SIXTH FLOOR, 900 HOWE STREET, BOX 250 VANCOUVER, B.C. V6Z 2N3 CANADA web site: http://www.bcuc.com IN THE MATTER OF the Utilities Commission Act, R.S.B.C. 1996, Chapter 473 and An Application by Sun Peaks Utilities Co., Ltd. for Approval of its 2006/07 Revenue Requirements BEFORE: L.F. Kelsey, Commissioner O R D E R WHEREAS: A. On September 26, 2006, Sun Peaks Utilities Co., Ltd. (“SPUCL”) filed for approval of its 2006/07 Revenue Requirements Application to amend its rates on an interim and final basis, effective October 1, 2006, (the “Application”) pursuant to Sections 58 and 89 of the Utilities Commission Act (the “Act”); and B. The Application proposed to increase the monthly basic charge by 20 percent and the delivery rates by $0.36/GJ for all customer classes; and C. SPUCL incurred a loss of $8,786 in F2006 and forecasts a loss of $19,570 for F2007 if a rate increase is not approved; and D. Commission Order No. G-123-06 approved an increase in the monthly basic charge of 20 percent and the delivery rates by $0.36/GJ for all customer classes on an interim refundable basis effective November 1, 2006. Order No. G-123-06 also established a written public hearing process, set a deadline for the registration of intervenors and interested parties and required SPUCL to inform all customers of the interim rate increase and the written public hearing process; and E. No Intervenors registered to participate in the written public hearing process; and F. Commission Order No. G-10-07 set down a Regulatory Timetable for a Commission information request, an SPUCL information response and an SPUCL Final Submission; and BR I T I S H COL U M BI A U TI LI TI E S COM M I SSI ON OR D E R NUM B E R G -60-07 TELEPHONE: (604) 660-4700 BC TOLL FREE: 1-800-663-1385 FACSIMILE: (604) 660-1102 May 31, 2007 …/2
2 G. SPUCL filed its responses to Commission Information Requests on March 8, 2007. SPUCL did not file a Final Submission; and H. The Commission has reviewed the Application by SPUCL to Alter Rates and the evidence adduced thereon, all as set forth in the Reasons for Decision attached as Appendix A. NOW THEREFORE the Commission, for the reasons stated in the Reasons for Decision attached as Appendix A, orders as follows: 1. SPUCL is to recalculate 2006/07 rates and to refile rate schedules in accordance with the Reasons for Decision and this Order. 2. SPUCL is to provide a reconciliation of total revenues with the 2006/07 recalculated revenue requirement, including the five Regulatory Schedules, and other schedules SPUCL may choose to rely on, in a timely fashion. 3. If the 2006/07 recalculated revenue requirement is lower than the revenue requirement in the Application, SPUCL is to refund to customers the excess revenue effective November 1, 2006 with interest calculated for the refund period at the average prime rate of the principal bank with which SPUCL conducts its business as required by Commission Order No. G-123-06. 4. SPUCL is to inform its customers of the final rates by way of a Customer Notice that is provided to the Commission in advance for its review. DATED at the City of Vancouver, in the Province of British Columbia, this 12 Attachment Orders/G-60-07_Sun Peaks 2006-07RR_Reasons for Decision BR I T I S H COL U M BI A UTI LI TI E S COMM I SSI ON OR D E R NUM B E R G-60-07 th day of June 2007. BY ORDER Original signed by: L.F. Kelsey Commissioner
APPENDIX A to Order No. G-60-07 Page 1 of 6 Sun Peaks Utilities Co., Ltd. 2006/07 Revenue Requirements REASONS FOR DECISION 1.0 BACKGROUND Sun Peaks Utilities Co., Ltd. (“SPUCL”) is a privately owned corporation that provides (1) gas, (2) water and (3) other utility services to the resort community of Sun Peaks Corp. (“the Resort”) through three separate divisions. By Order No. C-11-98, the British Columbia Utilities Commission (“Commission” or “BCUC”) approved a Certificate of Public Convenience and Necessity for SPUCL to operate an underground propane grid distribution system, including related propane storage and vaporizer equipment, to service the Resort and the surrounding area at Tod Mountain northeast of Kamloops. The propane distribution utility operates as Sun Peaks Utilities Co., Ltd. (Gas Division) (“SPGD”). SPGD is a small utility with less than 800 customers in F2007 and a rate base of about $150,000. The gas utility incurred a loss of $8,786 in F2006 and forecasts a loss of $19,570 in F2007 in the absence of a rate increase. On September 26, 2006 SPUCL filed its 2006/07 Gas Division Revenue Requirements Application for the period from October 1, 2006 to September 30, 2007 (“the Application”). Pursuant to Sections 58 and 89 of the Utilities Commission Act (“the Act”) the Application requested Commission approval to increase the monthly basic charge by 20 percent and the delivery charge by $0.36/GJ on an interim and final basis for all customer classes effective October 1, 2006. In addition to other matters, the Application proposed that SPGD’s return be calculated by means of an operating ratio in place of a return on rate base. Commission Order No. G-123-06 approved the requested interim rate increases effective November 1, 2006, subject to refund with interest, and established a written public hearing process. The order also stated that a regulatory timetable would be established following the November 1, 2006 deadline for the registration of Intervenors. No Intervenors registered to participate in the written public hearing process. Order No. G-10-07 set down a regulatory timetable consisting of one round of BCUC Information Requests (“IRs”) with SPUCL’s Final Submission to be filed no later than March 5, 2007. The deadline for filing the responses to the IRs was later extended as requested by SPUCL, and SPUCL subsequently filed its responses on March 8, 2007. SPUCL did not make a Final Submission.
