COST ALLOCATION. Canadian Gas Association 23nd Annual CGA Regulatory Course Ottawa, ON. Presented by: Brad De Ryck,

Transcription

1 COST ALLOCATION Canadian Gas Association 23nd Annual CGA Regulatory Course Ottawa, ON Presented by: Brad De Ryck, Gas Cost Allocation Supervisor Manitoba Hydro

2 OVERVIEW Cost Allocation CONCEPTS What? Why? When? Who? How? 2

3 WHAT? Cost allocation involves the assignment of the costs incurred by a company to each customer or customer class. Cost of providing service (Revenue Requirement) Cost Allocation Residential Customer Class Commercial Customer Class Industrial Firm Customer Class Industrial Interruptible Customer Class 3

4 WHAT? Assigns Historical & Forecast Costs to Customer Classes Rate Base: Historical & 1 or 2 years Forecast Revenue Requirement: 1 or 2 years Forecast Historical Costs = Actual Embedded Costs Accounting costs per plant records Costs recorded at time of construction New plant reflects current costs Compare allocated costs by class vs. revenue recovered by existing rates (Revenue Deficiency) 4

5 WHAT? Cost allocation studies Embedded Marginal Historical Forecast Short run Long run 5

6 WHY? REGULATED Regulated service: Essential service Capital intensive Economies of scale Natural monopoly NON REGULATED Competitive service No barrier to entry Multiple providers Regulation Fair prices? Competitive prices A Competitive prices B Cost related rates Cost allocation Customer choice 6

7 WHY? Cost-based vs cost-related rates Cost based rates Cost related rates Possible if: no competition no political, social or environmental consideration... Practically impossible due to shared costs between classes More realistic when: competitive considerations political and social considerations postage stamp same price for old and new customers rates must be kept simple Cost allocation is not an exact science 7

8 WHY? Shared Costs An Example Residential Customers Town Regulator Station Lg./Sm. Commercial Customers Industrial Customers 8

9 WHY? Cost Allocation Study is used for: Allocating a utility s costs to customers recognizes that many costs incurred to provide service to customers are shared and not incurred specifically on behalf of a customer Determining that rates charged to different customers are fair & equitable (as close as possible to competitive market conditions) Supporting rate design proposal Evaluating economic feasibility of capital projects and spending programs 9

10 WHY? If we simply assigned costs on a proportionate basis and did not prepare a cost allocation, consider the following result: IT department costs $100,000/mth 5 departments are provided service on an equal basis Current allocation is $20,000/mth to each 10

11 WHY? Dept. Outside Cost Charge Result A $18,000 $20,000 Unhappy, wants out B $22,000 $20,000 Happy C $30,000 $20,000 Happy D $30,000 $20,000 Happy E $30,000 $20,000 Happy Total $130,000 $100,000 11

12 WHY? Charge Charge Charge Charge Dept. Outside Cost 1st Iteration 2nd Iteration 3rd Iteration 4th Iteration A $18,000 $20,000 exits B $22,000 $20,000 $25,000 exits C $30,000 $20,000 $25,000 $33,333 exits D $30,000 $20,000 $25,000 $33,333 exits E $30,000 $20,000 $25,000 $33,333 exits Total $130,000 $100,000 $100,000 $100,000 12

13 WHY? Consider: Why might departments C, D and E have a higher outside cost than department A? Should they pay more for IT services than A? Is another allocation other than a proportionate split appropriate? Charge costs to departments based on % of service used. Under-charging some implies potential cross subsidization and potential for overpayment 13

14 WHEN? Revenue Requirement Cost Allocation Rate Design 14

15 WHO IS INVOLVED? Internally Accounting Budgeting Forecasting Engineering Planning Cost Allocation Study Regulatory Operations Sales/Marketing Gas Supply Billing 15

16 WHO IS INVOLVED? Externally Utility Residential Customers Board Staff Cost Allocation Study Commercial Customers Industrial Customers Board Members Other Interveners DECISION 16

17 HOW? More art than science Great deal of judgment Depends on each company s situation Good knowledge of the company Specific analysis before each step 17

