Rising Gas rates: A painful proposition

Enbridge Gas NB ran into some serious opposition this week with a proposed rate increase for the large commercial accounts.   Although they represent only 1% of the customers of the gas company, they have big political pull.  EGNB is proposing that the distribution charge for this group of customers would be increased from $2.39 to $4.54 per GigaJoule, which is still less than the other classes.  This is a substantial increase of between 10% and 18% based on the volume that the customer uses.

The natural gas franchise was authorized in 2000 for New Brunswick but it takes time and a lot of money to build a network like we see in other provinces like Ontario. Roughly seven years later, they have 8000 customers while NB Power still has a substantial, roughly 60% of the heating market, which translates into perhaps 190,000 electric heat customers. Its not unusual that Enbridge shows up at each rate hearing for NB Power insisting that electric rates classes should by modified and the rates raised. The more electricity you use, the cheaper it gets. This isn’t fair to the environment or the poor.

Enbridge is supposed to make money from its gas distribution system as a fixed rate of return. It also adds onto the bill the actual cost of the gas commodity itself, which includes the cost of transmission from Sable Island to NB on the Maritimes and Northeast pipeline.

Enbridge obtained approval from the EUB in 2000 for a market-based rate system commonly used to build a customer base. The company ensures that the price of natural gas is always lower by a certain percentage than oil, which provides the incentive to switch. This incentive required may vary between classes and Enbridge has taken considerable losses to do so. The worst case is when the price of natural gas is high and the cost of oil is low. The best case is  when oil is high (like now) giving the company room to raise rates and still have a competitive product (10% savings for this class over light fuel oil).

In 2006, EUB document filings indicate that Enbridge NB lost $4.3 million dollars, and increased its regulatory deferral account by $19.2 million – effectively losing $23.5 million. This increased that account to a total of $102 million dollars in 2006. This account shows the shortfall between revenue and the cost of service. The company has until 2040 to recover the debt in the deferral account from rates. If we assume that 2007 continued with a loss of $20 million, then the deferral account is now $122 million in the hole. The development period was extended to 2010 at a hearing in 2005. It can be seen that Enbridge NB is in a difficult position with inadequate customer base for its fixed cost, rates that do not recover enough revenue and a large deferral account.

The EUB will be faced with considerable pressure to moderate the proposed rate increases in the industrial rate, but oil is at $90 and not likely to retreat. This rate increase was based on $80 oil so a further increase may be justified in 2008. OPEC, by refusing to increase oil supply, essentially indicates they consider $90 as the floor price.

What is the effect of the rate increase on industrial customers on the products they produce? I considered two cases with gas at 10% or 40% of an industrial company’s total expenses. The rate increase affects customers from 10% to 18% based on volume of usage, as the commodity cost is a fixed value. Multiplying the figures gives a range of between 1% and 7.2% in product cost.

Is a 1 % increase acceptable? Is 7.2% too much? What kind of pill will the EUB prescribe for the patients complaining of increasing and severe gas pain? Will they require a cost of service review as part of the examination? Part of the hearing may require the industrial customers to provide financial information to back up their claims. After all, the price of energy is rising in other jurisdictions. At some point the end consumers of the products have to pay for the real costs to manufacture.

A question that might be asked is how long the parent company of Enbridge NB will allow mounting losses to accumulate before calling it a day. The large volume users have been allowed a bypass by the Gas Distribution Act – the single end user franchise for a mere $50,000 a year. In addition, there are provisions in the Act for a LNG franchise (Irving), which will give considerable latitude in serving large industrial concerns and perhaps others. On the electrical side, will the EUB insist on the abolition of the declining block rate at NB Power ordered by the PUB well over a decade ago? Should the EUB pursue the merging of the general service rates as suggested by its PUB predecessor?

The industrial companies, Enbridge Gas NB, and NB Power are in a zero sum game. What helps one hurts the other. Enbridge is ailing from a Catch 22 situation – lack of customer base and rates too low to support it. If they raise rates too much, they lose customers. NB Power wants to raise rates to reduce its heavy debt but the political heat is too great to get more than 6% at the moment. Their low rates and declining block structure cuts Enbridge off at the knees.

Will the EUB be similar to a doctor who would like to, but dares not prescribe the medicine that is required? There is a strong possibility that we will to see the same patients back at the clinic on a yearly basis looking for a fix.

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