APPENDIX A to Order No. G-60-07 Page 2 of 6 2.0 REVENUE REQUIREMENTS 2.1 Introduction In the Application (Exhibit B-1), SPUCL provided financial information in the form of eleven financial schedules. For clarity these will be referred to as the SPUCL Financial Schedules. In the response to a Commission information request, SPUCL also provided the Commission’s five standard regulatory schedules (“Regulatory Schedules”) (Exhibit B-3, IR 5.1): Regulatory Schedule 1 – Utility Income and Earned Return Regulatory Schedule 2 – Utility Rate Base Regulatory Schedule 3 – Calculation of Income Taxes on Utility Income Regulatory Schedule 4 – Common Equity Regulatory Schedule 5 – Return on Capital Regulatory Schedule 1 summarizes the total cost of service (also known as revenue requirement), and rates are then set to equate the cost of service with revenues received. 2.2 Contributions in Aid of Construction Regulatory Schedule 2 details Utility Rate Base for F2007. It lists an addition to gross plant in service of $150,000 and an offsetting addition to contributions in aid of construction (“CIAC”) of $150,000. Most additions to SPGD’s plant in service are financed by developers through a CIAC, and thus SPGD’s rate base grows slowly if at all. SPGD’s F2007 rate base is forecast to be $152,394. This $150,000 amount is again incorrectly shown at line 18 of Regulatory Schedule 1 under the heading of “Expenses”, and is described as being the sum of the actual cost of new gas service line and meter installations of $120,000, plus the cost of grid extension work of $30,000. Both of these amounts are charged to developers on a cost recovery basis, except the service line and meter installation cost is marked up a further 25-33 percent (Exhibit B-1, p. 9).
APPENDIX A to Order No. G-60-07 Page 3 of 6 The cost of new service line and meter installations is also incorrectly shown on SPUCL Financial Schedule 4, where it is treated as “Other Revenue” which is composed of the $120,000 amount marked up by $33,000 to a total of $153,000; the grid extension amount of $30,000; and three other minor revenue items, all totaling $196,306. This amount is then shown in Regulatory Schedule 1 at line 10 as “Other Income”. Commission Determination Standard regulatory accounting requires that the actual cost of the new gas service lines and meters, and grid extensions, should be treated as additions to gross plant. For Sun Peaks this gross plant addition is offset by any CIAC received. To the extent that the amounts recovered from the developers are greater than the actual cost, the excess is to be treated as “Other Income”. The markup of $33,000 is appropriate to include in Other Income but it is incorrect for Other Income to include the cost of the new service line and meter installations of $120,000 and the grid extension amount of $30,000, therefore Other Income is to be reduced by $150,000 in Regulatory Schedule 1. None of these expenditures or recoveries is eligible for treatment as an expense. The amount of $150,000 is to be removed from Expense in Regulatory Schedule 1. The inclusion of $150,000 as an addition to gross plant in service for new gas service lines and meters and grid extensions, and an equal offsetting credit to CIAC of $150,000 is appropriate. 2.3 Remote Metering SPUCL proposes to replace its existing meters with remote metering. The required expenditure is $20,000 per year over 12 years. Once the majority of the meters have been installed, it is anticipated that between 7 and 20 hours per month of meter reading time will be avoided. SPUCL states the driving factor for upgrading the meter reading capability is the safety of its employees. SPUCL has treated the cost of the meters as an operating cost (Exhibit B-3, IR 7). Commission Determination The Commission is concerned with the lack of cost-justification for the remote metering project, and denies the inclusion of the cost of this project in revenue requirement. The Commission may reconsider this item if SPUCL files a formal benefit/cost analysis in its next revenue requirements application. The analysis should consider alternative configurations such as remote metering for only the most high risk locations or extended meter reading
APPENDIX A to Order No. G-60-07 Page 4 of 6 schedules. It is the Commission’s view that Section 3061 of the CICA Handbook, and the treatment accorded to other utilities in the Province, requires that the annual expenditures on remote metering be recorded as capital. Therefore, the expense in F2007 must be reduced by $20,000 and no adjustment to gross plant is required. 2.4 Bank Interest Cost SPUCL had forecast that SPGD would be allocated $1,500 in interest expense resulting from a line of credit. The line of credit was not approved by the owners and as a result SPGD will not incur the $1,500 expense (Exhibit B-3, IR 7.13-7.15). Commission Determination SPUCL is directed to remove $1,500 from its forecast F2007 expense. While not an issue in the Application, SPUCL should be mindful that under Section 50 of the Act the issuance of securities with terms of one year or more requires Commission approval. 2.5 Corporate Administration Fee The Resort began charging a $2,000 per month administration fee to SPUCL beginning in F2006 for services it provides for various administrative support functions. SPGD is allocated one-third of that amount since SPGD is one of three utilities which comprise SPUCL. SPUCL provided alternative methods of calculating the allocation (Exhibit B-3, IR 7.12-7.13). Commission Determination The Commission finds that the recovery of cost claimed by SPUCL, on behalf of SPGD, is appropriate. 2.6 Utility Revenue At line 13 of Regulatory Schedule 1, as a component of Utility Revenue, an amount of $18,760 is shown which is described as “Revenue Requirement”. No justification or explanation for this amount is provided in the Application or Information Request Responses.
