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HomeMy WebLinkAboutINS-13-077 - MIK Gas Rates Follow-Up - Gas Supply Options REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: September 30, 2013 SUBMITTED BY: Walter J. Malcolm, Director of Utilities, 519 741 2600 ext 4538 PREPARED BY: Loraine Baillargeon, Manager Asset Optimization, 519 741 2600 ext 4532 Jim Gruenbauer, Manager Regulatory Affairs & Supply, 519 741 2600 ext 4255 WARD(S) INVOLVED: All DATE OF REPORT: September 24, 2013 REPORT NO.: INS-13-077 SUBJECT: NATURAL GAS RATES FOLLOW-UP REPORT - GAS SUPPLY OPTIONS RECOMMENDATION: For Information Only EXECUTIVE SUMMARY: In theory, Kitchener Utilities (KU) could cease purchasing gas supply from its suppliers for KU customers who choose not to buy from retail energy marketers, and instead purchase system supply for these customers from Union Gas. However, a Return to Union System Gas Supply (RTS) is not considered viable or practical. BACKGROUND: Report INS-13-022 on Natural Gas Rates was presented at the May 27, 2013 meeting of the FCS. INS-13-022 included a review of the gas supply program of KU. During discussion of the Report, a Member of Council questioned if it is possible for KU to purchase gas supply from Union Gas, as has been done in the past. REPORT: There are several issues of concern if KU was to discontinue its gas supply program and become a system gas customer of Union Gas, as it was prior to 1998. These issues include: 1. Existing Gas Supply Contracts 2. Quarterly Rate Changes 3. Retroactive Bill Adjustments 4. Willingness of Union Gas to accept KU as a system gas customer 5. Facilitation of retail competition and direct purchase contracts 2 - 1 1. Existing Gas Supply Contracts A number of existing supply contracts for future delivery to KU at fixed prices is in place. Prior to any return to Union system gas, these fixed price contracts would need to run their course and expire. If they were to be terminated early to enable a faster transition to RTS, then they would be liquidated at prevailing market prices. This could result in significant financial losses if the prevailing market prices are less than the fixed contract price. (Financial gains on liquidation are also possible in the reverse price situation.) 2. Quarterly Rate Changes Importantly, RTS removes any control by KU over gas supply costs and the rate to be charged to its system customers. Under the OEB approved Quarterly Rate Adjustment Mechanism (QRAM) for Union Gas, a return to its system gas would impose market pricing for all KU system customers with frequent (quarterly) rate changes – contrary to current customer preference for stable rates. 3. Retroactive Bill Adjustments RTS reinstates a risk of retroactive rate adjustments under QRAM for Union’s system gas. This could negatively impact customer satisfaction with KU and with natural gas as fuel of choice. Prior to 1998 when KU was the largest system gas customer of Union Gas, such retroactive adjustments were common and, in some cases, very significant and unfavorable (collecting an under-recovery of costs). As a system gas customer of Union Gas, the possibility of retroactive bill adjustments is real. KU would be responsible for passing along such retroactive charges to its customers. The current billing system is not capable of doing this. 4. Willingness of Union Gas to accept KU as a system gas customer KU Staff has contacted Union Gas to investigate if and how a return to its system gas supply (RTS) could be done. RTS is possible, in theory, but would require the reinstatement of legacy tri-party contracts between KU, end users / agents, and Union Gas. These cumbersome contracts were in place in the late 1990’s prior to KU taking control over gas purchases. They no longer exist as the market and Ontario Energy Board (OEB) regulatory regime has changed considerably since then to foster competition and customer choice. 5. Facilitation of retail competition and direct purchase contracts KU is required under the existing energy policy and regulatory regime in Ontario to provide open access by customers to competitive suppliers of gas. This is governed by the OEB Gas Distribution Access Rule (GDAR). Under the current arrangements with Union Gas, KU purchases its own supply of gas and only contracts for gas storage and transportation services. This enables KU to efficiently facilitate retail supply choices under GDAR for its customers. In particular, it allows for separate tracking, accounting and billing of gas purchased by KU for system supply as contrasted with gas purchased by direct purchase customers. Union Gas has advised Staff that it views and treats KU as a single entity – even though KU is a gas distributor with 65,000 customers. Union Gas has no visibility or ready means to identify or separately track gas purchases by system and direct purchase customers behind the handful of 2 - 2 gas meters which it has in place to measure total volumes delivered daily to KU. This is a serious impediment to KU returning to Union’s system gas supply. Changes in billing systems and staffing levels for KU would likely be needed to overcome this impediment. Alternative Approach to KU Gas Supply Program KU buys gas supply for future consumption by its system customers using a combination of fixed and spot (floating) prices. KU’s supply program is driven by a preference for stable rates by the majority of its customers. KU gas rates typically change on an annual basis. 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. Due to Union’s 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. From a rate perspective, Council could achieve the same outcome for KU as returning to Union system supply by simply adopting its spot purchasing approach and QRAM rate-setting policy. While this approach is counter to the historical preference for stable gas rates in Kitchener, this will be canvassed in a substantial customer engagement process in 2014. 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: None COMMUNITY ENGAGEMENT: Quantitative customer research and focus groups to be explored in Q1 of 2014 prior to finalizing proposed gas rates for July 2014. CONCLUSION: A return to Union system gas supply is not considered viable or practical. ACKNOWLEDGED BY: Pauline Houston, Deputy CAO, 519 741 2600 ext 4646 2 - 3