18 HOW? Fundamental Principles Fully recover the approved revenue requirement Fairness/Equity: to the extent possible recover costs from those who cause them to be incurred (cost causality) Reflect costs that allow consumers to make economically efficient purchasing decisions Rate simplicity & administrative ease Rate stability & gradualism 18

19 HOW? Costs (Revenue Requirement) Functionalize Classify Allocate 19

20 FUNCTIONALIZE Definition: an activity to functionalize means to divide costs into its functions, activities or services Commonly used types of functions: Production (Gas supply/molecule) Pipeline Storage Transmission Distribution Onsite Others: Load Balancing may be used by utilities with direct access to storage Mix a cost that tends to serve a mix of functions or influenced by a mix of factors (e.g. Distribution Mains) Derived allocations based on the results of other allocation within the study (e.g. Return on Rate Base) Direct Assignment costs allocated to a specific customer class (eg. Meters & Services) Ideally all costs should be directly assigned. 20

21 FUNCTIONALIZE Example Step 1: Functionalization Acct Description Total ($) Direct Derived Production Pipeline Storage Transmission Distribution Onsite Rate Base Transmission Mains 200,000 x 200,000 Distribution Mains 300,000 x 300,000 Meters 50,000 x 50,000 Services 100,000 x 100,000 Total 650, , , ,000 Revenue Requirement Molecules 2,000,000 x 2,000,000 TCPL Demand Charges 200,000 x 200,000 Storage Capacity Charge 100,000 x 100,000 O & M Billing 20,000 x 20,000 Bad Debt 10,000 x 10,000 System Integrity 20,000 x 8,000 12,000 Return 50,000 x 15,400 23,100 11,500 Total Revenue Requirement 2,400,000 2,000, , ,000 23,400 35,100 41,500 21

22 FUNCTIONALIZE Acct Description $ Allocation Transmission Distribution Onsite Total System Integrity 20,000 Mains Trans Mains 200, ,000 Dist Mains - 300, ,000 Total 500,000 % 40% 60% 100% Allocation 8,000 12,000 20,000 Return 50,000 Rate Base Trans Mains 200, ,000 Dist Mains 300, ,000 Meters 50,000 50,000 Services , ,000 Total 200, , , ,000 % 31% 46% 23% 100% Allocation 15,400 23,100 11,500 50,000 22

23 CLASSIFY Basic principles Ideally all costs should be directly assigned Detailed information used for direct assignment is not always available Determine the basis of variability. That is, how do costs vary between customer classes? More contentious than the functionalization phase (primarily between what is classified as capacity and customer) 23

24 CLASSIFY Commonly used types of classification factors: Customer related Commodity related Capacity related We choose these factors because the nature of costs in a utility tend to vary by the number of customers on the system, the volume throughput, or the peak usage of the system 24

25 CLASSIFY Customer related Costs that tend to change with the number of customers. Billing Customer calls Postage stamps Zero diameter mains 25

26 CLASSIFY Commodity related Costs that tend to change with the volume of gas used by a customer class. Gas Supply (molecules) Compressor fuel Unaccounted For Gas? 26

27 CLASSIFY Capacity related A cost related to the peak demand of a customer class. Transmission Mains Distribution Mains (partially) TCPL fees Storage 27

28 CLASSIFY The classification of Mains is the most controversial There are two types of Main costs: 1. Transmission a customer cannot be directly attached 2. Distribution serves 2 purposes: a. Provides sufficient capacity (diameter) to meet peak requirements of customer b. Sufficient length to attach customer directly (a flat cost that every customer has to support for the use of the main) There are 3 common methods for distinguishing the demand related and customer related components of Distribution Mains: A. Minimum Plant B. Zero Intercept C. Material Labour 28

29 CLASSIFY Minimum Plant Studies provide an estimate of the minimum sized plant needed to connect customers to the transmission system Material Labour Studies approximate the cost of connecting customers to the transmission system by recognizing that the cost of installing distribution main tends not to vary with the diameter of the main e.g. The cost of digging for a 2 or 4 main is about the same Given the cost of the pipe does vary with diameter, the material cost is considered to represent the capacity cost of the main The labour cost then represents the customer component of the main Zero Intercept Studies estimate the cost of connecting customers to the transmission system using a hypothetical zero diameter pipe 29

