PNG (N.E.) 2011 REVENUE REQUIREMENTS
EXHIBIT B-10
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 1 April 8, 2011
TABLE OF CONTENTS Page No. A. OPERATING EXPENSES .................................................................................................................. 1 B. MAINTENANCE EXPENSE .............................................................................................................. 2 C.
ADMINISTRATIVE AND GENERAL EXPENSE ................................................................................... 4
D. SHARED SERVICE CHARGES ........................................................................................................... 5 E.
TRANSFERS TO CAPITAL ................................................................................................................ 6
F.
RATE BASE .................................................................................................................................... 6
G. DEPRECIATION EXPENSE ............................................................................................................... 8 H. EMPLOYEE BENEFITS: PENSION AND NON‐PENSION POST RETIREMENT BENEFITS ...................... 10 I.
DEFERRAL ACCOUNTS /AMORTIZATION EXPENSES ..................................................................... 11
J.
OTHER INCOME .......................................................................................................................... 11
K.
RETURN ON RATE BASE .............................................................................................................. 11
L.
2011 FORECAST GAS DELIVERIES ................................................................................................ 11
M. OTHER ........................................................................................................................................ 12
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 1 April 8, 2011
BRITISH COLUMBIA UTILITIES COMMISSION Commission Information Request No. 2 Pacific Northern Gas (N.E.) Ltd. [PNG (N.E.)] Fort St. John/Dawson Creek Division (FSJ/DC) Application for 2011 Revenue Requirements (RRA) A. OPERATING EXPENSES 1.0
Reference:
Maintenance Expense Exhibit B‐6, BCUC IR 1.1 Supervision 670
1.1 Based on the information filed in BCUC IR 1.1.1 and the 2009 revenue requirements application, staff compiled the following table. Please confirm that it is accurate or update as necessary.
Response: Confirmed. 1.2 Please explain why forecast supervision costs were 32‐35% higher than actual in both 2009 and 2010.
Response: There has been a mis-alignment of where expenses are forecast and where employees are coding their costs. PNG is working to correct this mis-alignment through education and training. By comparing total Operating and Maintenance costs for these years one can see that total actual costs are similar to total forecast expenditures. Year
2010
2009
O&M Forecast $3,969,000 $3,809,000
O&M Actual
$3,893,000 $3,924,000
Difference
$76,000
($115,000)
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 2 April 8, 2011
1.3 Test Year 2011 supervision costs are forecast to increase by 40% ($470‐$336 = $134/$336) over actual 2010. Please provide further evidence for the requested $470,000 and explain why the forecast is so much higher than the previous year actual.
Response: The 2011 forecast expense for supervision is based on the anticipated workload for planning administering and overseeing the forecast 2011 work. See response 1.2 which demonstrates that the overall costs incurred in 2009 and 2010 were similar to what was forecast. PNG expects the overall 2011 costs to be similar as well and is working to correct any misalignment between forecasting and actual cost tracking through education and training. 2.0
Reference:
Maintenance Expense Exhibit B‐6, BCUC IR 1.2 Vehicles
2.1 Actual vehicle expenses in 2010 were approximately $100,000 and appear to be consistent with actual vehicle expenses in 2008 and 2009. In Test Year 2011 PNG FSJ/DC is forecasting vehicle expense of approximately $155,000, a greater than 50% increase over the prior year. Please provide further justification, on a vehicle by vehicle basis, for the significant forecast increase.
Response: The increase in vehicle expenses is due to price of gas (up 8.5%), auto maintenance costs (up 40%) and the reclassification of vehicle insurance from administrative and general expenses to vehicle expenses pool of $20,000. 2.2 PNG FSJ/DC states in response to BCUC IR 1.2.2 that one of the driving forces in the increase in vehicle expenses is the addition of vehicle insurance in the calculation of the pool. Please identify where vehicle insurance expense was recorded in previous applications.
Response: This was previously recorded under administrative and general expenses, Account 723, insurance expense. See Tab 1, Page 5, Line 4.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 3 April 8, 2011
B. MAINTENANCE EXPENSE 3.0
Reference:
Maintenance Expense Exhibit B‐6, BCUC IR 1.2 General
3.1 Based on the information filed in previous years’ revenue requirements applications, staff compiled the following table. Please confirm that it is accurate or update as necessary.
