Utilities Kingston Report to Council Report Number

Transcription

1 To: From: Resource Staff: Utilities Kingston Report to Council Report Number Mayor and Members of Council Jim Keech, President and CEO, Utilities Kingston Randy Murphy, Chief Financial Officer Date of Meeting: November 21, 2016 Subject: Executive Summary: Sherry Gibson, Senior Advisor, Rates and Regulatory Affairs Approval of Local Distribution Rate Changes for Natural Gas The Government of Ontario released the province s Climate Change Strategy in November 2015, establishing the province s vision and greenhouse gas (GHG) emission reduction targets for 2020, 2030 and Kingston, as a natural gas distributor is required to participate in the programs to acquire emissions allowances to cover the natural gas that is metered and distributed to customers. This report is requesting an adjustment to distribution rates for the natural gas utility for January 1, 2017 so as to recover Cap and Trade program costs related to gas distributor greenhouse gas emission (GHG) compliance obligations for its facilities and customers. A typical residential customer utilizing an average annual amount of 2,300 m3 of natural gas per year will see an initial increase of $80.50 on the portion of the bill related to Local Distribution Costs. Recommendation: That Council approve: 1. The proposed Gas Rate changes effective January 1, 2017 as detailed in this report; and 2. By-Law Number 2016-XX A By-Law to Amend By-Law Number A By-Law to Impose Gas Rates, as amended by By-Law , and as amended by By-law (Exhibit A); and Committee of the Whole - November 21, 22 and 23 44

2 Report to Council Report Number: November 21, 2016 Page 2 of 7 3. Representatives of Utilities Kingston be authorized to act, on behalf of the Corporation of the City of Kingston, in order to comply with the legislated requirements of the Ontario Cap & Trade Program; and 4. Utilities Kingston be authorized to execute any required operational documents that falls within the provisions of the Ontario Cap & Trade Program. Committee of the Whole - November 21, 22 and 23 45

3 Report to Council Report Number: November 21, 2016 Page 3 of 7 Authorizing Signatures: Jim Keech, President and CEO, Utilities Kingston Gerard Hunt, Chief Administrative Officer Consultation with the following Members of the Corporate Management Team: Lanie Hurdle, Commissioner, Community Services Desirée Kennedy, Chief Financial Officer & City Treasurer Denis Leger, Commissioner, Corporate & Emergency Services Not required Not required Not required Committee of the Whole - November 21, 22 and 23 46

4 Report to Council Report Number: Options/Discussion: November 21, 2016 Page 4 of 7 This report details the proposed local distribution rate changes for the natural gas utility so as to recover Cap and Trade program costs related to gas distributor greenhouse gas emission (GHG) compliance obligations for its facilities and customers. The Corporation of the City of Kingston (the City ), as a natural gas distributor, must purchase emission allowances on behalf of its natural gas customers, that are not otherwise required to report greenhouse gas emissions and will recover these costs through a new cap and trade charge of 3.5 cents per cubic metre to all applicable customers. This charge will be included as part of the Delivery line on natural gas customer bills. Utilities Kingston, as the City s authorized operating agent, will be responsible for all aspects of administering the City s compliance obligations for this program. Distributor Cap and Trade Obligations As detailed in the Climate Change and Low-Carbon Economy Act, 2016, the Cap and Trade program will begin on January 1, The program is designed to address climate change by putting a price on greenhouse gas (GHG) emissions which are created when fossil fuels are burned. The total amount of emissions allowed in Ontario will be capped and reduced over time. Since natural gas is a fossil fuel, it is subject to this new charge. Utilities Kingston is required to obtain emission allowances through proposed auctions to cover off GHG emissions compliance obligations for the natural gas distribution facilities it operates and for the natural gas customers served. Current regulations do not provide for any free emissions allowances for gas distribution. Utilities Kingston will need to recover the costs associated with these obligations on customers natural gas bills. Further detail of cap and trade regulation is provided in Exhibit B Cap and Trade Regulation of this report. Rate Structure and Billing for Cap and Trade Costs The Cap and Trade program is a new set of obligations for all Ontario gas distributors, as is the review and assessment of the associated costs of compliance. The additional cost to the natural gas utility s rate payers is estimated to be approximately $3.5 million annually (based on an initial anticipated auction floor price estimated at $18.00 CAD per tonne of emissions), and approximately $14 million over the first compliance period, which is January 1, 2017 through December 31, In each year of the program the cap will be lowered and the floor price of the allowances will increase by 5% plus inflation and the actual price will be determined by auction. Therefore the actual cost to ratepayers will vary and will not be known until the point at which allowances are purchased. It is proposed that the actual cost be tracked through variance accounting similar to the tracking of the gas commodity pricing and storage and transportations pricing. Committee of the Whole - November 21, 22 and 23 47

