D Barry Kirkham, QC+ James D Burns+ jeffrey B Lightfoot' Christopher P Weafer+ Michael P Vaughan Gary M Yaffe+ Jonathan L Williams+ Scott H Stephens+ james W Zaitsoff jocelyn M Le Dressay Carl J Pines, Associate Counsel+ Robin C Macfarlane+ Duncan 1 Manson+ Daniel W Burnett, QC + Ronald G Paton+ Gregory J Tucker+ Heather E Maconachie Michael F Robson+ Zachary 1 Ansley+ Pamela E Sheppard Katharina R Spatz! L Basham, QC, Associate Counsel+ Hon WalterS Owen, OC, QC, LLD (1981) john I Bird, QC (2005) January 31, 2014 VIA ELECTRONIC MAIL Douglas R Johnson+ Alan A Frydenlund+ * Harvey S Delaney+ PauiJ Brown+ Karen S Thompson+ Terence W Yu+ james H McBeath+ Susan C Gilchrist George J Roper British Columbia Utilities Commission 6 111 Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3 josephine M Nadel+ Allison R Kuchta+ James L Carpick+ Patrick 1 Haberl+ Andre 1 Beaulieu+" Harley 1 Harris+ Paul A Brackstone+ Edith A Ryan Daniel H Coles + Law Corporation Also of the Yukon Bar Also of the Alberta Bar 0\iVEN·Bl..RD PO Box 49130 Three Bentall Centre 2900-595 Burrard Street Vancouver, BC Canada V7X 1J5 Telephone 604 688-0401 Fax 604 688-2827 Website www.owenbird.com Direct Line: 604 691-7557 Direct Fax: 604 632-4482 E-mail: [email protected]Our File: 23841/0092 Attention: Ms. Erica Hamilton, Commission Secretary Dear Sirs/Mesdames: Re: FortisBC Inc. Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 No. 3698719 Re: FortisBC Energy Inc. (FEI) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 No. 3698715 We are counsel for the Commercial Energy Consumers Association of British Columbia (CEC). Further to our letter and the CEC's submissions of January 29, 2014, attached please find the CEC's responses to the unanswered questions of Information Request #1 of the BC Sustainable Energy Association and the Sierra Club British Columbia (BCSEA) pertaining to the above- noted matters. We apologize for any inconvenience caused by this delay. A copy of this letter and attached Responses has also been forwarded to FortisBC, FEI, BCSEA and registered interveners by e-mail. If you have any questions regarding the foregoing, please do not hesitate to contact the undersigned. Yours truly, OWEN BIRD LAW CORPORATION Christopher P. Weafer CPW/jlb {00100103;1) AFFtLJATED WITH AIRD & BERLIS • TORONTO B INTERLAW MEMBER OF lNTERLAW, AN INTERNATIONAL ASSOCIATION \8J OF !NDEI'F.NDENT LAW FIRMS IN MAJOR WORLD CENTRES C6-13-1
Transcript
D Barry Kirkham, QC+ James D Burns+ jeffrey B Lightfoot' Christopher P Weafer+ Michael P Vaughan Gary M Yaffe+ Jonathan L Williams+ Scott H Stephens+ james W Zaitsoff jocelyn M Le Dressay
Carl J Pines, Associate Counsel+
Robin C Macfarlane+ Duncan 1 Manson+ Daniel W Burnett, QC + Ronald G Paton+ Gregory J Tucker+ Heather E Maconachie Michael F Robson+
Zachary 1 Ansley+ Pamela E Sheppard Katharina R Spatz!
Rose~Mary L Basham, QC, Associate Counsel+ Hon WalterS Owen, OC, QC, LLD (1981) john I Bird, QC (2005)
January 31, 2014
VIA ELECTRONIC MAIL
Douglas R Johnson+ Alan A Frydenlund+ * Harvey S Delaney+ PauiJ Brown+ Karen S Thompson+ Terence W Yu+ james H McBeath+
Susan C Gilchrist George J Roper
British Columbia Utilities Commission 6111 Floor, 900 Howe Street Vancouver, B.C. V6Z 2N3
josephine M Nadel+ Allison R Kuchta+ James L Carpick+ Patrick 1 Haberl+ Andre 1 Beaulieu+" Harley 1 Harris+ Paul A Brackstone+
Edith A Ryan Daniel H Coles
+ Law Corporation Also of the Yukon Bar Also of the Alberta Bar
0\iVEN·Bl..RD
PO Box 49130 Three Bentall Centre 2900-595 Burrard Street Vancouver, BC Canada V7X 1J5
Re: FortisBC Inc. Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 ~Project No. 3698719
Re: FortisBC Energy Inc. (FEI) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018 ~Project No. 3698715
We are counsel for the Commercial Energy Consumers Association of British Columbia (CEC).
