Union Gas Proposes Rate Design Changes

March 2012

• As part of its 2013 rates application to the Ontario Energy Board, Union has proposed rate design changes for a number of its rate groups.
• If approved, some of the rate redesigns will be implemented at the start of 2013 and others are planned for the beginning of 2014.
• Union is proposing to split the current T1 semi-unbundled rate class into two for 2013.
• Some of the other groups for which changes are proposed are: general service (Rate 01 and M1, Rate 10 and M2), M4, M5A, M7, Rate 20, Rate 25, and Rate 100.

In November 2011, Union Gas filed an application with the Ontario Energy Board for new delivery rates for 2013. For the five years ending with 2012, Union's rates have been set according to an incentive ratemaking formula that adjusts rates for inflation and productivity. The current incentive rate mechanism expires at the end of 2012. For 2013, rates will be rebased, which means they will be set based on an updated forecast of Union's revenues and costs rather than by formula. As part of the rebasing application, Union is also proposing to change the rate design for a number of its rate groups. Certain of the proposals are highlighted below. Some of the changes are targeted for implementation at the beginning of 2013 and others for the start of 2014.

Redesign of T1

Union is proposing to split the current T1 semi-unbundled rate group into two rate classes with distinct rate structures - a new T1 mid-market service and a new T2 large-market service. The changes apply to the transportation service offered under the current T1. No changes to the design of the storage service are proposed. If approved, the changes will take effect on January 1, 2013.

Union indicates that the main reasons for the proposed split are to better align cost incurrence and cost recovery for T1 customers and to address the significant diversity in daily contracted quantity and firm annual consumption that exists now between small-volume and large-volume customers in the group.

The following points summarize the key features of the new groups. Proposed T1

• Annual transportation volume (firm and interruptible combined) of 2,500,000 m³ or greater and firm contract demand up to 140,870 m ³/day
• Two firm transportation contract demand blocks: first 28,150 m³/day and next 112,720 m³/day
• Single firm transportation commodity block
• Firm transportation rate design: monthly customer charge, two-block monthly demand charge, single-block commodity charge

Proposed T2

• Firm transportation contract demand of at least 140,870 m³/day. (Firm and interruptible daily contract demands of less than 140,870 m³/day cannot be combined to qualify.) No minimum annual volume requirement
• Two firm transportation contract demand blocks: first 140,870 m³/day and all over 140,870 m³/day
• Single firm transportation commodity block
• Firm transportation rate design: monthly customer charge, two-block monthly demand charge, single-block commodity charge

Union's proposed monthly customer charges for its new T1 and T2 are: T1 - $1998.83 (versus $6,605.75 with no redesign but based on 2013 costs) and T2 - $6,000 (versus $6,605.75 with no redesign but based on 2013 costs).

Union estimates that typical delivery bill impacts of the redesign for those that will be in the new T1 class are: small customer - (8.1)%, average customer - 4.4%, and large customer - 19.0% with brackets indicating a decrease. For customers who will be in the new T2 group, the typical bill impacts are estimated to be: small customer - 10.3%, average customer - (0.5)%, and large customer - (3.4)%.

Bundled Contract Rate Eligibility in Union South

Union is proposing to lower the eligibility criteria for its mid-market groups, M4 (firm) and M5A (interruptible), as well as its large market M7 class. All are in its Southern Operations Area. The reasons for the changes relate to continuity of service (being able to remain in the class) and sufficient class size (number of customers in the group). Implementation of the changes is proposed for January 1, 2014.

Under current criteria, customers are eligible for M4 or M5A service if they have a daily contract demand between 4,800 m³ and 140,870 m³ and a minimum annual volume of 700,000 m³. Under Union's proposal, the new criteria would be a daily contract demand between 2,400 m³ and 60,000 m³ with a minimum annual volume requirement of 350,000 m³. The current requirement that an M4 customer must have a load factor of at least 40% would continue.

Union is also looking to add an interruptible service component to the M4 rate schedule so that all contract rate customers in Union South have both firm and interruptible offerings. To be eligible for the proposed M4 interruptible service, a customer would have to have an interruptible contract demand of at least 2,400 m³ and a minimum annual interruptible volume of 350,000 m³.

The changes proposed for M7 include lowering the minimum contract demand from 140,870 m³/day (for combined firm, interruptible and seasonal volumes) to 60,000 m³ and eliminating the minimum annual volume requirement (currently 28,327,840 m³).

General Service Rate Redesign

Union's general service classes are M1 and M2 in the South and Rate 01 and Rate 10 in Union North. M1 and Rate 01 are for small-volume general firm service, and M2 and Rate 10 are for large-volume general firm service. Union is proposing two changes for these rate groups, with implementation on January 1, 2014.

The first change that has been put forward is a lowering of the annual volume breakpoint between M1 and M2 and also between Rate 01 and Rate 10. In both cases, the current volume that defines the crossover point between the small-volume and large-volume general service groups is 50,000 m³. Union is proposing a new breakpoint of 5,000 m³, the objective being to improve rate class homogeneity (customers within the group have similar average use volumes) and rate class size.

The second proposed change is harmonization of the rate block structures in the small-volume general service groups as well as the large-volume general service classes. Specifically, Union is proposing that the current M1 and M2 rate block structures in the South be used for Rate 01 and Rate 10, respectively, in the North.

Monthly Customer Charges for Bundled Contract Rates

Union is proposing a number of changes to its monthly customer charges for its bundled contract rate groups, with implementation planned for January 1, 2013. If approved, the customer charges would be: Rate 20 - $1,000 (compared to $777.19 effective January 1, 2012), Rate 100 - $1,500 (compared to the current $777.19), Rate 25 - $375 (set at 25% of the Rate 100 customer charge), and M5A - $725 (based on the proposed average percentage increase in M5A interruptible delivery service).

Union's 2013 rate proceeding is in the relatively early stages of review by the OEB. The review will be very comprehensive with forecast revenues and costs for 2013 being closely examined as well as Union's costs allocation and rate design proposals.

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