2016 Rate Design Application

Transcription

1 0 Rate Design Application Workshop : Rate Design and Segmentation Discussion Guide August, 0

2 Table of Contents. INTRODUCTION.... RATE DESIGN PRINCIPLES.... Rate Design Principles.... CUSTOMER SEGMENTATION.... Existing Customer Segmentation.... COSA RESULTS.... Current COSA Results.... RESIDENTIAL RATE DESIGN.... Residential Customer Characteristics.... FEI Rate Structure Options for Residential Customers FEI Existing and Other Rate Structure Options for Residential Customers Evaluation of different rate structure options Recommended Rate Structure Option.... Fixed Versus Variable Rates and Costs for Residential Customers.... Residential Rate Design Recommendation.... Customer Bill Impacts.... COMMERCIAL RATE DESIGN.... Commercial Rate Class Characteristics.... Review of Commercial Customers Segmentation..... Commercial Customer Segmentation..... Average Customer Rate..... Summary of Commercial Customer Segmentation..... Rate Design Recommendation.... INDUSTRIAL RATE DESIGN.... Industrial Rate Class Characteristics.... Industrial Customers Segmentation.... General Firm Service: Rate Schedules (Sales) and (Transportation)..... General Firm Service Customer Characteristics..... Rate Design Considerations... Page i

3 Customer Peak Demand and Load Factor...0 Review of Rate Schedules and Economics... Rate Design Options Considered and Potential Impact... Rate Design Recommendations... Rate Schedule and Summary...0. General Interruptible Service: Rate Schedules and (Transportation) General Interruptible Service Customer Characteristics...0 Review of Current Rate Structures... Rate Design Options Considered and Potential Impact... Rate Design Recommendations.... Seasonal Firm Service: Rate Schedule Seasonal Customer Characteristics... Rate Design Considerations.... Large Volume Transportation: Rate Schedule and Large Industrial Contract Customers Customer Characteristics... Existing Rate Design for Large Volume Transportation Customers... Rate Design Options Considered... Summary of Large Volume Transportation Customers.... KEY DISCUSSION TOPICS.... Misalignment between Fixed Costs and Charges for Residential Customers.... Demand Charge Applicable to Rate Schedule and Rate Schedule General Service Customers.... Large Volume Transportation and Industrial Contract Customers: Rate Design Options... Page ii

4 List of Appendices Appendix A Jurisdictional Comparison of Residential Customers Page iii

5 Index of Tables and Figures Table -: FEI Existing Customer Segmentation and Their Load Characteristics... Table -: COSA R:C & M:C Ratios, Rebalancing and Bill Change Results... Table -: R:C & M:C Ratio Results for Rates Not Set Using COSA Results... Table -: FEI s Residential Customer Profile for 0 (Normalized Actuals)... Table -: Evaluation of Rate Structure Options Based on Major Rate Design Considerations... Table -: Misalignment between Fixed Costs and Fixed Charges... Table -: Bill Impact Explanations... Table -: Annual Bill Impact of Recommended Rates... Table -: Economic Crossover Volume for Rate Schedule and Rate Schedule... Table -: Industrial Customer Groups and Corresponding Rate Schedules... Rate Schedule Customers... Table -: Rate Schedule and Rate Schedule Description of Charges... 0 Table -: Number of Customers by Load Factor Segment (Combined Totals for Rate Schedule and Rate Schedule Customers)... Table -: Average Daily Demand (GJ) per Customer by Load Factor Segment (Combined Totals for Rate Schedule and Rate Schedule Customers)... Table -: Daily Load & Associated Load Factor to be Indifferent between Service Under Rate Schedules and at Current Rates... Table -: Daily Load & Associated Load Factor to be Indifferent between Service under Rate Schedules and with a $ Demand Charge Increase... Table -: Current FEI Rates for Interruptible Sales and Transportation Service... Table -: Rate Schedule Comparison to Rate Schedule at 0% Load Factor... Table -: Large Volume Transportation and Contract Customers Charges... Figure -: Residential Customers by Dwelling Type from 0 REUS... Figure -: Estimated Household Consumption by End Use from 0 REUS... Figure -: Distribution of Residential Consumption (0)... Figure -: Customer Bill Impact... Figure -: The 0 annual consumption histogram for customers in ECAP program... Figure -: Income and consumption levels based on 0 REUS... Figure -: Commercial Customer End Usage Characteristics... Figure -: Commercial Customers Bill Frequency... Page iv

6 Figure -: Small Commercial Customer Load Factor Distribution... 0 Figure -: Large Commercial Customer Load Factor Distribution... 0 Figure -: Relative Economics between Rate Schedules and... Figure -: Rate Schedules and Redesign at,000 GJ... Figure -: Industrial Sectors... Figure -: End Use by Industrial Customers... Figure -: Industrial Customer Bill Frequency (All Customers)... Figure -: Annual Bill Frequency for the Combined Total of Rate Schedule and... Figure -: Comparison of Rate Schedule and Rate Schedule Average Rates at Varying Load Factors... Figure -: Comparison of Rate Schedule Average Rates to Rate Schedule... Figure -: Rate Schedules and Combined Bill Frequency... Page v

