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HomeMy WebLinkAboutFIN-08-145 - Natural Gas Rates - Additional Info1 KITC~~R Financial Services REPORT Report To: Mayor Zehr and Members of Council Date of Meeting: October 27, 2008 Submitted By: Dan Chapman, General Manager of Financial Services Prepared By: Wally Malcolm, Director, Utilities Ward(s~ Involved: All Date of Report: October 24, 2008 Report No.: FIN-08-145 Subject: NATURAL GAS RATES -ADDITIONAL INFORMATION RECOMMENDATION: For Information Purposes. BACKGROUND: On Monday, October 20, 2008, the Finance & Corporate Services Committee reviewed finance report FIN-08-131 -Natural Gas Rates. Staff recommended that the supply component of the natural gas rates be increased to 31.6 cents per cubic meter from 28.0 cents per cubic meter for system gas customers of the City of Kitchener effective November 1, 2008; and, that the transportation component of the natural gas rates be increased to 5.284 cents per cubic meter from 4.114 cents per cubic meter for system gas customers of the City of Kitchener effective November 1, 2008 to reflect the final rates charged by TransCanada Pipelines as previously approved by the National Energy Board. Following the presentation of the report, committee members deferred the decision on the recommendation and requested additional information pertaining to the proposed increase of rates to system gas customers. The additional information requested is summarized as follows: 1. What is the percentage increase received from TransCanada Pipelines? 2. What is the percentage of the average residential gas bill related to the transportation costs? 3. Require a historical breakdown of each component on the bill and the percentage change on the customer's bill. 4. Potential write down of gas inventory at the end of the year 5. Why is the Gas Utility revenue currently exceeding its budget? 6. Can we defer the percentage increase from winter rates to the following year to assist our customer's bottom line? REPORT: 1. Kitchener Utilities obtains some of its gas supplies from the western Canadian provinces through the TransCanada Pipeline Limited interprovincial pipeline system and related systems. In 2007, TransCanada Pipelines had received approval from the National Energy Board for a five year plan with the cost of transportation averaging 4 cents per cubic meter. In March of 2008, TransCanada Pipelines indicated a need to raise the rate for 2008 from 4.114 cents per cubic meter to 4.944 cents per cubic meter effective April 1, 2008 and then increase the rate to 5.284 cents per cubic meter effective June 1, 2008. The 4.114 cents per cubic meter rate was approved by the National Energy Board and Kitchener Utilities applied the new rate effective April 1, 2008. The National Energy Board approved transportation rate of 5.284 cents per cubic meter in June 2008 has not been included in the customers' rate by Kitchener Utilities. The rate increase attributed to the transportation component of the recommended rate equates to 28%. The reason for the increase in TransCanada Pipelines rates is attributed to a larger than forecast decrease in the contracting for TransCanada Pipelines transportation system resulting in a need to raise rates to recover expected costs of the system. 2. The percentage of an average residential natural gas bill related to the transportation component is 10%. With the proposed increase to the transportation component, the average residential customer bill will include approximately $9.25 per month or $110.96 per year for transportation costs. This proposed yearly increase is actually lower than the amount charged to residential customers in 2004. Based on current rates, the proposed increase amounts to an additional $24.57 per year or $2.05 per month for the average residential natural gas bill. 3. Please see the attached appendix for the following information: a. Historical Kitchener Utilities Component Rates b. Comparative Natural Gas Supply Rates c. Comparative Year End Total Gas Rates between Kitchener Utilities and Union Gas d. Current Retail Offerings for Kitchener Utilities Customers by Gas Marketers 4. The accounting requirement for year end financial statements is to value gas inventory at the lower of cost or market. If the prevailing market price is greater than the actual average cost, the inventory must be written down to the lower value. The write down is calculated by multiplying the amount of gas in storage by the difference between actual average cost and the current prevailing market price. Factors that contribute to the valuation include the amount of consumption by our customers, the average price of the natural gas, and the price at Dawn at the end of the year as well as the value of the Canadian currency at the end of the year. During any given time period, the value at market could vary substantially. Last week, the potential write down was in the range of $8 million dollars. With the decline in the value of the Canadian currency over the past week, the value of the natural gas was even with the market. As of the day this report was written, given the current price of natural gas at Dawn and the value of the Canadian dollar, the write down would be approximately $500,000. 