5 Report to Council Report Number: November 21, 2016 Page 5 of 7 Three types of Cap and Trade compliance costs have been identified for recovery through rates: customer-related obligations, facility-related obligations and administrative costs. These have been defined in Exhibit C - Compliance Costs, Cost Causation and Recovery of this report. It is recommended that all three charges apply to customers that Utilities Kingston must report and that the facility related and administrative costs be charged to any entity that is required to report under the regulation. Consistent with the approach of other natural gas distributors (both rate-regulated and municipally-owned) in Ontario, it is proposed that Cap and Trade costs be recovered from customers based on cost causation and that the costs be included on the volumetric Delivery line of the bill. More specifically it is proposed: 1. That given that the driver for GHG emissions is gas consumption, cap and trade costs will be recovered through a volumetric (m3) charge based on consumption, and the rate will be part of the Local Distribution Costs rate structure; and 2. That for bill presentment the charges related to the recovery of cap and trade costs will be included in the volumetric Delivery charge line on the bill; and 3. That there be bill messaging on customer bills to communicate cap and trade cost information; and 4. That Cap and Trade rate components will be separately identified on the natural gas rates schedule to the by-law for purposes of easy identification of these costs, and to facilitate tracking and updating as needed; and 5. That the rate recovery mechanism for cap and trade should allow for the need to be flexible and adjust as experience is gained and cap and trade markets evolve. As such, similar to the way in which natural gas commodity and transportation & storage rates are based on market costs and adjusted, it is proposed that these cap and trade rates may be adjusted by Utilities Kingston from time to time without amending the gas rates by-law; and 6. That Utilities Kingston s natural gas rates will change effective January 1, 2017 to be aligned with the new Ontario Cap-and-Trade charge; and 7. That the initial 2017 cap and trade rate be $0.035 per cubic metre for all customers except those that are Cap and Trade program Large Final Emitters and Voluntary Participants. And that the initial 2017 cap and trade be $0.002 per cubic metre for Cap and Trade program Large Final Emitters and Voluntary Participants. The current gas Local Distribution Cost rates have been in effect since March 1, These rates are separate from the Commodity and Transportation & Storage charges that are treated as pass-through and not affected by these changes. The following chart summarizes the current and the proposed January 1, 2017 Local Distribution Costs: Committee of the Whole - November 21, 22 and 23 48

6 Report to Council Report Number: Local Distribution Costs November 21, 2016 Page 6 of 7 March 1, 2015 January 1, 2017 Change Monthly Fixed Charge Residential $21.00 $21.00 $0 Commercial $70.00 $70.00 $0 Volumetric Delivery Charges per m 3 per m 3 1st 1500 m 3 $ $ $.0350 Next 3500 m 3 $ $ $.0350 Next 70,000 m 3 $ $ $.0350 over 75,000 m 3 $ $ $.0350 The change in volumetric Delivery charges above specifically reflects the addition of cap and trade customer and facilities & administration related costs applicable to all customers except Cap and Trade program Large Final Emitters and Voluntary Participants. Customers that are Cap and Trade program Large Final Emitters and Voluntary Participants will be allocated a share of facility-related obligation & administration costs only for cost recovery. For the specific breakdown of the volumetric rate between local distribution costs and cap and trade costs please refer to Schedule A, Appendix A of the proposed By-law. For a typical residential customer with 2300 m3 per year consumption, the annualized bill impact is an estimated $80.50 increase on the gas bill, before applicable taxes, and is in line with cost forecasts of government and other gas distributors. Existing Policy/By-Law: By-Law No A By-Law to Impose Gas Rates ( Ontario Limited operating as Utilities Kingston), as amended. Notice Provisions: Not applicable. Accessibility Considerations: Not applicable. Financial Considerations: As discussed in the report. Committee of the Whole - November 21, 22 and 23 49