7 0. INTRODUCTION Starting in the spring of 0, FortisBC Energy Inc. (FEI or the Company) is holding a series of workshops for the purpose of working towards an efficient and cost effective regulatory process once the 0 FEI Rate Design Application (Application or RDA) is filed later this year. The key objectives of the Rate Design and Segmentation workshop are to inform stakeholders regarding the rate design options that FEI is considering for the RDA and to engage them in compiling a key issues list, which will then be utilized to focus the scope of the RDA. FEI has prepared this discussion guide that summarizes cost of service allocation (COSA) results after rebalancing, rate design and segmentation considerations for residential, commercial and industrial customer groups. In addition, the last section of the discussion guide lists key discussion topics to help focus the discussion during the workshop. These rate design considerations and key discussion topics reflect FEI s current plan for the 0 RDA, FEI will consider the input of stakeholders prior to the filing to the Application. FEI is circulating this discussion guide in advance of the workshop so that all stakeholders can review the material and prepare to participate effectively at the workshop and to contribute to the development of the key issues list. While FEI does not expect that all parties will be in agreement on all the key issues, and that some may well have to be settled through the regulatory process, it will be beneficial for everyone involved in the process to hear and understand the position of various parties as FEI moves toward filing the RDA in the fall of 0. SECTION : INTRODUCTION PAGE

8 . RATE DESIGN PRINCIPLES. RATE DESIGN PRINCIPLES FEI applies rate design principles based on those identified by Dr. Bonbright in his widely accepted work, Principles of Public Utility Rates. The principles adopted by FEI for rate design, in no particular order, are: 0 Principle : Recovering the Cost of Service; The aggregate of all customer rates and revenues must be sufficient to recover the utility s total cost of service; Principle : Fair apportionment of costs among customers (appropriate cost recovery should be reflected in rates); Principle : Price signals that encourage efficient use and discourage inefficient use; Principle : Customer understanding and acceptance; Principle : Practical and cost-effective to implement (sustainable and meet long-term objectives); Principle : Rate stability (customer rate impact should be managed); Principle : Revenue stability; and Principle : Avoidance of undue discrimination (interclass equity must be enhanced and maintained). 0 In addition to these rate design principles, FEI takes into account other rate design considerations such as provincial government energy policy objectives. FEI believes that Customer rates should be set at levels that consider competitiveness of natural gas with other fuel alternatives. FEI continues to follow these rate design principles, which are widely accepted throughout the utility industry for setting rates and have been considered by FEI for many years in its past rate design proceedings. No single rate design can perfectly satisfy all of the rate design principles simultaneously as some principles may contradict with others. Furthermore, different rate design principles may have varying level of importance for different rate classes. Rate design should strive to strike a balance among competing rate design principles based on specific characteristics of customers in each rate schedule. James C. Bonbright, Albert L. Danielsen, David R. Kamershen, Principles of Public Utility Rates, second edition,, p.-. SECTION : RATE DESIGN PRINCIPLES PAGE

9 . CUSTOMER SEGMENTATION This section describes the existing customer segmentation that FEI has in place to provide natural gas service to its customers. FEI s customers are segmented based on their load characteristics, which includes their average annual energy consumption, load factor (i.e. how much they consume on average as compared to their peak demand) and in some cases, rate schedules are specific to their end use. 0. EXISTING CUSTOMER SEGMENTATION For ease of understanding, FEI has separated its customers into general categories depending upon the customer s type of premise: Residential, Commercial, Industrial and Other. These categories include different types of customers which are segmented according to their load characteristics. Table - below provides a list of rate schedules that FEI has currently in place representing the customer segmentation under each of these general categories. FEI has reviewed the load characteristics of its customers and believes that the existing customer segmentation continues to reflect the appropriate load characteristics of its customers. However, FEI has identified some areas of the existing customer rate design that should be evaluated for changes which FEI would like to discuss at the workshop. The following sections review the changes FEI is considering for evaluation in the RDA. SECTION : CUSTOMER SEGMENTATION PAGE

10 . Customer Group RESIDENTIAL COMMERCIAL Table -: FEI Existing Customer Segmentation and Their Load Characteristics FEI Tariff Rate Schedule Rate Schedule /U/B Rate Schedule /U/B Rate Schedule /U/B Rate Schedule Description and Example Customers Residential firm service for use in residential applications - central space heating, water heating, cooking, fireplaces and clothes dryers. Applicable to residential customers only Annual use <,000 GJ. Small commercial firm service for use in approved appliances in small commercial, institutional, or small industrial operations. Example customers: restaurants, apartment buildings Annual use >,000 GJ. Large commercial firm service for use in approved appliances in large commercial, institutional, or small industrial operations. Example customers: apartment buildings, rec centres, care homes Annual use >,000 GJ. Large commercial firm transportation service. Typical Load Characteristics Number of Customers LF UPC (GJ).%, 0.%,.%,,00.%,, INDUSTRIAL Rate Schedule Seasonal firm service for customers who typically N/A, consume gas during off-peak (April to October) periods. Example customers: greenhouses and paving companies Rate Schedule General firm service with an applicable monthly demand.%, 0 charge per month per GJ of daily demand. Example customers: pulp, paper, and lumber operations, manufacturers, apartment buildings Rate Schedule General firm transportation service with an applicable.%, monthly demand charge per month per GJ of daily demand. Rate Schedule Natural gas vehicle service (resale for natural gas 00.0%,0 vehicles). Example customers: public fueling stations Rate Schedule General interruptible service. N/A 0,0 Example customers: manufacturers, greenhouses, service industry customers Rate Schedule General interruptible transportation service. N/A 0, 0 Rate Schedule Large volume transportation service with a minimum take or pay of,000 GJ per month. Example customers: greenhouses, educational institutions, cement plants N/A, Rate Schedule A (Closed) Rate Schedule B (Closed) Rate Schedule 0 Large volume firm and interruptible transportation service for select customers (closed rate schedule). Example customers: pulp, paper and lumber operations Large volume firm and interruptible transportation service for select customers (closed rate schedule).large volume transportation service. Example customers: mining and lumber operations Large volume firm and interruptible transportation service. OTHER Rate Schedule P Natural gas vehicle refueling service at Surrey Operations. Example customers: public customers with natural gas vehicles Rate Schedule LNG sales, dispensing, and transportation service. Example customers: waste hauling companies.% N/A.0% N/A 00% NIL NIL N/A N/A N/A 00.0%, Load Factors are as in the RDA COSA Model. Use per Customer in gigajoules (GJ) is as set out in the FEI Annual Review for 0 Rates Order G-- Compliance Filing, Section, Schedule, column 0 divided by column. Number of Customers per Rate Schedule is as set out in the FEI Annual Review for 0 Rates Order G-- Compliance Filing, Section, Schedule, column 0. SECTION : CUSTOMER SEGMENTATION PAGE