5. During 2008, Kitchener Utilities (delivery business) received a rebate from Union Gas valued at approximately $1.1 million. This rebate was unusually high due to favourable market conditions (seasonal spread between the summer and winter gas) for storage in 2007. The rebate is attributed to a revenue sharing mechanism in place to ensure Union Gas shares profits with their customers in regard to their unregulated long-term storage contracts. The value of the rebate will decline over four years based on an Ontario Energy Board decision. Union Gas customers will no longer receive a long term storage contract benefit after the fourth year of the Ontario Energy Board decision. Following the four year phase out period, Union Gas customers will see some storage rebates at significantly reduced levels. The sharing of profits earned by Union Gas on long-term storage contracts will be phased out over the 2008 to 2011 as follows: 2008 = 25%, 2009 = 50%, 2010 = 75%, 2011 =100% 6. The City of Kitchener has a disciplined portfolio approach to natural gas purchase. We buy natural gas in smaller amounts at various times of the year, at the best price available at that time. This approach removes most of the large swings in price from impacting our customers. Our retail rate is determined based on our committed purchases forward, some forecast purchases and costs already incurred but not yet recovered. As a normal part of our business, we begin filling the storage allocation we have during the summer in order to provide continuous natural gas service in the winter months. Prices in natural gas rose sharply from April to mid July 2008. During this time period, Kitchener Utilities had to fill our storage requirements during this period of rapidly rising and volatile market pricing to ensure enough natural gas was available to our customers during the winter heating season. Since mid July 2008, the price of natural gas has fallen sharply. Kitchener Utilities has taken advantage of this significant drop for future pricing and storage allocation of natural gas; however, we must set our current retail rates to customers to recover our costs for the current storage of natural gas obtained for the upcoming winter heating season. It is important to note that the Ontario Energy Board does not allow rate regulated utility to profit on its gas purchases with the result that the utility has no profit incentive to increase the cost of gas to its customers. The utility charges its customers the price that it pays to secure the gas for the customers' consumption. There are many factors that contribute to the volatility that Natural Gas has shown over the past 12 months. Some of those factors are the demand for the commodity, the current and future availability of the supply of the commodity, the economic climate and the production levels of the commodity. During the process of deregulating the energy industry, the Ontario Energy Board recommended that all municipal utilities be regulated by the Ontario Energy Board to ensure a level playing field for energy utilities in the province. Through lobbying on the political and staff level with the Ministry of Energy, the City of Kitchener was able to maintain its historical right to be regulated through municipal council. Part of the lobbying effort was a commitment to provide a cost based gas supply service to our customers without cross-subsidization from the delivery business. A deferral of the proposed increase in supply price would result in a deficit of approximately $2,000,000. A deferral of the proposed increase in the transportation component would result in a reduction of revenue of approximately $2,000,000. A reduction may impact budgeted transfers to the tax supported operating and capital budgets. The potential cost of this deferral along with any potential year end inventory write down, could result in significant rate increases or rate uncertainty at a later date. In addition, it is our policy to ensure that supply rate shortfalls or surpluses are balanced out and built into the rates within a one year period. FINANCIAL IMPLICATIONS: For the average residential customer using 2100 cubic meters of gas a year, the annual increase of the recommended rates is approximately $100 or 27 cents per day. Wally Malcolm, MBA, P.Eng. Dan Chapman, CA, MPA General Manager of Financial Services 750 00 Kitchener Utilities Rate Components . 700 00 . 650 00 . 600 00 . 550 00 . 500 00 . 450 00 . 400 00 . 350.00 300.00 250 00 . 200 00 . 150 00 . 100.00 50 00 . ~` Off` Off` O~ ~~ O~ O~ OHO ~~O OHO OHO O~ ~~ O~ O~ O~ ~~ O~ O~ ~`~~ PJO; ~o~' ~~~ ~`~~ PJO; ~o~ ~~,p ~`a~ PJa; ~o~ ~~~ ~`~~ Pao; ~o~' ~~~ ~`a~ PJO; ~o~ Supply Transportation Delivery 7o°i Kitchener Utilities Rate Components Percentage Change ° 65°i ° 6o°i° 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% %of total %of %of %of %of %of %of %of %of %of total total total total total total total total total Supply ~ Transportation ~ Delivery ~~ $0.42000 - $0.37000 - $0.32000 - $0.27000 - $0.22000 - $0.17000 - $0.12000 - $0.07000 -~ roo~rn~o~o~rnoooooo~~~~~~NNNcVNNc~c~Mr~c+~c+~~.~~~.~.~~~~cr~cr~cr~cocoocococonn^nnnroro~rocnro rno~~°~rnrnrnoo~ooooo~ooooo~ooooo~ooooo~ooooo~ooooo~ooooo~ooooo~ooo Major Utility A ~ CCK ~ Major Utility B Comparative Natural Gas Supply Rates Rate Comparison 60 50 m m ~' 40 E ~ 30 m a 20 a~ 10 0~ 1998 2000 2002 2004 2006 2008 2010 ~ Kitchener - --Union Gas Year Supply Rate Comparison 45 39.9 40 35 30 M 25 m ~ 20 15 10- 5 0~ 37.5 39.9 38.7 31.6 Superior Energy FireFly Energy OESC Universal Energy Kitchener Utilities Source: Energyshop