BR I T I S H CO L U M B I A UT I L I T I E S CO M M I S S I ON OR D E R NU M B E R G-85-07 SIXTH FLOOR, 900 HOWE STREET, BOX 250 TELEPHONE: (604) 660-4700 VANCOUVER, B.C. V6Z 2N3 CANADA BC TOLL FREE: 1-800-663-1385 web site: http://www.bcuc.com FACSIMILE: (604) 660-1102 IN THE MATTER OF the Utilities Commission Act, R.S.B.C. 1996, Chapter 473 and An Application by Terasen Gas Inc. for Approval of a Gas Supply Mitigation Incentive Program for the 2007/08 Gas Contract Year BEFORE: L.F. Kelsey, Commissioner July 26, 2007 O R D E R WHEREAS: A. The Commission, by Order No. G-92-95, approved for Terasen Gas Inc. (“Terasen Gas”) (formerly known as BC Gas Utility Ltd.) the Off-System Incentive Program (“OSIP”) for a two-year period commencing January 1, 1996; and B. As part of its May 5, 1997 Revenue Requirements Application for 1998 to 2002, Terasen Gas filed a revised incentive plan. During the Alternative Dispute Resolution process, it was agreed by all parties to deal with the form of gas cost incentive plan(s) that would succeed OSIP in a series of separate meetings. The yearly meetings resulted in agreed-to plans sent to the Commission for approval. The following Commission Orders approved a Gas Supply Mitigation Incentive Program (“GSMIP”) for each subsequent gas contract year: Order No. G-125-97 for 1997/98, Order No. G-92-98 for 1998/99, Order No. G-82-99 for 1999/2000, Order No. G-106-00 for 2000/01, Order No. G-124-01 for 2001/02 and Order No. G-79-02 for 2002/03 which included the GSMIP settlement document attached a Appendix A; and C. Commission Order No. G-67-03 approved the continuance of the 2002/03 GSMIP for the 2003/04 gas contract year; and D. Commission Order No. G-98-04 approved the 2004/05 GSMIP for the 2004/05 gas year without any revisions to the formula or the Service Quality Indicators; and E. Commission Order No. G-83-05 approved the 2005/06 GSMIP for the 2005/06 gas year without any revisions to the formula or the Service Quality Indicators; and G. Commission Order No. G-137-0 approved the 2006/07 GSMIP for the 2006/07 gas year without any revisions to the formula or the Service Quality Indicators; and .../2
2 F. By letter dated July 20, 2007, Terasen Gas proposed that the 2006/07 GSMIP should continue for a further gas contract year for the period November 1, 2007 to October 31, 2008; and G. By letter dated July 26, 2007, the British Columbia Public Interest Advocacy Centre advised that it agreed that the 2006/07 GSMIP should continue for the 2007/08 gas contract year including the incentive formula; and H. The Commission has reviewed the filing and is satisfied that the GSMIP Settlement document, attached as Appendix A, should continue unchanged for the 2007/08 gas contract year. NOW THEREFORE the Commission approves for Terasen Gas the 2007/08 Gas Supply Mitigation Incentive Program that is attached as Appendix A to this Order for the gas contract year from November 1, 2007 through October 31, 2008. DATED at the City of Vancouver, in the Province of British Columbia, this 3 Attachment Orders/G-85-07_TGI_GSMIP 2007-08 Incentive Plan BR I T I S H CO L U M B I A UT I L I T I E S COM M I S S I ON OR D E R NU M B E R G-85-07 rd day of August 2007. BY ORDER Original signed by: L.F. Kelsey Commissioner
8 APPENDIX A Terasen to Order No. G-85-07 Gas Page 1 of 7 TERASEN GAS INC. GAS SUPPLY MITIGATION INCENTIVE PROGRAM ("GSMIP") PLAN FOR THE 2007108 CONTRACT YEAR The Terasen Gas Inc. ("Terasen Gas" or the "Company") GSMIP plan will continue to generate revenue based on mitigation activities to offset customer costs while the sharing mechanism will limit Terasen Gas' share of the revenue in excess of $1 million. In order to provide the British Columbia Utilities Commission (the "Commission") information to assess performance, various Service Quality Indicators ("SQlsn) will be reported along with certain market information. The Commission have the right to disapprove mitigation revenue sharing if it deems Terasen Gas' performance under the SQls is not acceptable. All GSMIP mitigation activity falls within the Midstream Cost Reconciliation Account and GSMIP revenues contribute to reducing Midstream costs which benefit all Sales customers. The following objectives and guiding principles have not changed and continue to influence the act ubtLsre ui C;SiV;IP. GSMIP Objectives and Guiding Principles 1. Supply Security The plan should discourage any activity that might adversely affect the security of supply or total net gas costs. 2. Alignment of Interests The plan should ensure that Terasen Gas maximizes net revenues from its off-system business activities. 3. Fair and Reasonable Incentives The plan should be structured to avoid paying incentives for activities and results already achieved, but reward new, substantial exertions by the Company. 4. Simplicity The plan should be structured in such a way that it minimizes administrative effort. 5. Fair and Reasonable Performance Targets The plan should ensure that performance targets and expected productivity improvements are just and reasonable, and that the level of incentive sharing corresponds to the level of excellence demonstrated by Terasen Gas' gas procurement and mitigation activities. This document outlines the terms of the 2007108 GSMIP plan which remain unchanged from those of the 2006107 GSMIP plan. Page 1 of 7