11 . COSA RESULTS 0. CURRENT COSA RESULTS FEI has calculated cost of service allocations using the approved costs from FEI s Annual Review for 0 Rates (Order G--) in the COSA model, and then included known and measurable changes for major projects expected to be in-service or close to their in-service dates at the time that rate changes from this rate design are put in place. The resulting revenue to cost ratios are shown in the following Table -. In Table -, FEI has included both the current revenue to cost and margin to cost ratios before rebalancing, and also after rebalancing to the 0-0% range for discussion purposes only. To achieve this, in the following table, FEI has rebalanced Rate Schedule and Rate Schedule A to 0% revenue to cost ratio and, for discussion purposes, has shifted the resulting revenue deficiency of approximately $. million to Rate Schedule. FEI applied the deficiency to Rate Schedule because it has the lowest revenue to cost ratio of all other rate schedules. As mentioned above, FEI regards these rebalanced revenue to cost ratios for discussion only. There are other considerations that FEI will take into account, which will impact the revenue to cost ratio proposals and rebalancing approach for the RDA. SECTION : COSA RESULTS PAGE

12 Table -: COSA R:C & M:C Ratios, Rebalancing and Bill Change Results Rate Schedule Rate Schedule Residential Service Rate Schedule Small Commercial Service Rate Schedule / Large Commercial Sales and Transportation Service Rate Schedule / General Firm Sales and Transportation Service Rate Schedule Natural Gas Vehicle Service Rate Schedule A Transportation Service (Closed) Inland Service Area Rate Schedule B Transportation Service (Closed) Columbia Service Area Current R:C % Current M:C % Rebalanced R:C % Rebalanced M:C % Rebalance Amount Approximate Annual Bill Change.... +$,, % $, % $,, % FEI has excluded Rate Schedules,, and / from the rebalancing as shown in Table - above. This is because Rate Schedule is a seasonal service (firm in the summer and interruptible in the winter), Rate Schedule is predominantly interruptible and Rate Schedule / is fully interruptible. These rates do not drive system capacity additions, and consequently are not allocated any demand-related costs. The rates within these rate schedules are not set using their allocated costs from the COSA and therefore these rate schedules are not R:C denotes Revenue to Cost Ratio (includes the Cost of Gas) and M:C denotes Margin to Cost Ratio (excludes the cost of gas) One Rate Schedule customer has TJ per day of firm. All other Rate Schedule customers have no firm Demand. Under Rate Schedule, customers can negotiate a firm service level and rate that is subject to Commission approval. Rate Schedule is winter interruptible and this is when FEI s system peaks SECTION : COSA RESULTS PAGE

13 rebalanced. Table - below shows revenue to cost ratios and margin to cost ratios for Rate Schedule, Rate Schedules / and Rate Schedule. Table -: R:C & M:C Ratio Results for Rates Not Set Using COSA Results Rate Group Rate Schedule Seasonal Firm Gas Service Rate Schedule / General Interruptible Sales and Transportation Service Rate Schedule Large Volume Transportation Service Current R:C % Current M:C %....,.,0. R:C denotes Revenue to Cost Ratio and M:C denotes Margin to Cost Ratio SECTION : COSA RESULTS PAGE

14 . RESIDENTIAL RATE DESIGN Rate Schedule (RS ) includes service to single family residences, separately metered single family townhouses, row houses and apartments. FEI serves more than,000 customers in RS which accounts for approximately % of the total number of customers in FEI s service territory. Table - below provides a summary profile of the residential customer class demand and revenue. Table -: FEI s Residential Customer Profile for 0 (Normalized Actuals) PJ Percentage Customer Profile by Demand Customer Profile by Revenue.. $000 s Percentage,. 0. RESIDENTIAL CUSTOMER CHARACTERISTICS To understand residential customer characteristics, FEI reviewed its most recent Residential End-Use Study (0 REUS), which suggests that the majority (%) of residential customers are residing in single family dwellings, although the recent trend shows that the percentage is declining. Figure - below shows the residential customers by dwelling type. Figure -: Residential Customers by Dwelling Type from 0 REUS The 0 REUS also suggests that the majority (%) of residential customers demand is used for space heating and water heating. Figure - below shows the estimated household consumption by end-use. SECTION : RESIDENTIAL RATE DESIGN PAGE