Response: Confirmed. 3.2 Based on the information in the table it appears that, other than in 2009, PNG FSJ/DC has over forecast Maintenance Expenses by 18% to 35%. Please comment on these findings.
Response: Mis-alignment between where forecast expenditures are budgeted, and where the actual costs incurred are coded can occur. PNG contends that this, and the need to adjust workload to meet the immediate needs of providing safe and reliable service, can result in some mismatching of forecast and actual expenses when compared in a selective manner. However, when the overall operating and maintenance forecast expenses are compared to the actual expenses there is no material difference between the forecast and actual account values as shown below. Year
2010
2009
2008
2007
Forecast O&M $3,969,999 $3,809,000 $3,640,000 $3,350,000 Actual O&M
$3,893,000 $3,924,000 3,629,000
$3,409,000
Difference
$76,000
($59,000)
($115,000)
$11,000
This total difference between forecast and actual expenditures amounts to an average of approximately (0.6%) per year over the 4 year period.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 4 April 8, 2011
3.3 What information does PNG FSJ/DC currently have that could validate that the Test Year 2011 forecast is not over estimated by 18%‐35% ($60,000 ‐ $117,000).
Response: The 2011 maintenance expenses are forecast based on the anticipated workload. PNG continues to work to correct any mis-alignment of where expenses are forecast and where employees are coding their costs through education and training. The operating and maintenance costs summary in response 3.2 demonstrates that forecast and actual expenses have been within a reasonable band recognizing forecasting uncertainty. C. ADMINISTRATIVE AND GENERAL EXPENSE 4.0
Reference:
Administrative and General Expense Exhibit B‐6, BCUC IR 1.10 General
4.1 Please update the table in BCUC IR 1.10.2 which calculates the average Administrative and General Expense per customer to include Test Year 2011. In doing so please normalize the Administrative and General Expense for the transfer to capital amount that would have been reported had the old methodology been maintained. (Exhibit B‐1, p. 11 $234)
Response: The table below shows the calculation of the A&G expense per customer under two scenarios. The updated figures reflect the expected reductions to A&G expenses when PNG files it updated application. The figures under the 2011 heading reflect the original application. Updated Figures Application 2011 2011 Administrative & General Expenses 1,769,000 1,907,000 Higher transfers to capital under old methodology (234,000) (234,000) Vehicle insurance reallocation from operating expenses and capital 20,000 20,000 Lower shared services recovery under old methodology (25,000) (25,000) 1,530,000 1,668,000 Forecast Customer Count (17,493 + 183) 17,676 17,676 Average Administrative & General Expense per Customer $ 86.56 $ 94.37
Administrative & General Expenses Actual Customer Count Average Administrative & General Expense per Customer
Updated Figures Application (Old Overheads) (Old Overheads) 2011 2011 2010 2009 2008 2007 2006 1,530,000 1,668,000 1,340,101 1,310,236 1,239,532 1,208,941 1,179,355 17,676 17,676 17,493 17,039 16,819 16,538 16,211 $ 86.56 $ 94.37 $ 76.61 $ 76.90 $ 73.70 $ 73.10 $ 72.75
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 5 April 8, 2011
4.2 Please update the table in BCUC IR 1.10.3 which calculates the average Administrative and General Expense per GJ sold to include Test Year 2011. In doing so please normalize the Administrative and General Expense for the transfer to capital amount that would have been reported had the old methodology been maintained. (Exhibit B‐1, p. 11 $234)
Response:
Administrative & General Expenses Deliveries (GJ) Average Administrative & General Expense per Deliveries
Updated Figures Application (Old Overheads) (Old Overheads) 2011 2011 2010 2009 2008 2007 2006 1,530,000 1,668,000 1,340,101 1,310,236 1,239,532 1,208,941 1,179,355 4,511,242 4,511,242 4,344,662 4,915,698 4,804,066 4,656,515 4,599,556 $ 0.34 $ 0.37 $ 0.31 $ 0.27 $ 0.26 $ 0.26 $ 0.26
D. SHARED SERVICE CHARGES 5.0
Reference:
Shared Services PNG‐West RRA 2011, Exhibit B‐8, BCUC IR 1.51
PNG states that the last time study of Vancouver head office employees’ time spent on PNG (N.E.) matters was done in 2003. 5.1 Would PNG agree that it would be appropriate to undertake a new time study in 2011 for implementation in 2012? If not, why not?