Further to our letter and the CEC's submissions of January 29, 2014, attached please find the CEC's responses to the unanswered questions of Information Request #1 of the BC Sustainable Energy Association and the Sierra Club British Columbia (BCSEA) pertaining to the abovenoted matters. We apologize for any inconvenience caused by this delay.
A copy of this letter and attached Responses has also been forwarded to FortisBC, FEI, BCSEA and registered interveners by e-mail.
If you have any questions regarding the foregoing, please do not hesitate to contact the undersigned.
Yours truly,
OWEN BIRD LAW CORPORATION
Christopher P. W eafer CPW/jlb
{00100103;1) AFFtLJATED WITH AIRD & BERLIS • TORONTO
B INTERLAW MEMBER OF lNTERLAW, AN INTERNATIONAL ASSOCIATION
\8J OF !NDEI'F.NDENT LAW FIRMS IN MAJOR WORLD CENTRES
C6-13-1
kberezan
New Stamp
January 31,2014 Page 2
cc: CEC cc: FortisBC Inc. cc: FortisBC Energy Inc. cc: Registered Interveners
{00100103;1)
-0VVEN•BII\D
CPW21307
COMMERCIAL ENERGY CONSUMERS ASSOCIATION OF BRITISH COLUMBIA (CEC)
CEC RESPONSES TO UNANSWERED QUESTIONS OF INORMATION REQUEST #1
OF BC SUSTAINABLE ENERGY ASSOCIATION AND THE SIERRA CLUB BRITISH COLUMBIA (BCSEA)
FortisBC Energy Inc. (FEI) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018
Project No. 3698715
AND
FortisBC Inc. (FBC) Application for Approval of a Multi-Year Performance Based Ratemaking Plan for 2014 through 2018
Project No. 3698719
2.3 Has Dr. Lowry examined the other important components of a multiyear rate plan proposed by FEI and FBC, either as they may affect the ARM or in their own right? If so, what comments can Dr. Lowry provide?
Response:
Dr. Lowry was retained in this proceeding to address the design of the ARMs for the two Fortis companies. He has not undertaken a careful review of all plan provisions. Please see his comments below on the earnings sharing and efficiency carryover mechanisms. Should BCSEA-SCBC have additional questions please follow up in the second round of information requests.
4.4 How would FEI's proposed PBR mechanism affect the utility's incentives to implement FEI's natural gas for transportation program? Is there a danger that the efficiency incentives in the PBR mechanism would induce FEI to curtail the NGT program inappropriately? If so, please identify the options for eliminating such perverse incentives.
Response:
It is Dr. Lowry's understanding that revenues from the natural gas for transportation program will not be addressed by the RSAM. Thus, FEI receives incremental margins from its efforts to promote transport volumes. The cost efficiency incentives of a PBR plan are usually insufficient to prevent a utility from investing in customer c01mections in support of new
COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No.1 of the
BC Sustainable Energy Association and Sierra Club BC
volumes. Cost tracking might be warranted for exceptionally lumpy infrastructure investments, as these investments were not common for utilities in Dr. Lowry's sample.
5.1 What are Dr. Lowry's recommendations, for FEI and for FBC, regarding
whether (if it approves PBR) the Commission should approve
5.1.1 the use of a macroeconomic output price index or a utility-specific input price index, and
5.1.2 comprehensive revenue (or cost) indexes or separate indexes for O&M and capex?
Response:
Dr. Lowry believes that a utility-specific price index is clearly warranted for a capex escalator, given the volatility of utility construction costs and the availability of credible construction cost indexes. The need for such an index is less clear for O&M revenue, capital revenue, and
total revenue caps, since the prices corresponding to these input groups are more stable and available macroeconomic price indexes aren't slowed by rapid growth in the MFP of the Canadian economy. Please see our response to BCUC-CEC (1) 22.1 for a specific
recommendation.
The choice between comprehensive revenue indexes like those used by Alberta gas utilities and
separate O&M and capex revenue indexes is a difficult one. The design of a comprehensive revenue cap index like those used by Alberta gas utilities is complicated by the fact that Fortis proposes to recover the costs of all large construction projects via a CPCN cost tracker. The residual capital cost addressed by the I-X mechanism would grow more slowly as a consequence of the large exclusions. CPCN projects involve "lumpy" plant additions, but most of these
additions were also routinely incurred by the companies in Dr. Lowry's productivity research sample. It is hard to ascertain what value of X will properly capture the slow growth of the
residual capital cost. The problem could be alleviated by narrowing the capex projects eligible
for tracker treatment.
