DECISION NSUARB-NG-02 2003 NSUARB 8
NOVA SCOTIA UTILITY AND REVIEW BOARD
IN THE MATTER OF THE GAS DISTRIBUTION ACT
- and -
IN THE MATTER OF Franchise Applications for the Distribution of Natural Gas in the Province of Nova Scotia
BEFORE: John A. Morash, C.A., Chair Margaret A. M. Shears, Vice-chair John L. Harris, Q.C., Member Kulvinder S. Dhillon, P. Eng., Member
APPLICANTS: HERITAGE GAS LIMITED John C. MacPherson, Q.C., Counsel
STRAIT AREA GAS CORPORATION Leonard MacDonald, Mayor, Town of Mulgrave Billy Joe MacLean, Mayor, Town of Port Hawkesbury Sam Murray, Chief Administrative Officer, Town of Mulgrave
HEARING PARTICIPANTS: Canadian Oil Heat Association (NS Chapter) David A. Hovell, Executive Director
Geostorage Associates Alan Ruffman, P.Geo., Partner
Halifax Regional Municipality Mary Ellen Donovan, LL.B. Senior Solicitor, Legal Services
Irving Energy Services Limited Christopher Stewart, LL.B.
Document : 82360 Municipality of the County of Richmond Louis A. Digout, Chief Administrative Officer Stewart MacDonald, Deputy Clerk-Treasurer Richard Cotton, Warden
Province of Nova Scotia Department of Energy James R. Gogan, LL.B.
The Sydney and Area Chamber of Commerce John MacIsaac
Wilson Fuel Co. Limited Steven Wilson, Director
WPS Energy Services Inc. John F. Sorenson
INTERVENORS: see Appendix ‘C’
BOARD COUNSEL: S. Bruce Outhouse, Q.C.
BOARD COUNSEL’S CONSULTANT: Richard G.C. DeWolf, P.Eng.
HEARING DATES: Heard at Halifax, Nova Scotia, between October 7, 2002 and October 18, 2002
FINAL SUBMISSIONS: December 6, 2002
DECISION DATE: February 7, 2003
DECISION: Heritage Gas Limited - Pursuant to Section 8 of the Gas Distribution Act, the Board grants a full regulation class franchise for a period of 25 years to Heritage Gas Limited, for the Counties of Cumberland, Colchester, Pictou and Halifax, the Municipality of the District of East Hants and the Goldboro area of Guysborough County, subject to the approval of the Governor in Council, and subject to the terms and conditions set forth in Appendix ‘A’, attached.
Strait Area Gas Corporation - Pursuant to Section 8 of the Gas Distribution Act, the Board approves the grant, in principle, of a full regulation class franchise for a period of
Document : 82360 25 years to Strait Area Gas Corporation, covering areas in Inverness County, Antigonish County, Guysborough County (excluding Goldboro) and Richmond County, subject to the filing of an executed BOOT agreement which is acceptable to the Board. The approval to grant this franchise, on an “in principle” basis, is subject to the approval of the Governor in Council, and is subject to the directives set forth in Appendix ‘B’, attached.
Document : 82360 TABLE OF CONTENTS
PART ONE
INTRODUCTION ...... 1
PART TWO
APPLICATION OF HERITAGE GAS LIMITED ...... 7
1.0 EXISTENCE OF MARKETS ...... 7
1.1 Submissions - Applicant ...... 7
1.2 Submissions - Intervenors ...... 8
1.3 Findings ...... 8
2.0 AVAILABILITY OF ADEQUATE SUPPLY ...... 8
2.1 Submissions - Applicant ...... 9
2.2 Submissions - Intervenors ...... 11
2.3 Findings ...... 11
3.0 ECONOMIC FEASIBILITY - PLANS FOR SERVICE AND FEASIBILITY TEST .. 12
3.1 Submissions - Applicant ...... 12
3.2 Submissions - Intervenors ...... 17
3.3 Findings ...... 21
4.0 FINANCIAL CAPABILITY AND RELATED EXPERIENCE ...... 24
4.1 Submissions - Applicant ...... 24
4.2 Submissions - Intervenors ...... 26
4.3 Findings ...... 26
5.0 FINANCIAL PLAN ...... 26
Document : 82360 5.1 Submissions - Applicant ...... 26
5.2 Submissions - Intervenors ...... 31
5.3 Findings ...... 33
6.0 SOCIO-ECONOMIC IMPACT STATEMENT AND BENEFITS PLAN ...... 35
6.1 Submissions - Applicant ...... 36
6.2 Submissions - Intervenors ...... 38
6.3 Findings ...... 39
7.0 CONCLUSIONS - HERITAGE ...... 40
PART THREE
APPLICATION BY STRAIT AREA GAS CORPORATION ...... 41
8.0 EXISTENCE OF MARKETS ...... 41
8.1 Submissions - Applicant ...... 41
8.2 Submissions - Intervenors ...... 43
8.3 Findings ...... 45
9.0 AVAILABILITY OF ADEQUATE SUPPLY ...... 48
9.1 Submissions - Applicant ...... 48
9.2 Submissions - Intervenors ...... 49
9.3 Findings ...... 49
10.0 ECONOMIC FEASIBILITY - PLANS FOR SERVICE AND BOOT PROPOSAL .. 50
10.1 Submissions - Applicant ...... 50
10.2 Submissions - Intervenors ...... 53