APPENDIX A to Order No. G-60-07 Page 5 of 6 Commission Determination The amount in question appears to be an amount included to equate forecast revenue with the cost of service. The Commission believes that this amount overstates forecast revenues, and directs SPUCL to decrease forecast F2007 Utility Revenue by $18,760. 2.7 Operating Margin SPUCL has requested that SPGD be regulated based on the “Operating Ratio Approach” which employs the concept of an operating margin. Operating margin is the percentage by which revenue is allowed to exceed the allowable operation and maintenance expense. This approach is currently used by the Comptroller of Water Rights in British Columbia (“Comptroller”) to regulate small water utilities with little or no rate base (Exhibit B-1, p. 4). This rate setting method is also used in various American jurisdictions (Exhibit B-1, p. 4). SPGD has a small total rate base for F2007 of $152,394 (Exhibit B-3, Regulatory Schedule 2). When this method is used the operating margin is included in the cost of service and replaces the earned return component. Earned return is the total allowable financing costs, including return on equity. Under the Operating Ratio Approach, no determination of return on rate base is required in order to set rates. The Comptroller has stated that the rate of return on common equity for benchmark, low risk, high grade utilities as established annually by the BCUC is an appropriate basis from which to determine the reasonableness of rates of return for regulated water utilities in British Columbia (Exhibit B-1, p. 5). SPUCL has requested an operating margin of 8.79 percent based on the BCUC’s 2006 published rate of return of 8.29 percent for low risk, high grade utilities plus 0.5 percent (Exhibit B-1, p. 5). Applying this percentage to SPGD’s expenses (excluding the cost of gas) results in an operating margin of $23,597 which is shown as “Earned Return” in Regulatory Schedule 1. Section 59(5)(b) of the Act states that one measure that a rate is unjust or unreasonable is if it is insufficient to yield a fair and reasonable compensation for the service provided by the utility, or a fair and reasonable return on the appraised value of its property.
APPENDIX A to Order No. G-60-07 Page 6 of 6 Commission Determination The Commission finds that it has the authority under the Act to set rates for utilities with little or no rate base by methodologies such as the Operating Ratio Approach. However, the Commission sees only a tenuous link between the required return on equity and an appropriate operating margin. The process of determining a benchmark Return on Equity considers utilities’ operating expense in only a tangential manner. The key considerations in such an analysis are risk and capital attraction. The Commission is further concerned that utilities under Commission jurisdiction often operate under some form of Performance Based Regulation or incentive mechanism, one component of which may be an incentive to reduce operating costs. The Commission is concerned that adoption of the Operating Ratio Approach in the form proposed may actually provide disincentives to control costs. For these reasons, the Commission declines to adopt the requested approach at this time. However, the Commission notes that this is a one year application and that the amount of $23,597 does not appear excessive, and is acceptable to SPUCL. As a result, for the test period, the Commission approves the use of the amount of $23,597 to set rates instead of the inclusion of a rate base-driven earned return. In its next general rate application the Commission suggests SPUCL consider a multi-period application, and if it still wishes to be regulated without regard to rate base, it should consider alternatives such as indexing, as employed by other utilities in British Columbia. 2.8 Refiling of Schedules Commission Determination SPUCL is directed to recalculate 2006/07 rates and to refile rates schedules in accordance with the above, and provide a reconciliation of total revenues with the recalculated revenue requirement, including the five Regulatory Schedules, and other schedules SPUCL may choose to rely on, in a timely fashion. Revised revenue from rates is to be calculated based on a permanent rate increase effective November 1, 2006. No rate relief is granted for the month of October 2006. Any excess revenue from interim rates is to be refunded to customers with interest.
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