With respect to the approach proposed by Fortis, extensive research on the drivers of energy
distributor O&M expenses makes it possible to design O&M revenue escalators with some precision. Considerably less research has been undertaken on the drivers of gas utility and
energy distributor capex. The research that we have undertaken uses only the number of customers served as the output measure. Multi -category output indexes would be more appropriate. Such indexes might include as additional output metrics, line miles and growth in the number of customers (customers1 - customerst-J). Weights for the output metrics could be
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COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No.1 of the
BC Sustainable Energy Association and Sierra Club BC
based on econometric estimates of cost elasticities, but this would involve considerable
additional research.
5.2 Please provide a summary of Dr. Lowry's recommendations regarding inflation factors.
7.1 What is the quantitative basis for Dr. Lowry's conclusion that "Considering all
of these factors, we believe that a stretch factor of 0.20% is reasonable for each
Fortis company" [p.70]?
Response:
Dr. Lowry has performed incentive power research for many years which estimates the expected cost efficiency growth of utilities under alternative, stylized regulatory systems. This research has been funded by numerous clients, including Canadian utilities and regulatory agencies. Based on this research, Dr. Lowry has found that a modest improvement in the incentive power
of a regulatory system is likely to accelerate cost efficiency growth by around 20 basis points in
the long run.
Dr. Lowry explained m his testimony that the incentive power of the regulatory systems proposed by the Fortis companies is likely to be only modestly stronger than the incentive power
of the regulatory systems of the sampled utilities. Attachment BCSEA/SCBC (1) 7.0 provides a survey of precedents for stretch factors and other features of attrition relief mechanisms which Dr. Lowry's staff has gathered. It can be seen that the average approved explicit stretch factor is 0.42%. Most recently, a 0.20% stretch factor was approved for Alberta Energy Distributors. Stretch factors in the new PBR plan for power distributors in Ontario average 0.30%, and vary
between companies in accordance with the results of an econometric total cost benchmarking study. 1 Since, additionally, there is no reason to believe that the utilities are superior or inferior
cost performers, stretch factors of 0.20% are indicated.
9.0 Topic: Earnings Sharing Mechanism
1 This benchmarking study was prepared by PEG Research.
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COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No.1 of the
BC Sustainable Energy Association and Sierra Club BC
Dr. Lowry discusses FEI's and FBC's proposed Earnings Sharing Mechanism in the context of discussing factors relevant to Dr. Lowry's proposed stretch factor.
9.1 Please provide Dr. Lowry's comments on FEI's and FBC's proposed Earnings Sharing Mechanism.
Response:
FBC and FEI both propose an ESM that shares all earnings variances 50/50 between the company and its customers. The downside of this approach is that it materially weakens performance incentives. The upside is that it reduces utility operating risk, guards against windfall gains and losses, and shares with customers the benefits of short-term cost savings that may not be passed through in the next rate reset. With respect to the latter consideration, a real concern is the possibility of approving X factors based on long-term productivity trends that do not reflect the opportunity to defer some costs until the end of the plan period. This concern can be mitigated by an appropriately designed efficiency carryover mechanism.
9.2 Please provide Dr. Lowry's comments on FEI's and FBC's proposed Efficiency Carry-Over Mechanism.
Response:
Dr. Lowry is generally supportive of the idea of efficiency carryover mechanisms ("ECMs") as a means of promoting long-term performance gains and discouraging opportunistic timing of deferrable costs. There is a real concern that a utility under PBR will defer costs in the early and middle years of a plan, only to raise them sharply in the final years and/or propose sharp hikes in the next rate case. This is particularly a concern for O&M expenses, since low capex in the early and middle years of the plan lowers capital costs for many years to come. ECMs must nonetheless be carefully designed to ensure that they encourage long-run efficiency gains and equitably share their benefits.
The ECMs proposed by Fortis share traits with those used in multiyear rate plans for energy distributors by the Essential Services Commission in Melbourne, Australia. In both cases, the utility would be guaranteed several years of benefits for reducing cost below the cap provided by the index-based escalator. A more detailed critique of the Fortis ECM proposal can be provided in the second round of IRs, should BCSEA and SCBC have an interest.
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COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No.1 of the
BC Sustainable Energy Association and Sierra Club BC
12.2 Please provide answers to the preceding questions applied to the choice of 10% removal of plant additions for FBC.
Response:
Dr. Lowry does not understand this question.
