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Business Risks
The risks identified below are specific to EGD. General risks that affect the Company as a whole are described under Risk Management.
Regulatory Risk
Through the regulatory process, the OEB approves the return on equity that EGD is allowed to include in rates, in addition to various other aspects of utility operations. The formula currently approved by the
OEB for determination of the return on equity is based on the OEB's current risk assessment of EGD for the 2007 fiscal year and is effectively embedded into rates over the IR period.
EGD expects the implementation of certain factors in the IR formula will permit it to recover certain costs that are beyond management control, but are necessary for the maintenance of its services. Furthermore, EGD has requested a mechanism to end the IR plan and return to cost of service if there are significant and unanticipated developments (i.e., natural disasters, war, high rates of inflation, etc.) that threaten the sustainability of the IR plan. To the extent the OEB denies recovery of any such costs, EGD is at risk.
EGD does not profit from the sale of the natural gas commodity nor is it at risk for the difference between the actual cost of natural gas purchased and the price approved by the OEB. This difference is deferred as a receivable from or payable to customers until the OEB approves its refund or collection. EGD monitors the balance and its potential impact on customers and will request interim rate relief that will allow it to recover or refund the natural gas commodity cost differential.
EGD has a quarterly rate adjustment mechanism in place for the natural gas commodity. This allows for the quarterly adjustment of rates to reflect changes in natural gas commodity prices. Adjustments are subject to prior approval by the OEB.
Volume Risks
Since customers are billed on a volumetric basis, EGD's ability to collect its total revenue requirement depends on achieving the forecast distribution volume established in the rate-making process. Under IR, volume forecasts will be reviewed and approved by the OEB annually. The probability of realizing such volume is contingent upon four key forecast variables: weather, economic conditions, pricing or competitive energy sources and the growth of customers.
Sales and transportation of gas for customers in the residential and commercial sectors account for approximately 78% (2006 – 77%) of total distribution volume. Weather during the year, measured in degree days, has a significant impact on distribution volume as a major portion of the gas distributed to these two markets is used ultimately for space heating. In 2007, the winter months were colder than forecast, resulting in a favourable weather related volume variance of 11.6 bcf.
Distribution volume may also be impacted by the increased adoption of energy efficient technologies along with more efficient building construction that continues to place downward pressure on annual average consumption. Average annual residential gas usage has declined by 1.3% per annum over the last 10 years, reflecting consistent customer conservation efforts.
Sales and transportation service to large volume commercial and industrial customers is more susceptible to prevailing economic conditions. As well, the pricing of competitive energy sources affects volumes distributed to these sectors as some customers have the ability to switch to an alternate fuel. Customer additions are important to all market sectors as continued expansion adds to the total consumption of natural gas.
Even in those circumstances where EGD attains its total forecast distribution volume, it may not earn the approved return on equity due to other forecast variables such as the mix between the higher margin residential and commercial sectors, and lower margin industrial sector.
Franchise Rights
EGD has an exclusive right to serve all end users within its franchise area, under its franchise agreements. Similar franchise agreements in adjacent areas are held by peer companies such as Union Gas Limited (UGL). On January 6, 2006, the OEB granted Greenfield Energy Corporation, a potential power plant customer of UGL, the right to physically bypass UGL's distribution network within UGL's franchise area, in order to serve its own power plant. The OEB's decision to not uphold exclusive franchise rights of a local distribution utility in Ontario was unprecedented. However, the OEB characterized this decision as transitional, and set up a rates proceeding which assessed the service requirements of gas fired generation in the province of Ontario. The OEB decision from this rates proceeding was issued in November 2006. EGD believes the new rates are robust and would make physical bypass of EGD's system unattractive to gas fired power generation plants. However, the OEB decision did not preclude any party from seeking approval from the OEB to build its own pipeline and bypass the local distribution utility. EGD objects strongly to the concept that any such franchise violation is acceptable and will object if any similar proposal arises in the EGD franchise area.