15 Figure -: Estimated Household Consumption by End Use from 0 REUS In terms of consumption pattern, the residential customers annual consumption distribution forms an overall bell curve with a slight skew to the right relative to the mean estimated at GJ per year excluding outliers. Figure - below shows the distribution of residential consumption. Figure -: Distribution of Residential Consumption (0) SECTION : RESIDENTIAL RATE DESIGN PAGE

16 FEI RATE STRUCTURE OPTIONS FOR RESIDENTIAL CUSTOMERS.. FEI Existing and Other Rate Structure Options for Residential Customers FEI has considered four rate structure options for its residential customers rate. Each one of these rate structures is defined below.... Flat Rate Structure: In this rate structure, also known as straight line meter rate structure, the variable charge is flat and does not vary with the customer s consumption. The flat rate structure is used by the majority of Canadian natural gas utilities for residential customers. Currently, FEI recovers the delivery cost of service allocated to the residential rate schedule through a daily basic charge (fixed charge) and a variable charge calculated based on the monthly natural gas consumption.... Declining Block Rate Structure: A declining block rate is designed with two or more successive blocks of use with decreasing prices per unit of volume. Rates of this type are usually designed to recover the substantial portion of costs in the initial block. As indicated in the jurisdictional comparison Appendix A, the natural gas utilities in Quebec and Ontario use declining block rate for their residential customers.... Seasonal Rate Structure: A seasonal rate structure refers to a rate structure in which rates may change based on the month of the year. The seasonal rate can be used as a proxy for demand charge.... Inverted Block Rate Structure: The inverted rate is the reverse of the declining block rate. Under this rate structure, the rate for successive blocks increases as consumption increases. Inverted block rates can be used to reflect a situation in which increased consumption causes rising costs, that is, where the longrun incremental cost for the business is above the average cost... Evaluation of different rate structure options In this section, above mentioned rate structure options are evaluated based on the major rate design principles, including ease of understanding, economic efficiency and fairness, customer bill impact and stability of rates and revenues. The Table - below illustrates how each one of the rate structures score against these principles: SECTION : RESIDENTIAL RATE DESIGN PAGE 0

17 Table -: Evaluation of Rate Structure Options Based on Major Rate Design Considerations Flat Rate Declining Block Rate Seasonal Rate Inverted Block Rate Ease of Understanding and Administration It is easy to understand. The ease of understanding for the general public will lead to relatively higher customer satisfaction, less cost pressures and easier administration of the residential rate class. The logic behind declining block rate structure is not easily understandable to the general public and some may misinterpret it as a form of subsidization to high use customers. The concepts of peak demand and cost attributed to seasonal rates may not be easily understandable to some customers. There is no simple methodology to come up with the ratio of winter to summer rates. This makes the administration of this rate more difficult. Similar to declining rates, the inverted rates may not be easy to understand for some customers. Customers may not be able to explain at what level of consumption and at what time of a month their consumption goes over the first block, leading to higher customer dissatisfaction. Economic Efficiency and Fairness Compared to other rate structures, flat rate can be considered as a neutral option for economic efficiency and fairness as it does not discourage or encourage consumption of natural gas in any particular pattern. This rate structure could be efficient for those situations where higher load factor customers are also higher volume customers. From a cost perspective, declining rates can be justified when the long-run incremental cost of service is below the average cost. Seasonal rate is used as a proxy for demand charge to ensure that the cost of future peaking-related expenditures is allocated to those most responsible for it. Seasonal rates will reduce price competitiveness of natural gas during the winter when natural gas is most valued. Also, seasonal rates introduce a form of regional price differential since the customers in colder environments might be impacted more than others. The natural gas distribution is widely considered to have economies of scale, meaning that as the size of the utility increases (i.e. increased consumption), the total average cost of the utility decreases. Therefore, there is no cost basis to justify inverted block rates for natural gas utilities. Inverted rates may send inefficient price signals because low volume customers could end up being subsidized. Customer bill impact Flat rates also help with customer bill impact since there will be no change in average rates based on consumption level. Depending on the portion of costs recovered in the first block, the customer bill impact for low use customers can be significant. The bill impact for those customers with natural gas space heating and for those in colder climates can be significant. Depending on the portion of costs recovered in the first block, the customer bill impact for high volume customers can be significant. Rate and/or revenue stability Annual forecasting for flat rates is more accurate than other rate options. Forecast accuracy results in improved rate and revenue stability. Compared to a flat rate, declining rate provides less utility revenue stability due to higher difficulty of forecasting the load in each block. This rate structure provides less utility revenue and customer rate stability as the price differential between winter and summer months can be significant. Compared to a flat rate, this rate structure provides less utility revenue stability due to higher difficulty of forecasting the load in each block. SECTION : RESIDENTIAL RATE DESIGN PAGE

