R ENTAL O WNERS AND MANAGERS ASSOCIATION OF BC TGVI Annual Review BCUC Order G-95-04 Submission to the British Columbia Utilities Commission Re: Terasen Gas (Vancouver Island) Inc. (TGVI) 2004 Annual Review ROMA BC – Background The Rental Owners and Managers Association of British Columbia (ROMA BC) is a non- profit organization, incorporated under the Society Act of B.C. in 1971. Today ROMA BC is a full service organization with over 1200 members throughout British Columbia, of which approximately 90% are on Vancouver Island. Collectively ROMA BC members own or manage over 27,000 residential rental units. ROMA BC’s services range from operational and legal advice through education and publications, to advocacy and lobbying. ROMA BC is 100% funded by its members, receiving no direct or indirect government funding. Since its inception, ROMA BC has had a series of contracts with Chevron Canada to provide heating oil to members at a significant discount. Today, ROMA BC Members purchase approximately 2.2 million litres per annum through this continuing contract. When TGVI’s predecessor Centra Gas obtained approval to provide natural gas to Vancouver Island, discussions with ROMA BC (previously called the Apartment Owners and Property Managers Association of Vancouver Island) led to the creation of the Apartment Conversion Rates (ACR) available only to apartment owners who converted to natural gas and who enrolled prior to February 1996. The ACR rates were clearly intended to be an incentive for apartment owners to convert from heating oil to natural gas. The ACR-1 and ACR-2 rates remained in place until the end of 2002 and 2003 respectively. BC Rental Rate History Canada Mortgage and Housing Corporation (CMHC) surveys residential apartment rental rates in 28 B.C municipalities each October. Following are the reported average monthly rents for two bedroom apartments in four selected communities on Vancouver Island: October 1996 October 2003 * %change Average annual % change Victoria $717 $789 +10.0% + 1.4% Nanaimo $601 $601 0 0 Courtenay/Comox $586 $550 - 4.6% - 0.7% Campbell River $553 $521 - 5.8% - 0.8% * Results of the 2004 survey will be available in late December 2004. Tel: (250) 382-6324 email: info@suites-bc.com 830B Pembroke St. Victoria, BC V8T 1H9 Toll Free 1-888-330-6707 http://www.suites-bc.com Fax: (250) 382-6006
British Columbia Utilities Commission November 19, 2004 Page two BC’s Rental Regulation History For several years British Columbia’s Residential Tenancy Act has prescribed both indirect rent controls (pre 2004) and direct rent controls (2004 and 2005). Until December 31, 2003, a landlord had the legal ability to increase a tenant’s rent by any amount, however the tenant had the right to dispute the increase through arbitration, with arbitrators following a government formula that would generate a typical rent increase in the range of 1.5% to 3.5%, depending on the current inflation rate. B.C.’s revised Residential Tenancy Act (“the Act”) came into force January 1, 2004, with direct rent controls being imposed by the government. For 2004 the maximum rent increase a landlord is permitted is 4.6%; for 2005 the maximum rent increase declines to 3.8%. Further, under the revised Act, landlords are permitted to increase a tenant’s rent only once in every 12 month period. The law prevents a landlord from passing through any cost increases to a tenant at any time. TGVI/Centra Gas Rate Setting Environment 1995 to 2003 Pricing formulas within the Special Direction issued in December 1995 established how rates were to be set for the Pioneer customers of TGVI’s predecessor, Centra Gas, including ACR Customers. As a result of the automated rate setting mechanisms in the Special Direction, representatives of Centra Gas had little reason to establish a working relationship with our industry. With the pending expiry of the ACR-2 rate class, representatives of TGVI initiated discussions with our industry in late 2003 to establish a rate that was reasonable, and would meet the needs of all parties. The result was the proposed Apartment General Service (AGS) class that was approved in the 2003 Annual Review. ROMA BC stresses that the working relationship established with TGVI during the discussions in 2003 and early 2004 was respectful and cooperative, an attitude that was 180 degrees opposite to the attitude of Centra Gas toward ROMA BC and the residential rental industry during the years covered by the Special Direction. One of the key components of the approved AGS rate of $8.25/GJ plus $40/month for 2004 was that the