Q APPENDIX A Terasen to Order No. G-85-07 Gas Page 2 of 7 Key Components of Gas Supply The key components of Gas Supply are as follows: 1. Development and implementation of an Annual Contracting Plan to acquire an optimum mix of transport, storage, and commodity supply contracts. 2. Planning and implementation of the Price Risk Management Plan. 3. Managing counterparty risk and credit exposures. 4. Ensuring 100% Firm customer commodity supply reliability. Acceptable measures of these four key components are listed below under Service Quality lndicators within the GSMlP structure section. GSMlP Structure I. Term The term of the 2007108 GSMIP plan will commence on November I,2 007 and will expire on October 31, 2008. Continuation of the GSMIP plan for future terms will be subject to Commission approval. 2. Expiration & Incentive Review The 2007108 GSMIP plan is recognized as short-term in nature, applying to the November 1, 2007 - October 31, 2008 contract period. At the end of the period the results will be reviewed and, following approval by the Commission, Terasen Gas will withdraw from the Midstream Cost Reconciliation Account any incentive amounts earned. 3. Service Quality Indicators Each of the SQls have identifiable targets that establish acceptable performance. At year- end Terasen Gas will file the required report on performance relative to the SQls. The Commission will then determine if the results of the SQls show that Terasen Gas has provided an acceptable level of overall Gas Supply Service in the year. The SQls are as follows: 3.1 Annual Contracting Plan ("ACP") - PortFolio Optimization As part of the ACP submission, Terasen Gas shall compare the expected overall costs of the proposed portfolio versus the current portfolio. Commodity and asset pricing used to determine overall costs for both portfolios will be based on forward market expectations at the time of submission. For example, if current asset costs are forecast to increase in the coming contract year that will be the new baseline used in the comparator analysis. Performance Target: Terasen Gas will continue to provide the ACP in a timely fashion meeting the expectations of the Commission for approval. The approved ACP, including any revisions throughout the year must be successfully implemented over the contracting period recognizing those market conditions that may arise. Page 2 of 7
Ba APPENDIX A Terasen to Order No~ . G- -8.5.- 0..7 Gas 3.2 Price Risk Management Plan ("PRMP") Implementation Page 3 of 7 Terasen Gas submits the PRMP to the Commission each spring to seek approval for hedging limits for the following contract periods. Once the Commission approves the PRMP, Terasen Gas begins implementation within the approved guidelines. Terasen Gas then provides to the Commission all trade data including the submission of quarterly updates on the mark-to-market activities. The Commission may also request information on status of the plan and Terasen Gas' strategy position. Performance Target: Terasen Gas is to continue to provide the PRMP in a timely fashion meeting the expectations of the Commission for approval. Terasen Gas is to implement the PRMP including any approved revisions within the guidelines presented in the plan including any provisions or understanding about transaction volumes within stated timelines. 3.3 Counterparty Risk and Credit Exposure Management Terasen Gas has a conservative, well defined credit policy that is actively managed. As a result, Firm customers have benefited as the Company has avoided non-recoveries over the last few years of volatile markets. Terasen Gas is to provide a report that summarizes credit management activities over the year, outlining mitigation strategies put in place to manage marketplace dynamics and identifying any defaults. Performance Target: Terasen Gas is to show that it has effectively managed credit exposure for Firm customers prudently avoiding potential non-recoveries if deemed reasonably preventable. 3.4 Commodity Supply Reliability Terasen Gas must balance cost minimization with supply reliability. Ensuring that Firm customers have 100% of Firm requirements is an overriding objective of Gas Supply. Terasen Gas shall identify any curtailments of Firm customers over the year. Terasen Gas will also identify curtailments of lnterruptible customers. Supply reliability also includes reliability of assets contracted by Terasen Gas to meet customer needs. Contract default and lnterruptible curtailments are subject to market conditions so targets are not being established for them. Terasen Gas will also summarize reliability measures put in place for the contracting year and a summary of any supply failures of commodity, pipeline and storage assets. Performance Target: 100% delivery of Firm customer demand. 