18 .. Recommended Rate Structure Option Based on the discussion above, FEI believes that its existing flat rate structure provides the best balance of rate design considerations for the residential customers. FEI s residential customers are already familiar with this rate structure, flat rates are simple to administer and easy to understand and provide more stability in terms of both utility revenues and customers bills. 0. FIXED VERSUS VARIABLE RATES AND COSTS FOR RESIDENTIAL CUSTOMERS FEI s current flat rate structure for the residential rate class consists of a daily basic charge (fixed charge) and a variable charge. The COSA model indicates that the majority of the costs allocated to the residential rate schedule are fixed costs. In the current residential rate structure, as shown in Table - below, the current basic charge (when calculated as the average fixed monthly amount) recovers about % of the customer-related costs and only about % of total fixed costs allocated to residential rate schedule. Type of cost Customer-related cost Demand-related cost Table -: Misalignment between Fixed Costs and Fixed Charges Unit Cost based on COSA results $. per month $. per month Current average Monthly basic charge Differences Total fixed costs $. per month $. per month $. per month Consistent with the fairness principle as discussed in section., FEI is reviewing the ratio of basic charge to variable charge and would like to discuss with the stakeholders if it is reasonable to adjust this ratio going forward. 0. RESIDENTIAL RATE DESIGN RECOMMENDATION Based on the discussion above, FEI recommends a residential rate design which accomplishes the following:. Maintains the current flat rate structure with a fixed basic charge and a variable volumetric charge. Improves the alignment between the fixed costs allocated to the residential rate schedule and the fixed charge. $. per month / $. per month $. per month / $. per month FEI s current Rate Schedule (residential) basic charge per day is $0.0. For analysis purposes in this section, the daily basic charge has been converted to an equivalent monthly charge of $. per month, based on 0. days in a month ($0.0 X 0. = $.). The 0. days per month is derived by the calculation of. days in a year divided by months = 0. days per month. SECTION : RESIDENTIAL RATE DESIGN PAGE

19 CUSTOMER BILL IMPACTS Any rate design recommendation should consider customers ability to pay and should be implemented in a way that avoids rate shocks to customers. The analysis of residential customers bill impact can be separated into two steps: () the impact from rebalancing discussed in section (for discussion purposes only) and () the impact from changes in the basic and variable charges. The impact on customers bills due to rebalancing revenue to cost ratios depend on the individual customers consumption level (i.e. the higher the consumption, the higher the impact will be). As indicated in Table -, the impact on an average use customer s annual bill is estimated to be around 0.% (based on.% R/C ratio) or 0.% on the delivery rate portion of the bill. The impact from changes in the ratio of basic and variable charges is different. The impact on an average use customer would be zero. This is because the changes are revenue neutral; any increase in the share of basic charge is offset by a similar decrease in the share of the variable delivery charge in revenue recovery. As referenced in section. above, the current rate structure has a basic charge of $0.0 per day (which equates to $. per month, based on 0. days in a month). Based on the 0 COSA model with all known and measurable changes included and after rebalancing, the variable charge is estimated to be $. per GJ. Implementing the rebalancing of fixed and variable charges results in an increase in the basic charge from $. to $. per month (an increase of approximately %) and a decrease in the variable delivery charge from the $. per GJ to $.00 per GJ (a decrease of.%). The break-even point, that is the point in which the customers experience no bill impact due to changes in the basic charge and delivery charge, is at the 0 to GJ consumption range. Customers with consumption above this range will experience a decrease of 0.% to.% in their annual bill amounts and customers with consumption below this range will experience an increase of 0.% to.% in their annual bills depending on their consumption level. Lower use customers (customer with annual consumption less than 0 GJ per year) would experience a slightly higher bill impact (approximately ranging from $ to $ annual bill impact depending on the level of annual consumption). In all cases, customers will pay rates more closely matched to their cost of service. The bill impact analysis for the recommended rate structure and fixed versus variable charges is demonstrated in Figure - and summarized in Table - below. SECTION : RESIDENTIAL RATE DESIGN PAGE

20 Figure -: Customer Bill Impact The following table describes each of the results that are shown in Figure - above. Table -: Bill Impact Explanations Graph Item Frequency (E) Cumulative % (H) Annual Bill Impact (F) Description These columns show the number of customers whose annual consumption falls within each GJ increments. The number of customers can be found on y-axis (A) and the Annual Consumption (GJ) of each GJ increments that can be found on x-axis (B). This line is the cumulative sum of the number of customers in each GJ increments. Sum of the Frequency (E). The cumulative percent can be found on y-axis (D). The dots on the graph show the approximate annual bill impact percent that customers will experience, from the rate structure change, based on their annual consumption (based on the each GJ increment into which they fit). The dots line up with Annual Bill Impact % which is the y-axis (C). The Table - below provides the dollar amount and percentage of annual bill impact of the recommended rates for various annual consumption levels: Customer Bill Impact from changes in ratio of basic to variable charges based on 0 COSA model with all known and measurable changes included and after rebalancing (for discussion purposes). SECTION : RESIDENTIAL RATE DESIGN PAGE

21 0 Annual Consumption Table -: Annual Bill Impact of Recommended Rates Annual Bill impact due to the changes in share of Basic and Delivery Charge dollar amount Percentage of total bill 0- GJ $.% 0- GJ $0.% 0- GJ $ 0.% 0- GJ $0 0% 0- GJ $(0) -.0% FEI also investigated the bill impact for low income customers and concluded that the recommended increase in the basic charge does not impact low income customers disproportionately. This is because even though low use customers are more negatively impacted by FEI s proposal (as shown in Table - above), low income customers do not necessarily equate to low use customers. FEI has collected data on income levels and natural gas consumption in its service territory from two different sources: () a database of low income customers who have applied to FEI s low income Energy Conservation Assistance Program (ECAP) and () the data collected as part of the 0 REUS. The ECAP is one of FEI s EEC programs designed to provide energy savings for low income households. To be eligible for this program, the applicant must meet the low income requirements and therefore all customers in this program are vetted to be low income customers. The figure below provides a histogram of ECAP customers annual consumption which shows that the ECAP customers consumption pattern is similar to FEI s general consumption pattern (as provided in Figure -) with a normal distribution slightly skewed to the right and an S-curve cumulative frequency diagram. Figure -: The 0 annual consumption histogram for customers in ECAP program 0 SECTION : RESIDENTIAL RATE DESIGN PAGE

