HomeMy WebLinkAboutINS-14-083 - Natural Gas Rates - Follow-upStaff Rport
I r rc'.� ► t .R Infrastructure Services Department wmkitchener.ca
REPORT TO:
COUNCIL
DATE OF MEETING:
August 25, 2014
SUBMITTED BY:
Wally Malcolm, Director of Utilities, 519 - 741 -2600 ext. 4538
PREPARED BY:
Wally Malcolm, Director of Utilities, 519 - 741 -2600 ext. 4538
WARD(S) INVOLVED:
All
DATE OF REPORT:
August 20, 2014
REPORT NO.:
INS -14 -083
SUBJECT:
Natural Gas Rates — Follow Up
RECOMMENDATION:
For Information
BACKGROUND:
The Finance and Corporate Services Committee reviewed Staff Report INS -14 -015 —
Natural Gas Rates on August 11, 2014. Committee Members requested additional
information, for consideration by Council, in regard to the following:
Potential impact of a 1, 2 and 3 cent reduction in the fixed daily charge for M1
customers from the proposed 73 cent fixed daily charge.
Potential impact of the reduction in the fixed daily charge, as noted above, on the
stabilization balance and the capital program.
Elaborate on the charges expensed in the Natural Gas Supply Program.
REPORT:
IMPACT OF A 1, 2, 3 CENT REDUCTION IN THE FIXED DAILY CHARGE FOR M1
CUSTOMERS
Gas delivery includes management of storage and transportation as well as providing all
distribution facilities and operations necessary to ensure delivery of natural gas to
customers on a firm and continuous basis throughout the year. The cost of gas delivery
is recovered through a two part rate: Daily Fixed Charge and Variable Delivery Rate.
The Daily Fixed Charge is a fixed amount per day which attempts to recover the fixed
costs attributed to the customer service line, meter reading and customer account
administration. The Variable Delivery Rate is a volumetric charge that applies to each
cubic metre of natural gas used by the customer. The Variable Delivery Rate attempts
to recover costs associated with the distribution system. As the customer's usage
varies, from month to month, so will the Variable Delivery Rate on the bill. By contrast,
the Daily Fixed Charge remains the same.
At Committee, it was commented that there was no rationale for the increase in the
fixed charge, which is why it could be reduced. Staff would like to respond to this point
to provide an important clarification. As was noted in the original report, the increase in
the fixed delivery charge is offset by a reduction in the variable delivery charge. This is
revenue neutral and is intended to better reflect the split of fixed and variable costs in
keeping with the approach followed by other natural gas utilities. The primary reason
for the 4.75% overall increase in gas rates is attributed to the actual increase in the cost
of gas supply, which is a flow- through cost, associated with the exceptionally cold
winter. While deliberating on the natural gas supply policy, Council determined that gas
rates should be more market responsive. As such, it will be an increasing reality that
gas rates will fluctuate up and down with more volatility based on differences in the
supply market and that it is unreasonable to expect that the overall rate impact can be
held "at the rate of inflation" which appears to be the intent behind the alternative rate
proposals being brought forward. Certainty and stability cannot be provided under a
market responsive approach. It would be inappropriate to attempt to subsidize a
necessary and legitimate gas supply rate change through reductions to the gas delivery
rate which cannot be supported by the actual cost of service for gas delivery.
The impact of a reduction in the proposed Daily Fixed Charge is as follows:
A Residential Customer (M1) Annual Bill Comparison for each proposed change in the
Daily Fixed Charge is attached as Appendix A.
Reduction
Total
Annual
Annual
in
Annual Fixed
Annual Variable
Annual
Deliver
charge
delivery charge
Delivery
Delivery
Revenue
charge
Impact
Impact
Current
$251.85
$158.29
$410.14
Proposal -
$266.45
$152.09
$418.54
$8.41
2.05%
$0.73 /day
1 cent reduction -
$262.80
$152.09
$414.89
$4.76
1.16%
$0.72 /day
$247,982
2 cent reduction -
$259.15
$152.09
$411.24
$1.11
0.27%
$0.71 /day
$495,964
3 cent reduction -
$255.50
$152.09
$407.59.