Response: PNG considers the 20.84 percent figure used for allocation of costs to PNG(N.E.) continues to be a reasonable estimate of the time spent by PNG on providing those services subject to the time study allocator as shown at Tab Application, Page 31. The time study allocator applies to Vancouver Administration under Account 721 and Terrace Engineering under Account 685. There have not been significant changes in the services provided by the Vancouver office or from Terrace engineering since 2003 that would warrant the time and effort of completing another time study in 2011. Regardless, PNG considers that starting a time study in May or June 2011 would not provide sufficient data to determine what allocator should apply in 2012. If a time study was to be completed, it should probably be done over a longer period than the remaining months in 2011 and it should be done with the objective of considering changes starting with 2013.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 6 April 8, 2011
E. TRANSFERS TO CAPITAL No IR #2 deemed necessary F. RATE BASE 6.0
Reference:
Administrative and General Expense Exhibit B‐6, BCUC IR 1.13 General
PNG’s response to IR 1.13.2.1 shows actual Capital Additions compared to approved Capital Additions as follows:
6.1 What Commission approval has PNG FSJ/DC received to allow the Capital Additions in excess of amounts approved in the revenue requirements applications to be added to rate base?
Response: The 2008 approved figure in the above table is not correct. The approved figure was $2,548,421 and the difference between approved and actual is $2,058,073. The Commission approves PNG’s applied for rate base each year. The previous year’s additions are approved by the Commission as part of the process of approving the current year’s revenue requirements application. 6.2 Does PNG FSJ/DC consider it necessary to obtain Commission approval for Capital Additions in excess of amounts approved in rate Applications? If no, please explain.
Response: See response 6.1.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 7 April 8, 2011
6.3 Please explain why PNG FSJ/DC forecast Capital Additions are so different than actual Additions in 2008‐2010.
Response: In all cases the predominant factor for actual capital additions being greater than those forecast is due to expenditures in mains and services related to new customer additions. In all three years PNG has experienced strong demand for the installation of new facilities. This was particularly accentuated in 2009 with the approval of the Tomslake CPCN which was not included in the originally forecast expenditures. 6.4 The table in response to BCUC IR 1.13.9 shows two forecast expense of $41,000 to replace two vehicles (pick‐ups) which each have 101,000 km and 89,000 km. Although these two vehicles are almost 10 years old the low km would indicate they are not heavily used. Please explain why PNG FSJ/DC does not consider it appropriate to retain these vehicles for use in Test Year 2011.
Response: Although the mileage on these vehicles may be lower than many of the other vehicles being replaced in the Test Year they do exceed the replacement criteria. The lower mileage results primarily from being used in construction and customer service activities that do not require travel but do require continuous operation of the vehicle which means the engine has been operated for at least as much if not more than vehicles with higher mileage due to highway driving. PNG considered the on-going operation of these vehicles at the time of preparing the Application and concluded they required replacement. 6.5 What type of vehicles will be purchased for the new meter reader and the measurement technician? If they are to be pick‐up trucks please explain why a truck would be required.
Response: Both the new meter reader and measurement technician vehicles will be pick-up trucks. Due to the rural nature of much of the NE service area both positions must access locations that do not have cleared roads in winter, and are impassible by smaller vehicles in the spring/fall due to mud and ruts. In addition the measurement technician must carry a substantial amount of replacement parts, tools and other equipment at all times and therefore a full sized enclosed camper style canopy is also required.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 8 April 8, 2011
6.6 Please demonstrate the need for an additional meter reader.
Response: Since 1997 when PNG acquired the Fort St. John system it has operated with no increase in meter reading resources, while still needing to perform all the associated meter reading tasks. The workload has steadily increased during this period due to strong customer additions. During this time the customer count has increased from 7,938 to 11,052. Non-meter reading personnel (i.e. customer service and construction staff) must provide assistance to complete the work without the additional meter reading staff. This not only increased the cost of acquiring meter reads, but also took qualified personnel away from their other duties. This consequently established the need for the addition of a meter reading resource. G. DEPRECIATION EXPENSE 7.0
Reference:
Depreciation Expense Exhibit B‐6, BCUC IR 1.18 Depreciation Study
In response to BCUC IR 1.18.2 PNG FSJ/DC states “PNG (N.E.) will not be using the depreciation rates per the depreciation study; rather remaining useful lives and average service lives provided in the depreciation study will be used to determine depreciation expense.” 7.1
Please explain why PNG FSJ/DC decided not to uses the recommended depreciation rates from the depreciation study?