22 The second source of information on residential customers income levels and annual consumption in FEI s service territory is based on the 0 REUS. Figure -: Income and consumption levels based on 0 REUS 0 As demonstrated in the box plot above, there is no clear trend between income level and consumption, while there is a large amount of variability in terms of consumption within each income level group. Due to the lack of correlation between income levels and consumption as displayed in Figures - and - above, FEI believes there are more effective and targeted means to assist low income households than through pricing mechanisms that apply to all customers. SECTION : RESIDENTIAL RATE DESIGN PAGE

23 . COMMERCIAL RATE DESIGN 0. COMMERCIAL RATE CLASS CHARACTERISTICS Commercial customers cover a range of natural gas end users which include restaurants, offices, health care facilities, retail outlets and apartments. FEI is currently serving more than 0,000 commercial customers accounts representing approximately % of FEI s total number of customers. Commercial customers also consume petajoules (PJ) of natural gas representing % of FEI s total 0 forecast throughput 0. Commercial customers end usage from FEI s 00 Conservation Potential Review study shows in Figure - that the majority (%) of end use is for space heating with the second highest end use for domestic hot water (%). Figure -: Commercial Customer End Usage Characteristics Commercial Cooking, % Other, % Domestic Hot Water, % Space Heating, %. REVIEW OF COMMERCIAL CUSTOMERS SEGMENTATION.. Commercial Customer Segmentation FEI has segmented its commercial customers into three rate schedules: Rate Schedule - Small Commercial Service (normal annual consumption is less than,000 GJ), Rate Schedule 0 FEI Compliance filing dated December, 0, Schedules and. Sum of forecast demand for Rate Schedules, and. SECTION : COMMERCIAL RATE DESIGN PAGE

24 0 0 - Large Commercial Service (normal annual consumption is,000 GJ or greater) and Rate Schedule - Commercial Transportation Service. The existing customer segmentation of commercial customers is primarily based on their load characteristics (annual demand and load factors). These characteristics are discussed below. Annual Demand FEI conducted a bill frequency analysis (number of customers for each annual consumption profile) for Rate Schedule and Rate Schedules /. Figure - below shows the 0 annual consumption of Rate Schedule and Rate Schedule / customers. The majority of Rate Schedule customers (%) use up to 00 GJ per year. FEI also notes that there are a small percentage of Rate Schedule customers (0.%) whose annual consumption is close to, or even greater than, the,000 GJ threshold. Figure - below also shows the annual consumption profile of the large commercial sales and transport customers (i.e. Rate Schedules and ). Based on 0 data, about % of Rate Schedule customers consumed between,000 GJ to,000 GJ. There were about % of customers that had consumption less than,000 GJ and about % of customers with consumption above,000 GJ. Although Rate Schedule is designed for customers with less than,000 GJ and Rate Schedule is designed for customers with greater than,000 GJ of annual consumption, occasionally some customers may consume amounts that are more than/less than this threshold, for a variety of reasons. For example, a customer may have ceased operations for a portion of the year, they may have added or changed their equipment or the consumption estimate for a new customer may have not been very accurate. As a result, FEI will periodically review customer consumption data and, after consulting with them, may decide to move them to another rate schedule. When these customers move between rate groups, there will be a resulting bill impact which FEI discusses further below. Small Commercial and Large Commercial Rate Schedules and respectively can receive their base load commodity from a marketer under the Customer Choice Program. Alternatively, under Rate Schedules B and B commercial customers can choose to purchase part or all of their commodity as biomethane (Renewable Natural Gas). SECTION : COMMERCIAL RATE DESIGN PAGE

25 No. of Customers FORTISBC ENERGY INC. Figure -: Commercial Customers Bill Frequency RATE RATE/,000,00,000,00,000,00,000,00, Annual Consumption (GJ) Load Factor FEI investigated the load factors for the existing small and large commercial groups. This analysis is shown in Figure - and Figure -. These figures illustrate that small commercial customers have a significantly lower load factor, averaging 0.%. The large commercial customers (Rate Schedule and combined) average.%. This analysis further supports the customer segmentation between small and large commercial customers. SECTION : COMMERCIAL RATE DESIGN PAGE

26 % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 00% More Customers % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 0% % 00% More Customers FORTISBC ENERGY INC. Figure -: Small Commercial Customer Load Factor Distribution 0,000,000,000,000,000 0,000,000,000,000,000 0 RS Load Factor Figure -: Large Commercial Customer Load Factor Distribution R & R SECTION : COMMERCIAL RATE DESIGN PAGE 0