-0.62%
$0.70 /day
$743,946
A Residential Customer (M1) Annual Bill Comparison for each proposed change in the
Daily Fixed Charge is attached as Appendix A.
IMPACT OF A 1, 2, 3 CENT REDUCTION IN THE FIXED DAILY CHARGE ON THE
STABILIZATION BALANCES
A Reserve Fund Policy, Staff Report FCS -12 -102, was presented to the Finance and
Corporate Services Committee in May 2012. Municipalities should strive to maintain an
appropriate level of reserve funds to ensure future liabilities can be met, capital assets
are properly maintained and sufficient financial flexibility exists to respond to economic
cycles or unanticipated financial requirements. Reserve funds form a critical part of
Kitchener's long -term financial planning framework and are used:
• To provide rate stabilization in the face of variable and uncontrollable factors
(e.g. growth, interest rates, weather, economic downturns, changes in
legislation);
• To avoid spikes in funding requirements for large capital projects, thereby
reducing the reliance on long -term debt; and
• To provide flexibility to manage debt levels within Council approved guidelines
and protect the City's financial position.
The Reserve Fund Information Sheet for the Gas Utility (Delivery) Stabilization Reserve
Fund states that the closing balance should not be less than 10% of the Gas Delivery
Revenues in keeping with the statement of recommended practice outlined by the
Government Finance Officers Association, among others.
Reserve levels, as per the current approved policy, are to be 10 -15% of Budgeted
Revenues. The range expected for 2014 is $3,731,880 to $5,597,820. Any reduction
would move the Stabilization Reserve below the minimum balance and seriously
expose the City to rate shock in 2015 should there be any negative deviation from
forecast as was the case for gas supply in 2014.
The impact of a reduction in the proposed Daily Fixed Charge on the Stabilization
Reserve is as follows:
Stabilization Reserve
Level Forecast to
December 2014
Stabilization Reserve
Level Forecast to
December 2015
Proposal - $0.73
$ 5,728,929
$ 708,175
1 cent reduction
$ 5,647,107
$ 460,193
2 cent reduction
$ 5,565,285
$ 212,211
3 cent reduction
$ 5,483,462
($35,771 35)
IMPACT OF A 1, 2, 3 CENT REDUCTION IN THE FIXED DAILY CHARGE ON THE
CAPITAL PROGRAM
Kitchener Utilities is committed to delivering safe and reliable natural gas to its
customers. Capital investment and operating costs related to public safety and system
integrity are the primary drivers of our delivery rates. Increased regulatory and industry
standards concerning local distribution pipelines and public safety has led to an
industry-wide step- change in capital investment on existing infrastructure. As part of
Kitchener's asset management and integrity management strategies, Kitchener Utilities
continues to expand its distribution main replacement program. This program has been
created to address emerging issues specifically related to aging infrastructure, with a
goal of creating a prioritized list of Kitchener Utilities gas distribution mains that should
be considered for replacement. Criteria such as age, material type, location, cathodic
protection and leak history are all being taken into account when determining priorities.
The impact of a reduction in funding, from our delivery rates, will impact Kitchener
Utilities Replacement Gas Mains and the Infrastructure Replacement Program. Each
$250,000 reduction in funds equates to five (5) city blocks with approximate 130
services not being replaced. The deferral of these projects will create future issues in
regard to replacing our aging infrastructure installed in Kitchener from 1950 -1970. The
same could be said for the balance of the capital program in the Gas Utility which
revolves around the lifecycle replacement of natural gas infrastructure whether it be
metering equipment, which is governed by Measurement Canada, or the timely
replacement of the billing system, which ensures that the City is able to remain abreast
of the ever - changing regulatory billing requirements for natural gas utilities.