10.3 Findings ...... 57
Document : 82360 11.0 FINANCIAL CAPABILITY AND RELATED EXPERIENCE ...... 59
11.1 Submissions - Applicant ...... 60
11.2 Submissions - Intervenors ...... 62
11.3 Findings ...... 62
12.0 SOCIO-ECONOMIC IMPACT STATEMENT AND BENEFITS PLAN ...... 62
12.1 Submissions - Applicant ...... 64
12.2 Submissions - Intervenors ...... 67
12.3 Findings ...... 69
13.0 CONCLUSIONS - STRAIT ...... 70
PART FOUR
OTHER ISSUES ...... 72
14.0 BUNDLED GAS SALES AND CODE OF CONDUCT ...... 72
15.0 REGULATORY OVERSIGHT ...... 75
16.0 MUNICIPAL FEES AND MUNICIPAL TAXATION ...... 80
17.0 LATERAL POLICY ...... 84
18.0 ROAD SHOULDERS/ROAD RIGHTS-OF-WAY ...... 86
19.0 FUTURE PROCEEDINGS ...... 87
20.0 SUMMARY OF FINDINGS ...... 88
HERITAGE
20.1 Grant of Franchise ...... 88
20.2 Existence of Markets ...... 88
20.3 Availability of Adequate Supply ...... 88
Document : 82360 20.4 Feasibility Test - Application ...... 89
20.5 Feasibility Test - Ongoing Review ...... 89
20.6 Customer Commitment ...... 89
20.7 Tolls and Tariffs Proceeding/Extension of Services ...... 90
20.8 Financial Capability and Related Experience ...... 90
20.9 Capital Structure and Cost of Debt ...... 90
20.10 Deferral Account ...... 91
20.11 Return on Equity ...... 91
20.12 Socio-Economic Impact Statement and Benefits Plan ...... 91
STRAIT
20.13 Approval of Grant of Franchise “in principle” ...... 92
20.14 Existence of Markets ...... 92
20.15 Availability of Adequate Supply ...... 93
20.16 Economic Feasibility - BOOT Agreement ...... 93
20.17 Filing Requirements - BOOT Agreement - Phase II ...... 93
20.18 Phase II/Costs ...... 95
20.19 Financial Capability and Related Experience ...... 95
20.20 Socio-Economic Impact Statement and Benefits Plan ...... 95
OTHER
20.21 Gas Sales ...... 96
20.22 Licencing Process ...... 96
20.23 Codes of Conduct - Working Group ...... 97
20.24 Gas Cost Variance Account ...... 97
Document : 82360 20.25 Regulatory Oversight ...... 97
20.26 Municipal Fees and Municipal Taxation ...... 98
20.27 Lateral Policy ...... 98
20.28 Road Shoulders/Road Rights-of-Way ...... 98
20.29 Future Proceedings - Strait ...... 98
APPENDICES
Appendix - A Heritage Gas Limited - Terms and Conditions of Franchise
Appendix - B Strait Area Gas Corporation - Directives Concerning Approval, in Principle, of Grant of Franchise
Appendix - C List of Formal Intervenors
Appendix - D Board Directions on Procedure and Board Regulations
Document : 82360 1
PART ONE
INTRODUCTION
[1] This decision follows a public hearing conducted by the Nova Scotia Utility and
Review Board (“the Board”) over nine hearing days between October 7, 2002 and October 18,
2002, in the matter of applications by Heritage Gas Limited (“Heritage”) and Strait Area Gas
Corporation (“Strait”) for franchises to construct and operate natural gas delivery systems in the Province of Nova Scotia. Heritage’s requested franchise area consists of all or part of the following eight counties: Cumberland, Colchester, Pictou, Guysborough, Halifax, Richmond,
Inverness and Hants. Heritage put forth a ten year development plan to serve all or part of these areas.1 Strait’s proposed franchise area covers parts of Inverness, Richmond,
Guysborough and Antigonish Counties.2
[2] Heritage is a corporation incorporated under the Canada Business
Corporations Act with its head office in Halifax Regional Municipality. The largest shareholder is SaskEnergy International Incorporated (50.1%), a wholly owned subsidiary of
SaskEnergy Incorporated (“SaskEnergy”). SaskEnergy’s principal business is the distribution and transmission of natural gas. It is a Saskatchewan Crown Corporation and a designated subsidiary of Crown Investments Corporation of Saskatchewan.
[3] The other shareholders of Heritage are Scotia Investments Limited (“Scotia
Investments”) (25%) and AltaGas Services Inc. (“AltaGas”) (24.9%). Scotia Investments,
1Exhibit N-3, Executive Summary, p. 2
2Exhibit N-10, p. 4
Document : 82360 2 established in 1945, is a Nova Scotia based investment holding company which is privately owned by the Jodrey family. Its holdings are diverse, including the production of linerboard paper products, food processing, transportation, real estate, health care, environmental and waste treatment industries, etc.