27 Average Rates ($/GJ) FORTISBC ENERGY INC. 0.. Average Customer Rate FEI also investigated the annual consumption and the average rate (in $/GJ) for the customers under Rate Schedule and Rate Schedules /. Figure - below shows that for example, for a customer who consumes,000 GJ per year, moving from Rate Schedule to Rate Schedule would raise their average rate by approximately $0.0/GJ. The figure also shows that the point where a customer would be indifferent to moving between Rate Schedule and Rate Schedule (referred to as the economic crossover point) is approximately,00 GJ instead of,000 GJ. The economic crossover occurs for an annual volume when a customer whether served under Rate Schedule or Rate Schedule would have the same annual total cost. Ideally, an economic crossover point would occur at the threshold value of,000 GJ. $.00 $.0 $.0 $.0 $.0 $.0 $.0 $.0 $.0 Figure -: Relative Economics between Rate Schedules and Relative Economics Rate Schedule and Rate Schedule (COSA Rates) Rate Rate This gap between Rate Schedule and Rate Schedule rates creates an incentive for Rate Schedule customers to move $.0 $ ,000,00,000,00,000,00,000,00 Annual Consumption (GJ) Table - below show the mathematical derivation of the economic crossover using the basic charges, delivery charges for Rate Schedules and, and the average cost of gas from the COSA model. The economic crossover is at, GJ. What this means as illustrated in Figure - is that a customer who consumes more than,00 GJ and less than,000 GJ is better off financially as a large commercial Rate Schedule customer. This results in incenting customers to being classified as large commercial customers when their consumption is in this range. The average rate is calculated by adding up all the annual fixed and variable costs and dividing by their annual consumption. SECTION : COMMERCIAL RATE DESIGN PAGE

28 0 0 The economic crossover is calculated by dividing the difference in the basic charge revenue by the difference in the Total Variable Cost ($,. / $0.0). This means that a small commercial customer and a large commercial customer who consume, GJ will have the same annual cost... Table -: Economic Crossover Volume for Rate Schedule and Rate Schedule Summary of Commercial Customer Segmentation As discussed in section.., FEI believes that the,000 GJ threshold between Rate Schedule and continues to be the appropriate threshold and that the existing customer segmentation should be maintained. However, FEI has identified a mismatch between the customer economics of Rate Schedules and / for customers whose consumption is near the,000 GJ threshold. Therefore, in order to mitigate the customer bill impacts discussed above, existing rates may be adjusted... Line No. Particulars Rate Schedule Rate Schedule Difference Basic Charge / Day $ 0. $. x # of Days.. Basic Charge Revenue $.0 $,0. $,. Delivery Rate $ / GJ $. $. Average Cost of Gas from COSA $. $. Total Variable Cost $ / GJ $.0 $.0 $ 0.0 Economic Crossover GJ Line / Line ), Rate Design Recommendation FEI believes that the small and large commercial customers rates may be adjusted to close the gap identified in section.. above. This will eliminate the customer bill differential between Rate Schedules and for customers whose annual consumption is close to the,000 GJ threshold. The goal is to make the customer economically indifferent between choosing Rate Schedule or if they are near this,000 GJ threshold. This will also remove any economic incentive for customers to be misclassified. The gap identified in Figure - can be closed by simultaneously raising the basic charge and lowering the delivery charge for Rate Schedule by an amount intended to leave the total revenue generated by Rate Schedule revenue neutral. This is represented by the dashed blue line in Figure - below. Similarly, the gap can also be closed by raising the basic charge and lowering the delivery charge for Rate Schedule, again by an amount intended to leave the rate group revenue neutral. This is represented by the dashed red line. The net effect of these adjustments is for the lines to now cross at the,000 GJ threshold. SECTION : COMMERCIAL RATE DESIGN PAGE

29 Average Rates ($/GJ) FORTISBC ENERGY INC. The rate impact for customers at the,000 GJ threshold, is a change of approximately $0.0/GJ (a reduction for a Rate Schedule customer and an increase for a Rate Schedule customer) on an average rate of approximately $.0 GJ (approximately %). $.00 Figure -: Rate Schedules and Redesign at,000 GJ $.0 $.0 $.0 $.0 Rate Rate Rate Redesign Scenario Rate Redesign Scenario $.0 $.0 $.0 $.0 $.0 - Rate design will move rates toward the middle of the economic gap - Each move is revenue neutral $ ,000,00,000,00,000,00,000,00 Annual Consumption (GJ) SECTION : COMMERCIAL RATE DESIGN PAGE

30 . INDUSTRIAL RATE DESIGN 0. INDUSTRIAL RATE CLASS CHARACTERISTICS The industrial customer group represents a wide range of industries and end uses. The industrial sector makeup is shown in Figure - and the end usage is shown in Figure -. This data comes from FEI s 00 Conservation Potential Review study. Figure - shows that the major gas consuming industries are the pulp and paper, agriculture and food and beverage industries with market shares of %, % and %, respectively. Figure - shows that the primary end uses are for boilers, air conditioning and pulp lime kilns with market shares of %, % and %, respectively. Figure -: Industrial Sectors Non-Metal Manufacturing, Fabricated % Metal, % Mining, % Other, % Pulp and Paper, % Miscellaneous Manufacturing, % Wood Products, % Chemical, 0% Food and Beverage, % Agriculture, % Figure -: End Use by Industrial Customers Direct Consumption, % Cement Kilns, % Other, % Paper, % Heat Treating, % Coal Drying, % Lumber Kilns, % Boilers, % Direct Fired, % Pulp Lime Kilns, % Air Heating, % SECTION : INDUSTRIAL RATE DESIGN PAGE