NATURAL GAS SUPPLY PROGRAM
Natural Gas Supply is the supply of the commodity. All customers have the option to
purchase their natural gas supply from a seller other than Kitchener Utilities. Gas
Supply is provided to customers who purchase their natural gas supply from Kitchener
Utilities. Natural gas is sold to customers at cost, along with expenses incurred in the
procurement of natural gas. Kitchener Utilities does not incur a gain or loss on the sale
of the commodity. The breakdown of the 2014 Budget Costs for the Natural Gas Supply
Program is attached as Appendix B.
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 proposed delivery rates, as outlined in Staff Report INS -14 -015, are the result of a
detailed cost allocation analysis that indicated a need to shift costs between different
rate classes as well as to shift costs between the daily fixed charge and the variable
delivery charge. The overall revenue impact to Kitchener Utilities is zero. The overall
impact to the Residential M1 customers is $8.40 or 2.05 %. A reduction in the proposed
daily fixed charge will result in a reduction in revenue, up to $743,946, based on a three
(3) cent reduction per day. This reduction will negatively impact our Stabilization
Reserve Fund which will move the fund below the minimum recommended balance and
seriously expose our customers to a substantial rate increase in 2015. The reduction
will also impact our infrastructure replacement program by reducing the funds required
to maintain a safe and reliable supply of natural gas to our customers.
ATTACHMENTS:
Appendix A — Residential Customer (M1) Annual Bill Comparison
Appendix B - Natural Gas Supply Program Costs
COMMUNITY ENGAGEMENT:
A "bill estimator' is being developed to allow customers to determine supply and
transportation rate change impacts on their specific annual consumption. Launch of the
new tool is projected for Q4 2014.
CONCLUSION:
Finance and Corporate Services Committee Recommendation:
That consideration of the recommendation be referred to the August 25, 2014
Council meeting to allow time for additional information to be provided regarding the
impact of the proposed change to the daily fixed rate for M1 customers:
"That the supply component of the natural gas rates be increased to 19. 0 cents
per cubic meter from 16. 5 cents per cubic meter for system gas customers of the
City of Kitchener effective September 1, 2014; and,
That the transportation component of the natural gas rate be decreased to 3.0
cents per cubic meter from 4. 0 cents per cubic meter for system gas customers
of the City of Kitchener effective September 1, 2014; and further,
That the delivery components of the natural gas rates be changed as proposed in
Infrastructure Services Department report INS- 14- 015 - Appendix A for all
Kitchener delivery customers effective September 1, 2014, except for the daily
fixed rate for M 1 customers which will be set at $ 0.70, as opposed to $ 0.73."
ACKNOWLEDGED BY: Pauline Houston, Deputy CAO, Infrastructure Services
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Gas Supply Program Costs
2014 Budget
1 Commodity & fuel gas & Agent Billing and Collection fee 31,425,331
Salary & Wages - Internal Staff 203,287
2 Internal Charges 47,801
3 Admin, Professional Services, Advertisement 163,317
31,839,736
1 Definitions:
Commodity - natural gas purchases
fuel gas - gas required for compressors to move gas along
pipeline
Agent, Billing and Collection - fee charged for producing
and managing the bill to customers
2 Internal Charges details:
INT CHG -ADMIN O/H
20,944
INT CHG -FACIL MTCE
4,535
INT CHG- STORES COSTS
1,826
INT CHG - COMMISH OFCE
19,926
INT CHG - PEOPLESOFT FEES
570
47,801
3 Admin, Professional Services, Advertisement details
Admin
LONG DISTANCE
95
CELL /PAGER CHG
856
MISC EXPENSE
285
TELEPHONE RSVE CHG
882
INT &CARRYING CHRGS
25,092
RENT &LEASE -COMP CHG
2,036
BANK SERV CHARGES
1,080
30,326
Professional Services
PROF SERV -AUDIT
991
PROF SERV- CONSULTANT (ECNG, AEGENT)
102,000
102,991
Advertisement
ADV &PUBLICITY
30,000
Total Admin, Professional Services, Advertisement
163,317