Enbridge Gas Distribution
EGD is Canada's largest natural gas distribution company and has been in operation for more than 160 years. It serves approximately 1.9 million customers in central and eastern Ontario, southwestern Quebec and parts of northern New York State. EGD's utility operations are regulated by the Ontario Energy Board (OEB) and by the New York State Public Service Commission.
Results of Operations
Adjusted earnings for the year ended December 31, 2008 were $123.3 million compared with $114.6 million for the year ended December 31, 2007. EGD's increased adjusted earnings for 2008 reflect early success during its first of five years under IR, specifically through customer growth and higher ancillary revenues.
EGD's earnings included a $2.8 million provision for one-time charges to better align certain operating practices with the EGD's strategy under IR.
Adjusted earnings for the year ended December 31, 2007 were $114.6 million compared with $98.7 million for the year ended December 31, 2006. Adjusted earnings in 2007 increased compared with 2006 because of customer growth, higher rates from the increased rate base and a higher deemed equity component of the rate base for regulatory purposes.
Improving the regulatory environment is a key strategic thrust to provide greater operational and organizational flexibility. In 2008, EGD moved to an IR methodology. Under IR, the distribution revenue requirement and therefore rates, are based on a formulaic approach, using 2007 as the starting point.
The objectives of the IR plan are as follows:
- reduce regulatory costs;
- provide incentive for improved efficiency;
- provide more flexibility for utility management; and
- provide more stable rates.
2009 Rate Adjustment Application
On September 26, 2008, EGD filed an application with the OEB to adjust rates for 2009 pursuant to the 2008 approved IR formula. Subject to OEB approval, the rate adjustment would be effective January 1, 2009. A settlement agreement containing all as applied for aspects of the formulaic component of the IR rate setting process was approved by the OEB on December 18, 2008.
In 2007, EGD filed a rate application requesting a revenue cap incentive rate mechanism calculated on a revenue per customer basis for the 2008 to 2012 period. The OEB approved the settlement agreement (the Settlement) with customer representatives.
EGD received a fiscal 2008 final rate order from the OEB on May 15, 2008, approving the implementation of a change in rates effective July 1, 2008, which enabled EGD to recover the approved revenues retroactively to January 1, 2008. The final rate order also approved a change in customer billing to increase the fixed charge portion and decrease the per unit volumetric charge, with no material annual earnings impact. The fixed charge portion will increase progressively over the IR term.
EGD's rates for 2007 were set under a Cost of Service methodology that allowed the revenues to be set to recover EGD's forecast costs. Forecast costs included natural gas commodity and transportation, operation and maintenance, amortization, municipal taxes, income taxes and the debt and equity costs of financing the rate base. The rate base is EGD's investment in all assets used in natural gas distribution, storage and transmission and an allowance for working capital. Under Cost of Service, it was the responsibility of EGD to demonstrate to the OEB the prudence of the costs it incurred or the activities it undertook.
Key elements of the OEB's 2007 rate decision, including issues previously settled and approved by the OEB, and a previous decision are summarized below:
|Regulatory Year||Approved 2007|
|Rate base (millions of Canadian dollars)||$3,745.7|
|Deemed common equity for regulatory purposes||36%|
|Rate of return on common equity||8.39%|
For 2007, EGD was granted a 1% increase in the equity component of its deemed capital structure. The 36% deemed equity level is better reflective of changes in EGD's current business and financial risk relative to the earlier deemed equity level of 35%.