31 Annual usage for Industrial customers varies widely, as shown by Figure -. This bill frequency graph also shows that there is a clustering of customers with annual consumption in the region of 0,000 GJ and another clustering of customers with annual consumption in excess of 0,000 GJ. Figure -: Industrial Customer Bill Frequency (All Customers) 0 The wide range of industries, end uses and annual consumption for the industrial customer group requires FEI to customize rate schedules according to the unique characteristics of each market segment. These considerations and market segmentation will be discussed in the next section.. INDUSTRIAL CUSTOMERS SEGMENTATION The industrial customer group includes customers who have unique demand characteristics that FEI has considered when designing the industrial rate schedules. These characteristics or customer service requirements include the following: Firm sales Firm transportation Interruptible sales Interruptible transportation Seasonal demand with summer peaking SECTION : INDUSTRIAL RATE DESIGN PAGE

32 High volume demand (both firm and interruptible service) FEI has segmented the industrial customers and has existing rate schedules and contracts to match these characteristics, which are listed below in Table -. SECTION : INDUSTRIAL RATE DESIGN PAGE

33 Table -: Industrial Customer Groups and Corresponding Rate Schedules Industrial Group FEI Tariff Rate Schedule / Contract Description Seasonal Firm Gas Service Rate Schedule Seasonal firm service during the off-peak period (April to October ) and interruptible service during the extend period (November March ). General Firm Service (Sales) Rate Schedule General firm sales service with an applicable monthly demand charge per month per GJ of daily demand. Firm sales service. General Firm Transportation Service Rate Schedule General firm transportation service with an applicable monthly demand charge per month per GJ of daily demand. Firm transportation service on FEI s system. General Interruptible Service (Sales) Rate Schedule General interruptible sales service Sales service is interruptible if there is insufficient capacity or operational restrictions to deliver the gas. General Interruptible Transportation Service Rate Schedule General interruptible transportation service. Transportation service that can be interrupted if there is insufficient capacity or operational restrictions to deliver the customer s gas. Large Volume Transportation Service Rate Schedule Large volume interruptible transportation service with a minimum take or pay of,000 GJ per month. Option to negotiate firm service subject to BCUC approval. Transportation Service (Closed) Inland Service Area Rate Schedule A (Closed) Large volume firm and interruptible transportation service for select customers in the Inland Service Area (closed rate schedule), available at the time of the Phase B Rate Design. Transportation Service (Closed) Columbia Service Area Rate Schedule B (Closed) Large volume firm and interruptible transportation service for select customers in the Columbia Service Area (closed rate schedule), available at the time of the Phase B Rate Design. Contract Vancouver Island Joint Venture Contract for firm and interruptible transportation service to five mills on Vancouver Island. Contract BC Hydro / Island ICP Contract for firm and interruptible transportation service to the Island Cogeneration Facility on Vancouver Island. Each of these types of industrial customers is discussed further in the following sections. SECTION : INDUSTRIAL RATE DESIGN PAGE

34 0 0. GENERAL FIRM SERVICE: RATE SCHEDULES (SALES) AND (TRANSPORTATION).. General Firm Service Customer Characteristics General Firm Service is intended for those commercial and small industrial customers that generally use natural gas for a processing load, as load that is relatively non-temperature sensitive and therefore relatively constant throughout the year. The typical type of customers using firm service include condominium strata customers and hospitals who use a high proportion of their overall gas demand for water heating needs and commercial customers and small industrial customers who use gas for their processing load. Therefore, these customers will generally have a relatively constant demand profile throughout the year. This relatively flat demand profile means that these customers will more highly utilize the FEI system than customers who contribute to FEI system peak demand on cold days such as the residential and commercial customers. FEI offers two related rate schedules to this type of customer Rate Schedule for General Firm Service (a sales service) and Rate Schedule for General Firm Transportation Service (for customers who choose to purchase their own natural gas from a Marketer). Rate Schedules and are companion rate schedules, in that each rate schedule has the same basic and delivery charges (as will be seen in Table - in section..). However, Rate Schedule has an additional administration charge to account for the separate administration and billing for customers who purchases their own gas from a Marketer. As of 0 year end, there were combined Rate Schedule and customers with a total demand of million GJ. The following Figure - shows the annual bill frequency graph for the combined Rate Schedule and customers. It shows that the majority of these General Firm Service customers use between,000 GJ and,000 GJ per year but some may use up to 0,000 GJ. SECTION : INDUSTRIAL RATE DESIGN PAGE

35 Figure -: Annual Bill Frequency for the Combined Total of Rate Schedule and Rate Schedule Customers 0.. Rate Design Considerations FEI developed Rate Schedules and to charge General Firm Service customers with high system utilization according to their individual demand profile, as measured by their load factor, which reflects their high utilization of the FEI system throughout the year. The demand/variable delivery type of rate structure for Rate Schedule and is more effective at reducing the total costs to high load factor customers. This is because when the demand charge is applied to customers with a higher load factor it results in a lower average cost per GJ of total throughput. In short, customers more effective use of the system is reflected in lower rates per gigajoule. FEI designed Rate Schedule to include a basic charge, a delivery charge, a demand charge; a commodity cost Recovery charge and a storage and transport charge. Similarly, Rate Schedule includes a basic charge, an administration charge, a delivery charge and a demand charge. These charges are shown below in Table -. FEI measures their system utilization by their load factor, which is defined as their average daily demand divided by their peak day demand. SECTION : INDUSTRIAL RATE DESIGN PAGE