Response: See response to PNG West BCUC IR No. 2, Question 9.1. 7.2
Has PNG FSJ/DC obtained a third party opinion on the selected depreciation rates?
Response: See response to PNG West BCUC IR No.2, Question 9.2. 7.3
Given that the depreciation rates are not the recommended rates that Gannet Fleming provided for the depreciation calculation, why does PNG FSJ/DC think these rates should be approved?
Response: See response to PNG West BCUC IR No.2, Question 9.3.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 9 April 8, 2011
7.4
What would the depreciation expense in Test Year 2011 be had Gannet Fleming recommended depreciation rates been adopted?
Response: The estimated depreciation expense in Test Year 2011, using the Gannett Fleming recommended depreciation rates, is $1.64 million. 8.0
Reference:
Depreciation Expense Exhibit B‐6, BCUC IR 1.19 Proposed Calculation of Depreciation Expense
BCUC IR 1.19.4 confirms that the forecast NBV that PNG FSJ/DC is requesting approval for does not agree with the amount used to prepare the consolidated PNG 2010 year end financial statements. 8.1
Is PNG FSJ/DC going to request that the opening NBV be updated to agree to the ending NBV that consolidates into PNG’s 2010 year end financial statements?
Response: Yes, numbers will be updated. 8.2
What would the deprecation expenses be for Test Year 2011 if it was based on the ending NBV that consolidates into PNG’s 2010 year end financial statements?
Response: PNG expects to be able to provide the requested information on or before Friday, April 15, 2011. 8.3
BCUC IR 1.19.10 requested that the total NET SALVAGE VALUE be included in the accumulated depreciation balance at December 31, 2010. It appears that PNG FSJ/DC did not provide the information that was being requested. Please provide it.
Response: See response to PNG West BCUC IR No.2, Question 10.3.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 10 April 8, 2011
H. EMPLOYEE BENEFITS: PENSION AND NON‐PENSION POST RETIREMENT BENEFITS 9.0
Reference:
9.1
Employee Benefits Exhibit B‐6, BCUC IR 1.20 Pension
Please explain the increase in the Current Service Cost in Test Year 2011 as reported in response to IR 1.20.3.
Response: The increase in service cost is mainly driven by the drop in the discount rate by approximately 120 basis points. In response to BCUC IR 1.20.3 PNG FSJ/DC reports the ‘Amortization of Net Actuarial Losses’ as $6,000 in 2010 and $50,000 in Test Year 2011. 9.2
Please explain the forecast large increase in amortization in the Test Year 2011.
Response: See response to PNG West BCUC IR No.2, Question 11.5. 9.3
Please provide the balance of the ‘Unamortized Experienced Actuarial Gains/Losses’ in 2008, 2009, 2010 and Test Year 2011.
Response: See response to PNG West BCUC IR No.2, Question 11.6. 9.4
Please complete the table provided in response to IR 1.20.3 to include Forecast and Actual balances for 2007, 2008, and 2009.
Response:
Current Service Cost Interest Cost Expected return on plan asset Amortization of net actuarial loss Amortization of Transitional Asset
Actual 2009
Budget 2009
Actual 2008
Budget 2008
Actual 2007
Budget 2007
133,000 194,000 (201,000) 2,000 (1,000) 127,000
130,000 193,000 (200,000) 2,000 (1,000) 124,000
162,000 183,000 (204,000) 25,000 (1,000) 165,000
152,000 183,000 (202,000) 25,000 (1,000) 157,000
149,000 162,000 (164,000) 42,000 (1,000) 188,000
148,000 156,000 (156,000) 44,000 (1,000) 191,000
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 11 April 8, 2011
10.0
Reference:
10.1
Employee Benefit Exhibit B‐1, Tab 2, p. 5 Exhibit B‐6, BCUC IR 1.22 Non‐Pension
In BCUC IR 1.22.10 PNG FSJ/DC confirmed that the amount of cash contributed to the plan and the amount recovered in rates up to December 31, 2010 equal $0. In this confirmation has PNG FSJ/DC taken into consideration the recovery of benefits paid to employees and recovered in rates?