30 CLASSIFY Zero Intercept: The allocation of Distribution Plant between Capacity and Customer is determined as follows: Transmission Main = Distribution Main = Total Main = Data DIAMETER LENGTH COST $/M (mm) (M) ($) ,000 10, ,000 90, , , Total 17, ,000 30

31 CLASSIFY Distribution Customer cost 25 DIAMETER mm $/M $/M mm Using a regression, we calculate the cost of a distribution main with zero diameter to be $5/M Distribution Customer cost = 17,000M X $5/M = $

32 CLASSIFY Distribution Capacity cost The cost of using the main Distribution Main = Distribution Customer cost +Distribution Capacity cost $ = $ Distribution Capacity cost Distribution Capacity cost = $

33 CLASSIFY Main cost $ Transmission cost Distribution Customer cost Distribution Capacity cost

34 CLASSIFY Example Step 2: Classification Acct Description Direct Derived Capacity Commodity Customer Rate Base Transmission Mains a 100% Distribution Mains a x% x% Meters a 100% Services a 100% Revenue Requirement Molecules a 100% TCPL Demand Charges a 100% Storage Capacity Charge a 100% O & M Billing a 100% Bad Debt a 100% System Integrity a x% x% Return a x% x% 34

35 CLASSIFY Example Step 2: Classification Acct Description Total ($) Direct Derived Capacity Commodity Customer Rate Base Transmission Mains 200,000 x 200,000 Distribution Mains 300,000 x 215,000 85,000 Meters 50,000 x 50,000 Services 100,000 x 100,000 Total 650, , ,000 Revenue Requirement Molecules 2,000,000 x 2,000,000 TCPL Demand Charges 200,000 x 200,000 Storage Capacity Charge 100,000 x 100,000 O & M Billing 20,000 x 20,000 Bad Debt 10,000 x 10,000 System Integrity 20,000 x 16,600 3,400 Return 50,000 x 32,000 18,000 Total 2,400, ,600 2,000,000 51,400 35

36 CLASSIFY Re Cap: The purpose of the classification phase is to understand how costs vary Important because it helps to determine how to allocate costs The Zero Intercept method helps us determine the basis of variability of distribution plant How you determine methodology will depend on: How the methodology corresponds to the planning process What others in the industry do The type of data compiled by the utility How do results compare to current methodologies If significant difference may be met with resistance from Regulator & Customers 36

37 ALLOCATE Customer classes have to be Homogeneous Similar system requirements Within each class, customers may also Have same characteristics of demand or peak load Be of the same type Example: - Residential - Commercial - Industrial firm - Industrial interruptible 37

38 ALLOCATE Costs are allocated to customer classes based on: 1. Number of Customers 2. Annual throughput (volume) 3. Peak Demand (capacity) 1. & 2. are straight forward 3. Demand related cost allocation is contentious. The methods include: Coincident Peak Non Coincident Peak Peak and Average 38

39 ALLOCATE Coincident Peak allocates demand/capacity costs on the basis of a customer s (or a customer class) usage on the day of the system peak Consistent with how a utility typically design its system Does not allocate any demand/capacity costs to the interruptible customers Non Coincident Peak allocates demand costs on the basis of each customer class peak Allocates joint costs assuming a class were being served on a stand alone basis Peak & Average considers that capacity costs should be allocated on a 2- part formula that recognizes both average use of capacity and peak use 39

40 ALLOCATE If a peak is observed for each customer, the term noncoincident peak is used, as each peak does not necessarily occur on the same day. If the volumes of all customers are added and a peak is calculated, the term coincident peak is used. Volumes (m 3 ) CUSTOMER 1 Day 1 Day 2 Day 3 Day Non-coincident peak CUSTOMER TOTAL COINCIDENT PEAK FOR THE SYSTEM = 36 40

