
¢/m¢/m¢/m¢/m
3
First1,000 m7.646616.54.028.1466
3
Next6,000m7.567716.54.028.0677
3
Next13,000 m7.332616.54.027.8326
3
All over20,000 m7.050516.54.027.5505
Supplemental Service to Commercial and Industrial Customers Under Group Meters
Combination of readings from several meters may be authorized where meters are located on contiguous pieces of property
of the same owner not delivered by a public right-of-way. In such cases, an additional service charge shall be rendered each
month in the amount of $15.00 per month for each additional meter so combined. This service is to assist in the
billing
administration of the for multiple meters on the same property. It does not contemplate amalgamating the
consumption readings for the purpose of qualifying for lower delivery rates.
Meter Readings
Gas consumption by each customer under this rate schedule shall be determined by periodic meter readings, provided that in
circumstances beyond the control of the Company, such as strikes or non-access to a meter. The Company may estimate the
monthly consumption between the meter readings and render a monthly bill to the customer.
Effective
July 1, 2013
Policy Relating to Terms of Service
2)Gas purchased under this rate schedule shall not be resold, directly or indirectly by the customer, unless resold as
3)Customers who temporarily discontinue service during any twelve consecutive months without payment of the
monthly fixed charge for the months in which the gas is temporarily disconnected shall pay for disconnection and
reconnection.
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CORPORATION OF THE CITY OF KITCHENER
NATURAL GAS
FIRM INDUSTRIAL AND COMMERCIAL CONTRACT RATE M4
Applicability
To a customer who enters into a contract for a minimum term of one year, that specifies a daily contracted demand as follows:
33
Between 4,800 m and 140,870 m.
Rate
1. Bills will be rendered monthly and shall be the total of:
3
¢/m
i)A Monthly Demand Charge
3
First8,450 mof the daily contracted demand,45.90
3
Next19,700 mof the daily contracted demand,19.80
33
All mover28,150mof the daily contracted demand,16.80
ii)A Monthly Delivery Charge
First 422, 250 m3 delivered per month.80
Next volume equal to 15 daysuse of daily contracted demand.80
For remainder of volumes delivered in the month.40
iii)A Monthly Gas Supply Rate
Utility Sales
Commodity & Fuel16.5
Transportation4.0
20.5
2. Over-run Charge
Authorized overrun gas is available provided that it is authorized by the Corporation in advance. The Corporation will not
unreasonably withhold authorization. Overrun means gas taken on any day in excess of 103% of contracted daily demand.
3
Authorized overrun will be available April 1 through October 31, and will be paid for at the rate of 2.0640 ¢/m for the
3
delivery and, if applicable, a gas supply rate of 20.5¢/m.
3
Unauthorized overrun in any month shall be paid for at the rate of 7.6466¢/m for the delivery and total gas supply charge
3
for system supplied volumes at the rate of 20.5¢/m.
3. Minimum Annual Charge
In each contract year, the customer shall purchase from the Corporation or pay for a minimum volume of gas equivalent to
150 days use of contracted demand. Overrun gas volumes will not contribute to the minimum volume. In the event that the
customer shall not take such minimum volume, the customer shall pay an amount equal to the deficiency from the
33
minimum volume times a rate of 4.5¢/m, and if applicable, a gas supply charge of20.5¢/m.
In the event that the contract period exceeds one year, the annual minimum volume will be pro-rated for any part year.
Effective
July 1, 2013
Policy Relating to Terms of Service
Gas purchased under this rate shall not be resold, directly or indirectly by the customer.
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CORPORATION OF THE CITY OF KITCHENER
NATURAL GAS
INTERRUPTIBLE INDUSTRIAL AND COMMERCIAL CONTRACT RATE M5
Applicability
To a Customer who:
3
A) enters into a contract for a minimum term of one year that specifies a daily contracted demand between 4,800 m and
3
140,870 m inclusive.
and,
B) has an alternate fuel supply and combustion system available.
Rate
1. The price of all gas delivered shall be determined on the basis of the following schedules:
Monthly Fixed Charge $560.00
and
3
¢/m
A) Delivery Charge
Daily Contracted Demand Level (CD)
33
4,800 m<CD 17,000 m2.4039
33
17,000 m<CD30,000 m2.2611
33
30,000 m<CD 50,000 m2.1859
33
50,000 m<CD 70,000 m2.1332
33
70,000 m<CD100,000 m2.0955
33
100,000 m<CD140,870 m2.0584
B) Gas Supply Rate
Utility Sales
Commodity & Fuel16.5
Transportation4.0
20.5
2. Over-run Charge
Authorized overrun gas is available provided that it is authorized by the Corporation in advance. The Corporation will not
unreasonably withhold authorization. Overrun means gas taken on any day in excess of 105% of contracted daily demand.
3
Authorized overrun will be available April 1 through October 31, and will be paid for at the rate of 2.0640 ¢/m for the
3
delivery and, if applicable, a gas supply rate of 20.5¢/m.
3
Unauthorized overrun in any month shall be paid for at the rate of 7.6466¢/m for the delivery and total gas supply charge
3
for system supplied volumes at the rate of 20.5¢/m.
3. Minimum Annual Charge
In each contract year, the customer shall purchase from the Corporation or pay for a minimum volume of gas equivalent to
3
150 days use of contracted demand which will not be less than 700,000 m per annum. Overrun volumes will not
contribute to the minimum volume. In the event that the customer shall not take such minimum volume, the customer shall
3
pay an amount equal to the deficiency from the minimum volume times 4.5¢/mfor the delivery charge and if applicable, a
3
gas supply charge of 20.5¢/m).
Effective
July 1, 2013
Policy Relating to Terms of Reference
Gas purchased under this rate shall not be resold, directly or indirectly by the customer.
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