1999 BC Gas Utility Ltd. annual report - FortisBC

Management Discussion and Analysis
Operation and maintenance expenses decreased to
$116.0 million in 1999 from $120.6 million in 1998. This
decrease was due largely to productivity improvements
flowing from a significant restructuring program at BC Gas
which was implemented in early 1998, offset by increases
in other operating costs.
Increased investment in gas plant in service resulted in
depreciation and amortization expense rising to $62.4 million
in 1999 from $61.3 million in 1998. Growth in the asset base
of the Company resulted in property and other taxes
increasing by $0.4 million to $31.9 million in 1999.
Financing costs increased to $87.4 million in 1999 from
$86.8 million in the previous year largely as a result of higher
debt balances and higher short-term interest rates during 1999.
Regulation and Rates – BC Gas Utility
BC Gas is regulated by the British Columbia Utilities
Commission (“the BCUC”), which approves rates and tolls for
services and the construction of facilities. Traditionally, rates
have been set using the historical cost rate base and a rate
of return. Since 1996, incentive-based regulation has been
incorporated into the rate setting process in order to enhance
both value to customers and returns to shareholders.
The Company’s rates are based on estimates of a number
of items, such as natural gas sales, cost of natural gas and
interest rates. In order to manage the risks associated with
some of these estimates, a number of regulatory deferral
accounts are in place. The three most significant deferral
accounts relate to the risks of weather, cost of natural gas,
and interest rates.
1999 ANNUAL REPORT
The deferral accounts for weather and cost of natural gas
reduce the Company’s earnings exposure to these risks by
deferring any variances between projected and actual gas
consumption and gas costs, and refunding or recovering those
variances in future customer rates. Transportation and sales
services to industrial customers are not covered by these
deferral accounts. As a result of these deferral accounts,
changes in reported revenues from year to year are caused
mainly by changes in gas costs and other components of the
Company’s cost of service which are recovered in customer
rates. Changes in volumes of gas sold to residential and
commercial customers due to weather or other factors have
a less significant impact on reported revenues.
BC Gas also has in place short-term and long-term interest
deferral accounts to absorb interest rate fluctuations. The
Company’s interest deferral accounts effectively locked in the
cost of short-term funds attributable to regulated assets at
5% during 1999 and 1998.
Allowed Return on Equity (“ROE”)
The Company’s 1999 allowed ROE of 9.25% was determined
based on a formula that applied a risk premium to a forecast
of long-term Government of Canada bond yields. The decline
from 10.0% in 1998 was a result of a decline in forecast longterm
bond yields.
In June 1999, the BCUC held a public hearing to review
the ROE formula, which had been in effect since 1995. In its
decision dated August 26, 1999, the BCUC amended the
formula for the years beginning in 2000. The effect of these
revisions is a lower allowed ROE for the Company with the
new formula than with the old formula, under most potential
long-term bond yields. For 2000, the Company’s allowed ROE
has been set at 9.50% using the revised formula, reflecting
higher forecasted long-term bond yields compared to the 1999
ROE calculation. Had the original formula remained in place,
the Company’s 2000 allowed ROE would have been 9.75%.
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