41 Centra s Peak Day Centra's Coincident Peak Day 12,000 10, M3 8,000 6,000 3,879 Mainline Co-op HVF LGS SGS 4,000 2,000 5,617 0 Peak Day 41

42 ALLOCATE Other Allocators: Internally Derived Total Rate Base Portions of Rate Base Transmission Plant Distribution Plant Combo of Transmission & Distribution Plant Special Studies: Meter Study Service Line Study 42

43 EXAMPLE Example Step 3: Allocation Factors Residential Commercial Industrial (Firm) Industrial Interruptible Total Data Annual Customers Annual Volume (M 3 ) 1,000 6,000 4,000 5,000 16,000 Revenues ($) 160, , , ,000 2,100,000 Coincident Peak (M 3 ) * 46 Non-Coincident Peak (M 3 ) Allocation Factors Customer 80% 15% 4% 1% 100% Commodity 6% 38% 25% 31% 100% CP (Dist Mains) 22% 43% 35% 0% 100% NCP (Trans Mains) 15% 30% 32% 23% 100% *For an interruptible customer, w e use a coincident peak of zero as the customer is interrupted during peak periods 43

44 EXAMPLE Example Step 3: Allocation Acct Description Total ($) Residential Commercial Industrial (Firm) Industrial Interruptible Rate Base Transmission Mains 200,000 NCP NCP NCP NCP Distribution Mains 300,000 CP/Cust# CP/Cust# CP/Cust# CP/Cust# Meters 50,000 Cust# Cust# Cust# Cust# Services 100,000 Cust# Cust# Cust# Cust# Total 650,000 Revenue Requirement Molecules 2,000,000 Commodity Commodity Commodity Commodity TCPL Demand Charges 200,000 NCP NCP NCP NCP Storage Capacity Charge 100,000 CP CP CP CP O & M Billing 20,000 Cust# Cust# Cust# Cust# Bad Debt 10,000 Cust# Cust# Cust# Cust# System Integrity 20,000 T/D Mains T/D Mains T/D Mains T/D Mains Return 50,000 Rbase Rbase Rbase Rbase Total 2,400,000 44

45 EXAMPLE Example Step 3: Allocation Acct Description Total ($) Residential Commercial Industrial (Firm) Industrial Interruptible Rate Base Transmission Mains 200,000 30,000 61,000 64,000 45,000 Distribution Mains 300, , ,000 78,000 1,000 Meters 50,000 40,000 7,500 2, Services 100,000 80,000 15,000 4,000 1,000 Total 650, , , ,000 47,500 Revenue Requirement Molecules 2,000, , , , ,000 TCPL Demand Charges 200,000 30,000 61,000 64,000 45,000 Storage Capacity Charge 100,000 22,000 43,000 35,000 - O & M Billing 20,000 16,000 3, Bad Debt 10,000 8,000 1, System Integrity 20,000 5,800 6,700 5,700 1,800 Return 50,000 20,400 14,500 11,400 3,700 Total 2,400, , , , ,800 Current Revenue 2,100, , , , ,000 Required Revenue Increase ($) 300,000 67,200 79, ,300 35,800 Required Increase (%) 14% 42% 10% 23% 6% 45

46 EXAMPLE Allocation Details Residential Commercial Industrial (Firm) Industrial Interruptible Transmission Mains NCP 15% 30% 32% 23% Capacity $ 200,000 30,000 61,000 64,000 45,000 Distribution Mains CP 22% 43% 35% 0% Capacity $ 215,000 47,000 93,000 75,000 - Distribution Mains Customer # 80% 15% 4% 1% Customer $ 85,000 68,000 13,000 3,000 1,000 Distribution Mains Total Alloc. 115, ,000 78,000 1,000 Meters Customer # 80% 15% 4% 1% Meters $ 50,000 40,000 7,500 2, Tran/Dist Mains RBase 145, , ,000 46,000 System Integrity Mains% 29% 33% 28% 9% System Integrity $ 20,000 5,800 6,700 5,700 1,800 Total Rate Base 265, , ,000 47,500 Return RBase % 41% 29% 23% 7% Return $ 50,000 20,400 14,500 11,400 3,700 46