12.3 If the Commission was to select an X factor for FEI in the [1.16%, 1.33%] range,
what is Dr. Lowry's opinion regarding whether the most appropriate figure is the lower bound, the upper bound, or some figure in between.
Response:
12.3.1 If the answer is 'some figure in between,' how should the figure be
chosen? A simple average?
Please see the response to BCUC CEC (1) 22.1 for Dr. Lowry's final X factor recommendations.
12.4 If the Commission was to select an X factor in the [1.13%, 1.38%] range for FBC,
what is Dr. Lowry's opinion regarding whether the most appropriate figure is the
lower bound, the upper bound, or some figure in between.
Response:
12.4.1 If the answer is 'some figure in between,' how should the figure be
chosen? A simple average?
Please see the response to BCUC CEC (1) 22.1 for Dr. Lowry's final X factor
recommendations.
13.0 Topic: X-Factor for Separate O&M and Capex Reference: Exhibit FEI CEC, Cl-9-1 (FBC CEC, C6-9-6), 8. Summing Up
"Suppose next that the Commission prefers to have separate cost targets for O&M expenses and some notion of capital cost."
13.1 For convenience, please confirm that in the event that the Commission prefers to have separate cost targets for O&M expenses and some notion of capital
cost Dr. Lowry's research supports for FEI an x0 M factor of 1.18% and an X
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Response:
COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No.1 of the
BC Sustainable Energy Association and Sierra Club BC
factor for capital in the [1.18%, 1.54%] range.
Please see the response to BCUC CEC (1) 22.1 for Dr. Lowry's final X factor
recommendations. These recommendations include the results of new research to develop appropriate X factors for capex escalators. This research was undertaken in response to this data request. Results of the research are provided in Attachment BCSEA/SCBC (1) 13.0.
Growth in the capex productivity of each sampled gas and electric distributor was calculated
as the difference between growth in the total number of customers and growth in a plant addition quantity index. Growth in each plant addition quantity index was calculated as the difference between growth in the value of gross plant additions and the growth in a plant addition input price index. For gas utilities, gross plant additions equaled total gross gas plant additions. For electric utilities, gross plant additions equaled the sum of distribution gross plant additions and a sensible share of general gross plant additions. The general cost allocator was the same as that used in the MFP research.
The plant addition input price index for gas utilities was the appropriate regional total-plant Handy Whitman index of cost trends in gas utility construction. For power distributors, growth in the plant addition input price index was a weighted average of growth in appropriate Handy Whitman indexes of electric utility construction cost trends for distribution and general plant. The shares of each asset class in total distribution and general plant additions were the weights.
13.2 Please confirm that in the event that the Commission prefers to have separate cost targets for O&M expenses and some notion of capital cost Dr. Lowry's
research supports for FBC an x0 M factor of 1.71% and an X factor for
capital in the [0.81 %, 1.25%] range.
Response:
Please see our response to question BCSENSCBC (1) 13 .1.
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Please see attached.
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COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No. I of the
BC Sustainable Energy Association and Sierra Club BC
Attachment 1 Question 7.0
7
Attachment BCSEA/SCBC-CEC (1) 7.0
COMPREHENSIVE INDEX-BASED ARMs OF NORTH AMERICAN ENERGY UTILITIES1
Service Utility Jurisdiction Term Cap Form Measure (P) (A) (B) X~Factor 3
Gas Distribution Blackstone Gas Massachusetts 2004-2009 Price Cap GDPPI NA NA 0,50%
Power All New Zealand 0.86% (AYcmgc Across distribution distributors NewZcnland 2004-2009 Price Cap CPI 2.10% NA Finns)
63%:-:lnllation Gas Distribution TcruscnGas British Columbia 20{}.1-2009 Rc\'CnucCnp CPI NA NA (Average)
Northcm
Power Territory, distribution Power & Water Australia 2004-2009 Price Cap CPI !.75% 0.25% HXI%
2004-2013,
terminated in Gas distribution Boston Gus (II) Massuchu.-.ctts 2010 Price Cap GDPPl 0.58% 0.30% 0.41%
Power All Ontario
Distribution Distributor:; Onturio 2006-2009 Price Cap GDPlPI NA NA 1.00%
Oil Pipelines All FERC 2006-2011 Price Cap PPI-Finishcd Goods NA NA -1.3%
Power
distribution Nstar Massnchuse11s 2006-2012 Price Cap GDPPI NA NA 0.63%(t\V(,.,.Ugc)
2006-2015,
tcnninutcdin Gas distribution Bay Stale Gus Massachusetts 2009 Price Cup GDPPI 0.58% 0.40% 0.51%
2007-2009, Btmdled power cxtcnd'-'t.l to
scn.•ice Pncificorp(II) California 2010 Price Cup CPI NA NA 0.50%
Power
Distribution ENNtAX Albertu 2007-2013 Price Cap lndustty-spccific 0.80% 0.40% 1.20%
47% x In!lation
Gas Distribution Enbridge Gus Ontario 2008-2012 RevcnucCnp GDPPI NA NA (Avcruge)
Gas Distribution UnionGns Ontario 2008-2012 Revenue Cap GDPPI NA NA 1.82%
2009-2011, Bundled power extended to
scn.•icc Sierm Pacific Power California 2012 Pricl.lCnp CPI NA NA 0.50%
Power Central Muine Power Distribution {lll) Maine 2009-2013 Price Cap GDPPI NA NA IJXJ%
Northern Power Territory.