4. Gas Cost and Market Pricing Information The following information is to be provided to the Commission: 4.1 Regional Local Distribution Company ("LDC") Rate Indicators Terasen Gas is to provide monthly Gas Costs as available for other regional LDCs such as Cascade Natural Gas Corporation, Puget Sound Energy, Avista Utilities, and Northwest Natural over the contract year. Terasen Gas will also provide a summary of the portfolios utilized by each of these other LDCs and illustrate differences from the Terasen Gas portfolio. Determination of the regional LDC portfolios will be through review of public information and discussion with each of their respective Gas Supply departments and will therefore be an estimate only. Regulator approved and implemented financial price fixing activity and deferral treatment vary significantly Page 3 of 7
'a APPENDIX A TeraSen to Order No. G-85-07 Gas Pa e4of7 between the LDCs and drive rates to a large extent so individual L D ~r!a tes could vary significantly at a given time. 4.2 Terasen Gas Actual Gas Costs and Market lndex Prices Terasen Gas shall provide actual incurred monthly Gas Costs excluding fixed costs and hedging. Terasen Gas shall also provide data on actual Daily and Monthly lndex prices at Sumas, NYMEX, AECO and Station #2. This Data will be used to calculate Gas Cost proxies for purchasing 100% of daily Firm demand at both the Sumas and AECO Daily midpoint lndex for reference. Because the Sumas Daily price does not meet intra-day balancing needs and there is insufficient market liquidity to consider this kind of purchase strategy, the comparison is a proxy intended to illustrate how the portfolio approach protects customers from market volatility even before hedging activity. 4.3 Commodity Costs Compared to Market Terasen Gas develops a portfolio of pipeline, storage and commodity contracts that provide supply reliability and price diversity for Firm customers. The majority of Firm demand is in the Lower Mainland and is tied to the Sumas Hub. The Sumas market is subject to considerable volatility. Terasen Gas must be a significant contributor to managing demand variability at this location. The portfolio of assets is accepted as necessary to manage Firm customer load variability and access less volatile supply sources upstream. Value recovery realized on transport and storage assets is subject to the volatile nature of market conditions and will vary considerably from year to year. Therefore, performance on contracted assets should be based on portfolio development and recovery of available mitigation value as proposed in this plan. The portfolio assets provide commodity purchasing options to Terasen Gas. Terasen Gas commodity buying should be reasonably competitive with market price availability. Terasen Gas will provide monthly data on actual Gas commodity purchase costs before hedging compared to Sumas, Station #2 and AECO Monthly and Daily lndex priced gas. 5. Sharing Mechanism Terasen Gas recovers mitigation revenue from surplus term gas purchased for Firm customers, unutilized Firm customer pipeline capacity and storage assets. Eligible commodity sharing and transport and storage margin will be combined to calculate the basis for Terasen Gas' final incentive sharing. 5.1 Eligible Commodity Resale Terasen Gas' commodity sharing is dependent primarily on how close it can come to achieving full recovery of purchase costs for core customers regardless of commodity pricing and volume available for resale. The formula for determining the commodity resale margin eligible for sharing is listed below for reference: Eligible Resale Margin = Weighted Average Annual Resale Price - (Weighted Average Annual Sumas Monthly lndex - Hurdle Discount) where the hurdle discount = 17PJ + Annual Volume. Page 4 of 7
GSMIP 2007108 COMMODITY RESALES SHARING $4 50 $4.00 53 50 - HURDLE DlSCOU $2.00 11 50 $050 - S- 0 2 4 6 8 10 12 ANNUAL FIRM VOLUME SOLD (PJ) 5.2 Transport and Storage The existing transportation and storage mechanism shall be continued whereby 100% of the margin resulting from mitigation of transportation and storage resources is eligible for the sharing incentive. 5.3 Terasen Gas Sharing Incentive The parties agree to combine the transport and storage revenue with the eligible commodity revenue to create one sharing mechanism. Terasen Gas' incentive share will be 5% of the Total Eligible Margin up to the first $1 million sharing,earned. In the event Terasen Gas achieves the $1 million sharing level, the Terasen Gas share will then reduce to 1.25% on all remaining Total Eligible Margin. The proposed mechanism meets the objective of limiting Terasen Gas' sharing in the case of unusually high mitigation recoveries and also provides reasonable sharing when minimal recoveries are available to Terasen Gas. Terasen Gas will continue to recognize those Gas Supply employees deemed to have directly or indirectly contributed toward the generation of net revenues achieved under the 2007/08 GSMlP plan. Such incentive compensation will be based upon the incentive earnings of Terasen Gas. Page 5 of 7 B APPENDIX A TeraSen to Order No. G-85-07 Gas Page 5 of 7 I I I HURDLE = 17PJ SOW 1 - -CAPPED AT $4.001 GJ - - 1 r I 1 14 16 18 20 22 24 26 28 30
