IN THE MATTER OF THE ENERGY ACT AND AN APPLICATION BY CENTRAL HEAT DISTRIBUTION LIMITED DATED SEPTEMBER 14, 1979 DECISION MARCH 14, 1980 BEFORE: D. B. KILPATRICK, COMMISSIONER AND CHAIRMAN J. D. KING, COMMISSIONER F. E. WALDEN, COMMISSIONER
TABLE OF CONTENTS Appearances List of Exhibits Introduction . . . . . . . .. Issues . . . . . . ... . . . Interventions .. . . . . .. Test Year . ... . .. . .. Income Tax . . . . . . . . . Decision . . . . . . .. . .. SCHEDULE I Adjusted Utility Income and Rate of Return THE ORDER Order G-14-80 Page . . . ... . . . ... 1 . .. . . . ... . .. 2 . .. . .. . . . . .. 3 . .. . .. . .. . .. 3 . . . ... . . . ... 4 . . . . .. . .. . .. 4
APPEARANCES C. B. Johnson for D. Nielsen for M. M. Moseley Central Heat Distribution Linlited Harbour Centre Complex Limited Commission Counsel
LIST OF EXHIBITS Exhibit No. Application of Central Heat Distribution Limited,dated September 14, 1979, to Amend Steam Tariff B.C.E.C. No. 1. 1 Affidavit of James S. Barnes, dated March 10, 1980. 2 B.C.E.C. request for additional information, dated February 20, 1980. Response from Central Heat Distribution Limited, dated March 3, 1980. 3 Central Heat Distribution Limited, system map. 4 B.C.E.C. letter of November 27, 1978 and B.C.E.C. Order No. G-50-78. 5 Central Heat Distribution Limited, Financial Statements, December 23, 1978 to December 31, 1979. 6 Letter of C. B. Johnson, dated October 20, 1978. 7 Letter of R. B. Lundgren, dated October 25, 1978 and letter of J. S. Barnes, dated October 27, 1978. 8 Submission of Harbour Centre Complex Limited, dated February 20, 1980. 9 Central Heat Distribution Limited, Steam Tariff, B.C.E.C. No. 1, original page 4. 10
CENTRAL HEAT DISTRIBUTION LIMITED Application Dated September 14, 1979 DECISION INTRODUCTION The application of Central Heat Distribution Limited for increases in its rates for steam service by 4% on October 1, 1979, and a further 4% on April 1, 1980 was heard in Vancouver on March 11, 1980. An interim increase of 4% effective October 1, 1979, refundable with interest at 9% if found to be excessive, was granted by Order G-34-79. The background and history of the company has been set out in some detail in the Commission's decision of October 22, 1975, and will not be repeated here. Since that date, by reason of an amalgamation of Vancouver Central Investments Limited and its subsidiary Central Heat Distribution Limited, with the approval of the Commission there is now only one company with a simplified debt and capital structure. The company's tariffs include a fuel cost adjustment provision so that while charges for steam heat have increased since the last application for relief, there has been no increase in the basic steam tariff since April 1, 1978.
2 ISSUES This application is for an increase of 8% in the base rate for service. The Applicant points out that this provides a return on rate base of about 7.1% and, on the basis of the capital structure presented, a return on equity of about 5.4%. While the Applicant does not consider this return to be adequate, the pressures of competition are clearly limiting the rates that can be charged. The company's rate base for its initial system was approved in the 1975 Commission Decision. Adjustments to the rate base presented in the application are set out in Schedule I attached. The capital structure as submitted shows that the company is financed by deferred demand bank loans, an amount due to a former shareholder following the corporate reorganization in 1973, and non-interest bearing shareholder loans and retained earnings. The bank loans are subject to a floating interest rate related to ''prime" which at this time is very high. The extent to which the retained earnings and shareholder loans should be considered as equity capital and what proportion thereof should be treated as "preferred" and subject to a smaller rate of return is an issue that must
3 ultimately be addressed. At the present time, however, the company's prospective net utility income will not provide an excessive return in any circumstances and an appraisal of the appropriate capital structures therefore need not be made. INTERVENORS The intervention of one of the Applicant's customers spoke to inefficiencies of operation particularly with respect to provision in the system for condensate return. Neither the Intervenor nor the Applicant provided adequate technical evidence for the Commission to make an assessment of the matter. In any event in view of the financial pressures upon the company, and the fact that the Applicant's rates for service are determined by forces of competition rather than by limits imposed by regulation, it is concluded that the company is strongly motivated to operate the system for the maximum efficiency possible under the circumstances. TEST YEAR The Applicant has presented a forecast test year based on experience for 1979 projected to 1980. While projections for revenue in 1980, on the basis of oral evidence