Response: See response to PNG-West, BCUC IR No.2, Question 12.2. 10.2
Please quantify the total amount of benefits paid to employees and recovered in rates for the period between 2000 and 2010.
Response: PNG only has readily available data from 2005 onwards: BCUC account 725 Employee Benefits (FSJ/DC) Actuals Budget Difference
2010
2009
2007
2006
2005
455,692 448,084 463,491 490,069 485,358 406,715 457,795 441,443 474,362 484,884 481,181 431,112 (2,103) 6,641 (10,871) 5,185 4,177 (24,397)
I. DEFERRAL ACCOUNTS /AMORTIZATION EXPENSES No IR #2 deemed necessary J. OTHER INCOME No IR #2 deemed necessary K. RETURN ON RATE BASE No IR #2 deemed necessary L. 2011 FORECAST GAS DELIVERIES No IR #2 deemed necessary
2008
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 12 April 8, 2011
M. OTHER 11.0
Reference:
Commission Orders Sought by PNG Exhibit B‐6, BCUC IR 1.40 Exhibit B‐1, Tab Application, p. 30
In regard to items 3 and 4 on page 30 of the Application PNG FSJ/DC is requested to list each item from the Application for with it is requesting Commission approval. Given the number of requested changes to the deferral accounts in the Application and the subsequent amendments a clear and detailed listing is deemed necessary. Further given the complex nature of the depreciation expense calculation a clear and completed listing of requested approvals is also necessary.
Response: Deferral Accounts Approvals The table below provides the details of the deferral accounts PNG FSJ/DC is requesting the Commission to approve under the Application. Amortization Expense
Deferral Account Type
Deferral Accounts
Rate Base
Property Tax Variance (1)
BCUC Hearing & CAP/ROE App. DC Industrial Deliveries IFRS Common Equity Old Revolving Debt Issue Costs BCUC Fees Short Term Interest Long Term Interest Plant Gains and Losses Reserve for Damages
Interest Bearing
Amortization Period
Test Year 2011 ($000's)
X
calendar year 2011
25
X X
calendar year 2011 calendar year 2011 amortization to be set in 2012 calendar year 2011 calendar year 2011 calendar year 2011 calendar year 2011 calendar year 2011 to be determined calendar year 2011
45 16
X X X X X X X X
Gross Amortization Less Future Income Taxes Net Amortization
0 398 30 4 4 (137) 0 (71) 314 (102) 212
Note: 1 BCUC Hearing deferral account to record budgeted to actual expenses difference.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 13 April 8, 2011
Depreciation Approvals As stated in the Application, PNG(N.E.) has proposed to make use of an IFRS-compliant depreciation approach for 2011 and future periods. In this regard, PNG(N.E.) is requesting Commission approval for the following items related to accounting for PP&E in 2011: 1) Measurement Basis (a) Historic Group Assets For group assets, approval to apply the IFRS 1 exemption which would establish the January 1, 2011 net book value of these assets as their deemed cost. (b) Historic Specifically Identifiable Assets For assets in Accounts 484 – Transportation Equipment and 485 – Heavy Equipment that are specifically identifiable, approval to account for these assets on an individual basis and to retroactively apply IAS 16 in determining historic cost and accumulated depreciation. Approval to record any residual balances arising from this retroactive application in a regulatory deferral account with amortization to be determined under the 2012 revenue requirements application. (c) Additions in 2011 and Subsequent Years Approval to account for asset additions in 2011 and future years at cost. 2) Determination of Cost Approval of the overhead allocation methodology proposed in the Application. 3) Commencement of Depreciation Approval to commence the recording of depreciation of PP&E at the time the assets are in the condition intended by management.
BCUC IR No. 2 FSJ/DC 2011 RR App. Page 14 April 8, 2011
4) Depreciation Methodology Approval to apply a straight-line depreciation methodology where depreciation will be calculated to reflect the use of an asset over its estimated economic useful life. 5) Negative Salvage Values Approval to not include provision for negative salvage amounts in the calculation of depreciation expense. 6) Gain / Loss on Asset Disposal Approval to record gains and losses arising from derecognition of assets in a regulatory deferral account.