47 EXAMPLE Example: Peak and Average Calculation (used in Manitoba) Residential Commercial Industrial (Firm) Total Firm Interruptible Total Annual Volume 1,000 6,000 4,000 11,000 5,000 16,000 Peak Day % of Peak Day 22% 43% 35% 100% Load Factor* 27% 82% 68% 66% % of Annual Volume 6% 38% 25% 31% 100% Peak & Average** 12% 40% 28% 20% 100% **Peak & Average Calc System Load Factor 66% 66% 66% 66% % of Annual Volume 6% 38% 25% 31% Average 4% 25% 16% 20% 1-System Load Factor 34% 34% 34% 34% % of Peak Day 22% 43% 35% 0% Peak 7% 15% 12% 0% Peak & Average 12% 40% 28% 20% * Load Factor: Annual Volume/365/PeakDay Total: 11000/365/46 = 66% Res: 1000/365/10 = 27% 47

48 HOW? Revenue Requirement Production Transportation Storage 1 Transmission Distribution On - Site Direct Commodity Commodity Capacity Commodity Capacity Capacity Commodity Capacity Customer Commodity Annual throughput Winter throughput Peaking throughput Capacity Coincident Peak Day Non- Coincident Peak Day Peak and Average Three Day Peak Customer Average customers Weighted customers Active meters Bills rendered Residential Commercial Industrial 1 excludes cost of molecules since these are functionalized as Production 48

49 QUESTIONS? 49

50 CONCLUSION THANK YOU Brad De Ryck Supervisor, Gas Cost Allocation Manitoba Hydro Phone#: (204)

51 Let s Practice! Try to determine the required rate changes Practice - DATA Rate Base $ Transmission Mains 200,000 Distribution Mains 600, km of 30 mm $40/m 6 km of 20 mm $30/m 1 km of 10 mm $10/m Service Lines 100,000 Total 900,000 Revenue Requirement Molecules 1,000,000 Transportation 150,000 Storage 50,000 O & M Salaries 80,000 Odorization 20,000 Line Location 50,000 Total 1,350,000 51

52 Let s Practice! Practice - Customer Data Residential Commercial Industrial Total Customers Annual Volumes (M 3 ) 20, ,000 80, ,000 Revenues ($) 200, , ,000 1,400,000 Peak Day

53 Let s Practice! Practice - Peak Data Load Curve: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Residential Commerical Industrial Total

54 Let s Practice! Practice Step 1: Functionalization Acct Description Total ($) Direct Derived Rate Base Transmission Mains Distribution Mains Service Lines Total Production Pipeline Storage Transmission Distribution Onsite Revenue Requirement Molecules Transportation Storage O & M Salaries Odorization Line Location Total 54

55 Let s Practice! Practice Step 2: Classification Acct Description Direct Derived Capacity Commodity Customer Rate Base Transmission Mains Distribution Mains Service Lines Revenue Requirement Molecules Transportation Storage O & M Salaries Odorization Line Location 55

56 Let s Practice! Practice Step 3: Allocation Acct Description Total ($) Residential Commercial Industrial (Firm) Rate Base Transmission Mains Distribution Mains Service Lines Total Revenue Requirement Molecules Transportation Storage O & M Salaries Odorization Line Location Total Current Revenue Required Revenue Increase ($) Required Increase (%) 56

57 Let s Practice! Answers Practice Step 1: Functionalization Acct Description Total ($) Direct Derived Production Pipeline Storage Transmission Distribution Onsite Rate Base Transmission Mains 200,000 x 200,000 Distribution Mains 600,000 x 600,000 Service Lines 100,000 x 100,000 Total 900, , , ,000 Revenue Requirement Molecules 1,000,000 x 1,000,000 Transportation 150,000 x 150,000 Storage 50,000 x 50,000 O & M Salaries 80,000 x 32,000 48,000 Odorization 20,000 x 20,000 Line Location 50,000 x 12,500 37,500 Total 1,350,000 1,000, ,000 50,000 44, ,500 57