4 in the hearing, may be overoptimistic, the use of such a test year, detailed in Schedule I is appropriate in the circumstances. INCOME TAX The company uses the ''taxes payable" method of accounting for income taxes. This imposes no problem at present as prior years' losses are available to offset taxable income. If and when timing differences in the incidence of allowable costs occur, the question of adopting tax allocation or deferred tax methods must be considered. DECISION The Commission concludes that the requested increases result in charges that are fair and reasonable to the Applicant's customers and gives the Applicant an opportunity to earn a return that is not unreasonable in the circumstances. The interim increase of 4% is hereby confirmed as permanent and the additional increase of 4% effective April 1, 1980 is approved. DATED at the City of Vancouver, in the Province of British Columbia, this 14th day of March, 1980. D. B. Commissioner J. F. E. Walden - Commissioner
SCHEDULE I CENTRAL HEAT DISTRIBUTION LIMITED Adjusted Utility Income and Rate of Return Application Commission Final Adjusted (Exhibit l) Adjustments Balance Revenue Steam sales $1,897,596 $ $1,897,596 Other 34,100 34,100 Fuel cost recovery 1,854,593 1,854,593 3,786,289 3,786,289 Expenses Fuel - natural gas 1,794,224 1,794,224 - fuel oil .572,470 572,470 water 38,740 (a) (12,357) 26,383 Chemicals 32,220 32,220 Power 18,136 18,136 Labour costs 411,000 411,000 Other operating & maint. expenses 50,000 50,000 General admin. & office expenses 186,550 (b) ( 5,992) (c) (31, 732) (d) ( 5, 000) (e) 932 144,758 Taxes other than income 145,900 145,900 Depreciation 138,568 138,568 3,387,808 (54,149) 3,333,659 Earned Return $ 398,481 $ 54,149 $ 452,630 Mean depreciated rate base $5,558,959 (f)$(23,611) $5,535,348 Earned return as a percentage of depreciated rate base 7.17% 8.18%
NOTES TO SCHEDULE I (a) Adjustment to water expenses. Per Application (Exhibit 1, Tab 4) deduct: revised amount per Applicant (Exhibit 3, Items 2 & 4) reduction required (b) Adjustment to insurance costs. Per Application (Exhibit 1, Tab 4) deduct: revised amount per Applicant (Exhibit 3, Item 3) reduction required (c) Provision for administrative overhead on construction (Exhibit 3, Item 6(b)). (d) Removal of non-recurring arbitration costs (Exhibit 3, Item 3). (e) Rate Hearing costs of $1 1 864. to be amortized over two years. $1,864 X 50% = (f) Rate Base Adjustment Revised amount per Applicant (Exhibit 3, Item 4) deduct: Rate Base per Application (Exhibit 1 1 Tab 5) add: provision for overhead on construction $31,732 (note (c)) x 50% (mean) reduction required $ 381740 26,383) $ 12,357 $ 24,600 181608) $ 51992 $ 31,732 $ 51000 $ 932 $ 51519,482 (51 5581 959) sub-total 391477) 151866 $ ( 23, 611)
£:,"' COLlJ.t~ ~\ ~ ~~; ~ ~:'!';.. ~ {~ / \ t ~ / i •c i ~ i , ~ ~ ~ ~ ,, A ,,,·,.·.,. ~-'Sl.. . . G'yCOtJ\~ PROVINCE OF BRITISH COLUMBIA IN 'rHE MATTER OF the Energy Act and IN THE MATTER OF an Application by Central Heat Distribution Limited BEFORE: Mr. D. B. ick, Chairman; Mr. J. D. King, Commissioner; and Mr. F. E. Walden, Commissioner WHEREAS by application dated September 14, 1979, Central Heat Distribution Limited ("Central Heat") sought to amend its filed tariffs concerning the rates to be charged for steam service rendered by the Company in its service area; and WHEREAS Central Heat increase of 4 effective October l, 1979 and a further increase of 4% effective April 1, 1980; and WHEREAS itial review of the the Commission issued Order G-34-79 dated September 21, 1979; and WHEREAS pursuant to Order G-6-80 the Commission considered the application at a public hearing in Vancouver on March 11, 1980; and WHEREAS the Commission has concluded that the requested increases totalling 8 11' :"· " .v .d ~:. Bf:: ''7($1 r·~. * ~ "'~"'"~!:.~~ ~ ;_ ~ ~ 1.. ) . ';...,, • ·~ -.: • •' '._. ... 5 ...... i : \ . I ~ ' 'v . ~ .. r;: 0 :. ,~J March 14, 1980 for both an interim tion result in charges that are ... /2 lH I t,. "\
2 fair and reasonable to the Applicant's customers and provides the Applicant an opportunity to earn a return on rate base which is not unreasonable in the circumstances. NOW THEREFORE the Commission hereby orders as follows: (1) The interim increase of 4 as permanent and the additional increase of 4~ effective April 1, 1980 is approved. (2) 'l'he Commission will accept for filing t.he t.ariffs reflecting these increases. DATED at the City of Vancouver, in the Province of Br tish Columbia this 14th day of March, 1980. ' •' "'• ~' . ! ! ,:, ~ ; '.-~ ~ l: . ,,·, . . • r r~ :· "1,1 :-_av.• I.J .... L •.. ··- "- l ""'. J G-14-80 is hereby confirmed BY ORDER -__0 /J./*;~·~'d ~ Commissioner
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