APPENDIX A Tera Q Sen to Order No. G-85-07 Gas Page 6 of 7 6. Regulatory & Management Reporting In order for the Commission to adequately monitor and evaluate the Company's performance, the existing record keeping and reporting procedures will be continued. In the interest of simplicity, it has been agreed that the year-end reporting will continue to include the high-level summary reports but exclude detailed reports and graphs showing margins and volumes by day, location and customer. Terasen Gas will continue with its current practice of filings with the Commission consisting of a summary report that details all off-system and non-core on-system activity and associated financial impacts. The first report will be submitted to the Commission within two months of the winter season. The final year-end report will be submitted by March 31,2008 accompanied by a letter from the Company's Internal Audit group outlining the findings of the review of the Total Eligible Margin. Terasen Gas will continue to provide an update on the status of the SQls and Gas Cost and Market Pricing twice per year, once after the winter and once after the summer at year-end, within two months of the season-end. Terasen Gas will also continue to keep distinct and separate records, for audit purposes, of a daily "Load Forecast Sheet", which details all on-system supply requirements, and a "Deal Sheet" for each and every transaction that will feature all information as it relates to the economics of each transaction. Terasen Gas will confer with Commission staff to ensure that these reports provide an appropriate level of disclosure and audit capability with a minimum of administrative burden. The Commission will examine the calculation of any incentive payments received under the 2007108 GSMlP plan and will make any appropriate adjustments. For the benefit of interested parties, an overview report analyzing the effectiveness of the 2007108 GSMlP will be issued by the Commission at the end of the term. Page 6 of 7
9 APPENDIX A TeraSen to Order No. G-85-07 Gas Page 7 of 7 Definitions: Core Commodity All gas volumes under purchase contract as approved by the Commission Volume to meet Firm customers as approved in the Annual Contracting Plan. Commodity All Commodity Volume purchases in the Annual Contracting Plan, Resale Volumes including daily-priced and monthly-priced gas, in excess of actual Firm customer needs. Hurdle Discount The unit commodity resale margin hurdle discount (CDN$/GJ) from the Weighted average Sumas Monthly lndex price converted to CDN$/GJ. The Discount Hurdle shall be determined at the end of the contract year once total annual resale volumes are known. The Hurdle Discount is calculated by multiplying by the factor of 171 (PJ annually resold). This equation is capped at $4/GJ. For example, if total annual volume sold is 20 PJ the Hurdle would be 17/20 = $0.85/GJ. Annual Average Volumes sold each month will be compared to the Sumas lndex for that Sumas lndex month. The Annual Average Sumas lndex Price shall be the weighted Price average of the actual monthly resale volumes times the monthly Sumas lndex for each of the months divided by the total annual volumes resold. Eligible Refers to the Hurdle rate before Terasen Gas shares in resale revenue Commodity calculated by the Annual Average Sumas lndex Price less the Hurdle. For Resale Hurdle example, if the annual average weighted Sumas lndex price was $6.125/GJ and Terasen Gas sold 20 PJ annually, the Hurdle Discount would be $0.85/GJ and the Eligible Commodity Resale Hurdle would be $5.275/GJ. Terasen Gas would share on all revenue recovery above this $5.275/GJ hurdle. Eligible Resale All revenue generated above the Eligible Commodity Resale Hurdle. Sharing Continuing the example above, if Terasen Gas averaged annually $6.20/GJ recovery on 20 PJ the Eligible Resale Sharing would be 20 PJ x ($6.20/GJ-$5.275/GJ) = $18.5 million. Eligible The revenue received by Terasen Gas from third parties via assignment of Transportation Core transportation and Storage including the net revenue received by and Storage Terasen Gas via back-to-back Transport and Storage buylsell mitigation Margin activity. Total Eligible Eligible Commodity Resale Sharing plus Eligible Transportation and Margin Storage Margin. Page 7 of 7
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