58 Let s Practice! Answers Practice Step 1: Back Up--Derived Functional Factors Acct Description $ Allocation Transmission Distribution Onsite Total 1. Salaries 80,000 Total O & M Odorization 20,000 20,000 Line Location 12,500 37,500 50,000 Total 12,500 57,500 70,000 % 18% 82% 100% Allocation 14,300 65,700 80, Line Location 50,000 Mains Trans Mains 200, ,000 Dist Mains 600, ,000 Total 200, , ,000 % 25% 75% 100% Allocation 12,500 37,500 50,000 58

59 Let s Practice! Answers Practice Step 2: Classification Acct Description Direct Derived Capacity Commodity Customer Rate Base Transmission Mains a 100% Distribution Mains a x% x% Service Lines a 100% Revenue Requirement Molecules a 100% Transportation a 100% Storage a 100% O & M Salaries a x% x% Odorization a x% x% Line Location a x% x% 59

60 Let s Practice! Answers Practice Step 2: Classification Acct Description Total ($) Direct Derived Capacity Commodity Customer Rate Base Transmission Mains 200,000 x 200,000 Distribution Mains 600,000 x 430, ,000 Service Lines 100,000 x 100,000 Total 900, , ,000 Revenue Requirement Molecules 1,000,000 x 1,000,000 Transportation 150,000 x 150,000 Storage 50,000 x 50,000 O & M Salaries 80,000 x 30,400 49,600 Odorization 20,000 x 14,400 5,600 Line Location 50,000 x 12,500 37,500 Total 1,350, ,300 1,000,000 92,700 60

61 Let s Practice! Answers Practice Step 2: Back Up--Derived Classification Factors Acct Description $ Allocation Capacity Commodity Customer Total 1. Distribution Mains 600,000 Min Plant* 430, , , Salaries 80,000 Total O & M 30,400 49,600 80,000 Calculation: Total O&M 26,900 43,100 70,000 % 38% 62% 100% 3. Odorization 20,000 Dist plant 14,400 5,600 20,000 Calculation: Total Dist Plant 430, , ,000 % 72% 28% 100% 4. Line Location 50,000 Trans 100% cap & Dist 100% cust 12,500 37,500 50,000 61

62 Let s Practice! Answers Practice Step 3: Allocation Acct Description Total ($) Residential Commercial Industrial (Firm) Rate Base Transmission Mains 200,000 30, ,000 68,000 Distribution Mains 600, , , ,200 Service Lines 100,000 70,000 20,000 10,000 Total 900, , , ,200 Revenue Requirement Molecules 1,000, , , ,000 Transportation 150,000 22,500 76,500 51,000 Storage 50,000 7,500 25,500 17,000 O & M Salaries 80,000 39,300 25,400 15,300 Odorization 20,000 6,100 8,500 5,500 Line Location 50,000 28,100 13,900 8,000 Total 1,350, , , ,800 Current Revenue 1,400, , , ,000 Required Revenue Increase ($) 50,000 (3,500) 50,200 3,200 Required Increase (%) 4% -2% 7% 1% 62

63 Let s Practice! Answers Practice Step 3: Allocation Factors Residential Commercial Industrial (Firm) Total Information Annual Customers Annual Volume (M 3 ) 20, ,000 80, ,000 Peak (M 3 ) Allocation Factors Customer 70% 20% 10% 100% Commodity 10% 50% 40% 100% Capacity 15% 51% 34% 100% 63

64 Let s Practice! Answers Practice Step 3: Back Up--Derived Allocation Factors Residential Commercial Industrial (Firm) Total Annual Volume 20, ,000 80, ,000 Peak Day % of Peak Day 21% 53% 26% 100% Load Factor* 27% 55% 88% 58% % of Annual Volume 10% 50% 40% 100% Peak & Average** 15% 51% 34% 100% * Load Factor: Annual Volume/365/PeakDay Res: 20000/365/200=27% **Peak & Average: Pd % of Total Firm(1 - Total LF) + Annual Vol %(Total LF) Res:.21(1-.58) +.1(.58) = 15% 64