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RENTAL OWNERS 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 Courtenay/Comox $586 $550
Campbell River $553 $521
* Results of the 2004 survey will be available in late December 2004.
SLIDE 2 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
- ur 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
- pposite 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
SLIDE 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
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
SLIDE 4
British Columbia Utilities Commission November 19, 2004 Page four Projected Gas Price and Canadian Dollar Exchange Rate Cost of gas is TGVI’s largest component of revenue requirement. TGVI has based its rate proposal to a large degree on the market’s view of the forward price curve for natural gas on a specific date, and on an assumed Canadian Dollar exchange rate, both of which materially impact the overall forecast cost of gas. ROMA BC respectfully submits that in the Annual Review TGVI used gas cost forward projections that were at or near the peak of market pricing, and a Canadian dollar exchange rate that is higher than can reasonably be expected to prevail over 2005. ROMA BC requests that TGVI review and revise its forecast cost of gas, based on these factors. “Competitive Price Gap” TGVI justifies the disproportionately high increase in the AGS rate by quoting the “competitive gaps” between TGVI rates and comparable electricity and heating oil rates (Section 8.3 – Apartment Proposal). The calculations used to determine the price gap between oil and natural gas pricing (Appendix E of the Annual Review) uses a forward oil price curve from October 28, at an exchange rate of US$1.00 = $1.3174CAN. ROMA BC submits that the spot price of West Texas Intermediate oil has decreased since this pricing forecast was conducted, and the exchange rate is materially lower than that used in the competitive pricing survey. The competitive pricing survey should be revisited prior to final agreement on rates for 2005 to ensure that the competitive guideline is accurately portrayed. ROMA BC also notes the concluding sentence in Section 8.3: “However, TGVI recognizes the need for relative rate stability while still trying to ensure recovery of the RDDA.” Again with respect, no reasonable person could conclude that a year over year 22.4% increase represents “rate stability.” We also note the reference in section 7.1.3 to the Commission approved TGVI “soft- cap” rate setting mechanism, which is intended to meet the objective of “avoidance of undue customer rate impacts.” A 22.4% rate increase will have an enormous undue impact on AGS customers. Rental Income – an Anomaly A landlord’s sole source of income is the rent paid by tenants. From this amount, owners must pay income and property taxes, insurance, maintenance, utilities and other costs directly related to owning and operating an apartment building. Hopefully – but by no means necessarily – a reasonable profit or return on investment remains after all rents are received and all bills are paid. Heating costs are a major component of the overall operating costs. From an expense perspective, the residential rental industry is no different from any other private sector industry in that it operates in the market place, pays market rates for all the products and services it consumes and competes for customers. (An indication of competition is vacancy rates, which on Vancouver Island range from 1.5% in parts of Victoria to over 45% in Port Hardy.) From a revenue perspective the residential rental industry is unique. While it operates in the competitive market place, it is prohibited from charging a market price for its product. The provincial government regulates its prices – without even an opportunity to make its case before a regulatory body. The result of this anomalous situation is evident in the above numbers. . . . 5
SLIDE 5 British Columbia Utilities Commission November 19, 2004 Page five Finally, the price for natural gas, one of the major products consumed by our industry on Vancouver Island, is regulated, but not “capped.” Neither does that price bear any relationship to the revenue limitations placed on our industry. Further there are no competitive alternatives for
- btaining natural gas on Vancouver Island, as there are on the B.C. mainland, (i.e. marketers).
Conclusion Since 1996, rents in Vancouver Island’s major communities have either decreased in actual, non-inflation adjusted dollars or increased at a rate significantly less than inflation, depending on
- location. During the same period, natural gas rates have increased annually at an average annual
rate of between 8.6% to 10.3%, (including the October 1, 2004 Rate Rider) The proposed AGS effective rate $10.507/GJ represents an increase of 22.4% over the previous year. While TGVI is able to increase gas rates by any amount, subject only to Commission approval, the residential rental industry continues to be unable to increase rents by more than the minimal amount prescribed by the Residential Tenancy Act – 3.8% for 2005, and may not even be able to support that amount of rent increase depending on competitive conditions in its various markets. Recommendation ROMA BC, on behalf of the residential rental industry on Vancouver Island respectfully submits that the proposed 22.4% increase in the AGS natural gas price is excessive, punitive and
- unjustified. Landlords are prevented by law from passing on increases in costs in excess of 3.8% to
the consumers of natural gas – their tenants. While ROMA BC recognizes the need for TGVI to
- perate on a financially viable basis in the long term, we can neither understand nor absorb a cost
increase of this magnitude. Consequently ROMA BC respectfully requests that the Commission reject TGVI’s application for an AGS rate of $10.166 plus $40/month, and instead approve a 3.8% increase over the currently approved AGS tariff rate of $8.25/GJ plus $40/month, to be effective from January 1, 2005 to December 31, 2005. All of which is respectfully submitted by Rental Owners and Managers Association of British Columbia