rate would be set 7% above TGVI’s calculated Revenue to Cost Ratio of 1.0, such that the rate would provide a buffer against rising costs in 2004, and help to provide rate stability for at least the first year. However, effective October 1, 2004 the Commission approved an 11.3% increase in the AGS rate from an effective rate of $8.581/GJ to $9.511/GJ, with no opportunity for consultation with or participation by ROMA BC in the review process. TGVI Current Rate Increase Application In this 2004 Annual Review, TGVI is proposing a further 10.5% increase in the AGS rate to $10.17/GJ plus $40/month effective January 1, 2005 (Section 8.1, TGVI 2004 Annual Review). In its application, TGVI also seeks approval to “set the October 1, 2004 GCVA Rate Rider D to zero effective January 1, 2005.” Although TGVI states in Table 8.1 that this is a 10.5% increase, with the reduction of Rate Rider D to zero the requested increase is actually 22.4% from the previously approved rate of $8.25/GJ plus $40/month fixed monthly charge, established just one year ago! Actual and proposed rates, based on a building consuming 1450 GJ per annum would increase from $8.581/GJ January 1, 2004 to $10.507/GJ January 1, 2005, a 22.4% increase. . . . 3
British Columbia Utilities Commission November 19, 2004 Page three Discussion AGS Rate Increase The proposed 22.4% rate increase to AGS customers is the highest increase of any rate class by a large margin. The AGS rate must be viewed as a form of residential, rather than commercial or industrial rate, given that gas is being provided to residences and – at least theoretically – it is indirectly paid by those who receive its benefits, i.e. tenants. ROMA BC respectfully submits that the magnitude of the proposed rate increase is well beyond an amount that can be absorbed by our industry. Further it is not justifiable under the terms of the approved rate design and Special Direction, which prescribes among other requirements, reasonableness of rates and rate stability. A rate increase of 22.4% cannot be considered to be reasonable. Rate Stability One of the key rate design philosophies inherent in TGVI’s approved Rate Design was the intent to provide to the greatest extent possible, rate stability to customers over time. In 2004, TGVI seems to have dismissed this important rate design goal. As stated above, the January 1, 2004 AGS rate was set 7% higher than it needed to be, with the full support of representatives of ROMA BC in the hopes that it would have stable rates for at least a full year. In September, TGVI applied for and was permitted to implement Rate Rider D of $0.91/GJ, effective October 1, 2004, to recover higher natural gas costs, leading to a rate increase for all core customer rate classes, including an 11% increase to AGS customers. Now TGVI is applying for a further 10.5% increase (effective January 1, 2005) to the AGS customer class for a total increase year over year of 22.4%. Other large commercial rate classes are also seeing rate increases, albeit to a lesser extent than AGS. The residential and small commercial rate classes appear to be forgotten in terms of rate changes for 2005. From ROMA BC’s perspective, the goal of rate stability appears to be relegated to the bottom of the rate design objectives. Rate Increase Relative to RDDA Amortization ROMA BC understands the need to recover the accumulated RDDA by 2011, however the AGS rate proposal included in this Annual Review is excessive, and not justifiable based on RDDA recovery. The proposed rates anticipate creating an annual revenue surplus of approximately $8.4 million from which to further amortize the RDDA principal in 2005 (Table 6.2). Based on TGVI’s projections, the RDDA will have been drawn down by $36.3 million by the end of 2005, which is considerably ahead of straight-line amortization of the RDDA that would equate to approximately $29.3 million over the same time period. Based on actual RDDA recovery to date, TGVI is achieving a higher level of success than is required to meet the 2011 time frame, meaning that if the current rate of RDDA recovery continues, TGVI will retire the RDDA well ahead of 2011. There is neither a regulatory nor a business case to be made for retiring the RDDA principal prior to 2011, which is when the provincial government royalties cease. ROMA BC submits that the AGS rate proposal included in the Annual Review is too high and not reasonable in relation to the actual and forecast level of RDDA recovered to date and over the forecast period. . . . 4
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