7 Report to Council Report Number: Contacts: November 21, 2016 Page 7 of 7 Jim Keech, President and CEO, Utilities Kingston, X2217 Randy Murphy, Chief Financial Officer, Utilities Kingston, X2317 Sherry Gibson, Senior Advisor Rates & Regulatory Affairs, Utilities Kingston X2383 Other City of Kingston Staff Consulted: Not applicable. Exhibits Attached: Exhibit A - By-Law No XXX A By-law to Amend By-Law No A By-Law to Impose Gas Rates ( Ontario Limited operating as Utilities Kingston), as amended. Exhibit B - Ontario Cap & Trade Regulation Exhibit C - Cost Types, Cost Causation and Recovery Committee of the Whole - November 21, 22 and 23 50

8 REPORT EXHIBIT A BY- LAW NO XXX A By-Law to Amend By-law Number , A By-Law to Impose Gas Rates ( Ontario Limited operating as Utilities Kingston) PASSED: Meeting date, 2016 The Council of The Corporation of the City of Kingston hereby enacts as follows: 1. By-Law No of the Corporation of the City of Kingston entitled, A By- Law to Impose Gas Rates ( Ontario Limited operating as Utilities Kingston), as amended, is hereby further amended as follows: 1.1 Clause 1(e) is replaced with the following new Clause 1(e): Local Distribution Costs shall mean (a) a charge for the operation, repair and maintenance of the gas works from the City of Kingston s connection to the Trans Canada Pipeline system to the customers point of connection, and (b) a charge for Cap and Trade greenhouse gas emissions compliance obligation costs. 1.2 Clause 2 is amended to add the following sentence to the end of Clause 2: The Cap and Trade rate component of Local Distribution Costs is based on market costs and may be adjusted by Utilities Kingston from time to time as needed, but no more frequently than quarterly, without amending this by-law. 1.3 Appendix A is hereby deleted in its entirety and replaced with the new Appendix A attached hereto and marked as Schedule A. 2. This By-Law shall come into force and take effect on January 1, GIVEN ALL THREE READINGS AND PASSED Meeting date, 2016 CITY CLERK JOHN BOLOGNONE MAYOR BRYAN PATERSON Committee of the Whole - November 21, 22 and 23 51

9 REPORT EXHIBIT A SCHEDULE A Appendix A Gas Rate Effective January 01, 2017 Local Distribution Costs Effective January 1, 2017 Local Distribution Costs include (a) a monthly service charge and (b) common monthly block rate delivery volumetric charges. These rates apply to all gas customers as applicable. (a) Monthly Service Charge Service Charge Rate Residential $21.00 Commercial $70.00 (b) Total Delivery (i) Local Distribution (ii) Cap and Trade Monthly Block Rate (i) + (ii) Volumetric Volumetric Delivery Volumetric Charges Rate per m 3 Rate per m 3 Rate per m 3 1st 1500 m 3 $ $ $ (1) Next 3500 m 3 $ $ $ (1) Next m 3 $ $ $ (1) All over m 3 $ $ $ (1) Note: (1) This Cap and Trade rate is comprised of (a) customer-related obligation costs of $0.0330/m3 and (b) facility-related obligation & administration costs of $0.0020/m3. All customers except Cap and Trade Large Final Emitters and Voluntary Participants are subject to both rate components. Large Final Emitters and Voluntary Participants are subject to (b) Facility-related Obligation & Adminstrative rate component only. The Cap and Trade volumetric rate components may be adjusted by Utilities Kingston from time to time without amending this by-law. Transportation and Storage January 1, 2017 This volumetric rate applies to all gas customers including System Gas, Direct Purchase (Retailer), and Interruptible customers. Rate per m 3 Transportation & Storage Rate $ (2) Note: (2) Transportation & Storage rate may be adjusted by Utilities Kingston from time to time without amending this by-law. Commodity January 1, 2017 This volumetric rate applies to all System Gas customers only. The commodity rate applicable to a Direct Purchase gas customer (Retailer) is per their retailer contract. Rate per m 3 Commodity Rate $ (3) Note: (3) Commodity rate may be adjusted by Utilities Kingston from time to time without amending this by-law. Committee of the Whole - November 21, 22 and 23 52