Distribution Power&Watcr Australia 2009-2014 Price Cap CPl !.10% 0.25% -0.85%
Power All Ontario 0.40% (A\'eragc Across l.l2%(AvcragcAcross
Distribution Distributors Ontario 2010-2013 Price Cap GDPPI 0.72% Fim1s) Fim1s)
Attachment BCSENSCBC-CEC (I) 7.0 Continued
Applicable Service Utility Jurisdiction
Power Green Mountain Distribution Power
Power Distribution All Distributors
Power Centra! Vcnnont Distribution Public Service
BunJlcd power service Pacificorp(lll)
Oil Pipelines All
Power CalifomiaPacitic Distribution Electric
ATCO Electric, Power EPCOR,
Distribution FortisAlbcrta
Gas Distribution All Distributors
Gus Distribution Union Gas
Power All Ontario
Distribution distributors
Averages* Gas Distributors Electric Utilities All Utilities
Vennont
New Zealand
Vcnnont
Califomin
fERC
Cu!ifomia
AlbcrU1
Alberta
Ontario
Ontario
Term
2010-2013
2010-2015
2011-2013
20! 1-20!3, c:-.:tcndcd to
2015
2013-2017
2013-2017
2014-20\S
2014-2018
Averages' Industry Specific Inflation Measure Macroeconomic Measure All Utilities
*Averages exclude X factors that are percentages of inflation.
Cap Form
Rev1.:nucCup
Price Cap
Revenue Cap
Inflation Measure (P)
CPJ
CPI
CPJ
PriccCup CPI
Price Cup PPI-Finishcd Goods
Revenue Cap CPJ
Price Cap lndustry-spcci!ic
Revenue Cap lndustry-spccillc
Revenue Cup GDPPI
Price Cap lndustry-spcci!ic
Acknowledged Productivity Trend
(A)
NA
1.!0%
1.03%
NA
NA
NA
0.96%
0.96%
NA
OJJO%
0.59% 1.06% 0.89%
0.79% 0.98% 0.89%
Stretch Factor 2
(B)
NA
NA
NA
NA
NA
NA
0.20%
0.20%
NA
0.30% (Approxinmtc uvcmgc across !inns)
0.54% 0.33% 0.42%
0.41% 0.44% 0.42%
X-Factor 3
0.00%
!.OO"A.
0.50%
-2.65%
0.50o/o
1.16%
!.16%
60o/o x In!lution
0.30% (Approximate uvcmgeacross !inns)
1.12% 0.96% 0.83%
1.30% 0.70% 0.83%
1 New Zealand and Northern Territory, Australia precedents are included because X factors there are based on productivity research in the North American s1yle.
2 Some approved X factors are not explicitly constructed from such components as a base productivity trend and a stretch factor. Many of these are the product of settlements.
3 X factors may differ from A+B for the following reasons: (1) A macroeconomic inflation measure is employed in the attrition relief mechanism, (2) Revenue cap index does not include a stand alone output driver, (3) The X factor may incorporate additional adjustments to account for special distributor conditions (e.g. declining rate base of SoCal Gas).
4 Shaded plans are plans that are not currently in effect.
Please see attached.
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COMMERCIAL ENERGY CONSUMERS ASSOCIATION Responses to Unanswered Information Request No. 1 of the
BC Sustainable Energy Association and Sierra Club BC
Attachment 2 Question 13.0
8
Attachment BCSEA/SCBC-CEC (1) 13.0
Capex Productivity Results For Sampled U.S. Utilities (Growth Rates) 1
Gas Utilities Power Distributors Year Output Capex Quantity Capex Productivity Output Capex Quantity Capex Productivity