10 REPORT EXHIBIT B Ontario Cap and Trade Regulation On May 18, 2016, the Climate Change Mitigation and Low-carbon Economy Act, 2016 (Climate Change Act) received Royal Assent. On May 19, 2016, Ontario Regulation 144/16, The Cap and Trade Program (Cap and Trade Regulation), was issued, which provides details about the Cap and Trade program. The Climate Change Act and the Cap and Trade Regulation establish the details of a Cap and Trade program for the purposes of reducing greenhouse gas emissions in Ontario. The Climate Change Act establishes that the first compliance period for the Cap and Trade program will run from January 1, 2017 until December 31, 2020, with subsequent three-year compliance periods. Cap and Trade Fundamentals In the cap and trade system, the government will release a limited number of allowances for emissions, creating a cap (the upper limit) on overall greenhouse gas (GHG) emissions allowed in a compliance period and then reduces the cap each following compliance period to reach a set GHG emissions target. Companies are required to surrender one emissions unit (allowance or offset credit) for each metric tonne of GHG emissions. Under the cap and trade program companies have options to meet their GHG emissions obligations; they can reduce emissions or they can buy allowances. The system is geared to reduce overall emissions by reducing the cap gradually year over year, while incentivizing companies to invest in cleaner processes and lower energy usage. Figure 1 below outlines a cap and trade system and its concepts. Figure 1: Cap and Trade Concepts Source: Government of Québec Committee of the Whole - November 21, 22 and 23 53

11 REPORT EXHIBIT B Who is required to purchase cap and trade allowances? For most Ontario businesses, purchasing cap and trade credits will be voluntary. Mandatory participation is required of only certain large industries for now namely cement, glass, petrochemical, copper and nickel, iron and steel, pulp and paper, and energy generation and storage. Electricity generators and natural gas and petroleum distributors will need to obtain additional allowances for the greenhouse gas emissions of their customers. In other words, the carbon generated for the production of electricity for your facility or the natural gas your business burns will be offset by credits purchased upstream by the distributors. These will be passed on to the customer as an additional cost on their natural gas bill. Types of Participants In Ontario s Cap and Trade program there are three types of participants: Mandatory participants: including Large Final Emitters (LFEs) who emit 25,000 tonnes of CO2e per year or more, fuel suppliers/distributors, and electricity importers Voluntary participants: commercial and/or industrial customers who emit between 10,000 and 25,000 tonnes of CO2e per year and who have chosen to participate in the program Market participants: participants who choose to trade in the carbon market but have no compliance obligation Distributor Obligations for Customer Types All natural gas distributors in Ontario are mandatory participants in Ontario s Cap and Trade program. As a mandatory participant, this means the gas utility will be responsible for the greenhouse gas (GHG) emissions from facilities that it owns or operates as well as the emissions from most of its natural gas customers, including: All low-volume residential and small business customers Commercial and industrial customers who are not Large Final Emitters (LFEs) or voluntary participants Natural gas-fired generators Utilities Kingston will be required to verify and report GHG emissions to the provincial government and match its total GHG emissions in each compliance period with an equivalent amount of emissions units. Committee of the Whole - November 21, 22 and 23 54

12 REPORT EXHIBIT C Compliance Costs, Cost Causation and Recovery Three types of cap and trade related costs for allocation and recovery from applicable customers have been identified: 1. Customer-related obligation costs include the costs of Cap and Trade allowances being purchased on behalf of the customer base that are not mandatory (large final emitter) or voluntary participants, of whom are responsible for managing their own compliance obligation. Customer related costs are driven by gas consumption, which causes the GHG emissions, and therefore should be allocated and recovered based on a customer s consumption. 2. Facility-related obligation costs include costs that are directly attributable to ensuring compliance for the utility s owned and operated facilities. Within the industry, this is considered a cost of doing business, and as such, the approach of distributors is to recover these costs from all customers. Given that the driver for GHG emissions is gas consumption these costs should be recovered through a volumetric (m3) charge based on consumption. 3. Administrative costs include costs for monitoring, reporting and verification of emissions, purchasing/trading emission credits, managing the utility s carbon portfolio and business processes and systems changes. Table 1 summarizes the Cap and Trade cost causation. Table 1: Cost Causation Customer Costs for Customer-related Obligations Costs for Facility-related Obligations Administrative Costs Residential Commercial Industrial Gas-fired Generator Large Final Emitter and Voluntary Participant Source: Ontario Energy Board Cap and Trade Staff Discussion Paper from EB Committee of the Whole - November 21, 22 and 23 55

13 REPORT EXHIBIT C Consistent with the approach of other distributors, costs relating to the implementation and ongoing operation of the Cap and Trade Program will be allocated and recovered from all applicable customers in the same manner based upon cost causation. These costs will be recovered through a volumetric (m3) charge based on consumption. All customers except Large Final Emitters and Voluntary participants will be charged a cap and trade rate to recover costs for customer-related, and facility-related & administrative costs. Large Final Emitters and Voluntary participants will be charged a cap and trade rate to recover facility-related & administrative costs only. Committee of the Whole - November 21, 22 and 23 56