[4] AltaGas is an Alberta based energy company involved in gathering and processing natural gas; the distribution of natural gas in Alberta and Northern Canada; and energy services including the marketing of natural gas and electricity.
[5] Strait is a joint venture of the Towns of Port Hawkesbury and Mulgrave which was formed for the purpose of seeking a natural gas franchise. If successful in its application
Strait will be incorporated as a separate entity with representatives from both Town Councils initially serving as members of the Board of Directors.
[6] The applications were heard under the authority of the Gas Distribution Act
S.N.S. 1997, c.4, as amended (the “Act”), and the Gas Distribution Regulations (Nova
Scotia) N.S. Reg. 86/98 as amended by N.S. Reg. 72/02, made under that Act by the
Governor in Council (“GIC Regulations”). The Board also made regulations, the Board Gas
Distribution Regulations (Nova Scotia), N.S. Reg. 85/02, which established the procedures, filing requirements and fees payable by the applicants (“Board Regulations”).
[7] This proceeding marks the second time in recent years that the Board has considered natural gas franchise applications for Nova Scotia. In November of 1999, the
Board granted a Province-wide franchise to Sempra Atlantic Gas Incorporated (“Sempra
Atlantic”) following a lengthy public hearing. The Governor in Council, by Order dated
Document : 82360 3
December 16, 1999, subsequently approved the grant of franchise to Sempra Atlantic. The
Board went on to conduct several other proceedings relating to natural gas distribution, including a Tolls and Tariffs hearing and a gas marketing hearing. Unfortunately, Sempra
Atlantic did not fulfil its commitment to build a gas distribution system. On October 26, 2001
Sempra Atlantic applied to the Board to surrender its franchise. In a decision dated February
26, 2002, the Board accepted Sempra Atlantic’s surrender of its franchise subject to certain conditions. The conditions included provisions, which were negotiated between Sempra
Atlantic and the Province, designed to facilitate the transfer of Sempra Atlantic assets to a subsequent franchisee. While Sempra Atlantic invested considerable funds in establishing an office and installed approximately 15 kilometres of pipe in Dartmouth, it had not connected any customers at the time of the franchise surrender. Heritage plans, if successful in the present application, to negotiate with Sempra Atlantic’s corporate successor to acquire certain of these assets.
[8] The GIC Regulations provide for three classes of franchise: full regulation class, producer class and single end user class. The two applicants, Heritage and Strait, have each applied for a full regulation class franchise for a term of 25 years.
[9] It is useful to review the mandate of the Board in this process. The Board’s role is set out in the Act and GIC Regulations. Section 2 of the Act states that the purpose of the Act is to:
(a) provide a framework for the orderly development and operation of a gas delivery system in the Province; and
(b) allow for fair competition in the sale of gas for consumption in the Province.
Document : 82360 4
[10] The Act requires the Board, upon receipt of an application for franchise, to notify the public of the application and provide an opportunity for input from all interested parties, including a public hearing if warranted. Accordingly, in this case the Board issued Directions on Procedure (attached as Appendix D) for a public hearing on the gas distribution franchise applications. The hearing was advertised throughout Nova Scotia.
[11] There were 25 formal Intervenors in this proceeding. A list of Formal Intervenors is provided in Appendix “C”. In addition, the Board received six letters of comment. Several of the Formal Intervenors were active participants at the hearing. They included the Provincial
Department of Energy (the “Province”); Canadian Oil Heat Association, Nova Scotia Chapter
(“COHA”); Halifax Regional Municipality (“HRM”); Geostorage Associates (“GEO”); Irving
Energy Services Limited (“Irving”); Municipality of the County of Richmond (“Richmond”);
Wilson Fuel Co. Limited (“Wilson”); WPS Energy Services Inc. (“WPS”); and The Sydney and
Area Chamber of Commerce. Stora Enso Port Hawkesbury Limited (“Stora”), Emera Inc.
(“Emera”) and Nova Scotia Power Inc. (“NSPI”) advised the Board that they would be withdrawing as Formal Intervenors.
[12] While the Act gives the Board the authority to grant a franchise application after a hearing, it also stipulates that the Board’s decision is subject to approval by the Governor in Council. Section 8 of the Act sets out the factors which the Board must consider when evaluating franchise applications.
[13] The Act also gives the Board the authority to set the rates and tolls to be charged by a franchise holder, and provides criteria for the Board to consider when determining appropriate rates and tolls.
Document : 82360 5
[14] In 2001, following Sempra Atlantic’s surrender application, the Government undertook a review of the statutory and regulatory framework governing natural gas distribution in the Province. Industry stakeholders were provided with an opportunity to have input with respect to the proposed changes. As a result of this process, a number of changes were made to the Act and GIC Regulations.
[15] The most significant change was the elimination of mandatory access targets which previously had required the natural gas distribution franchisee to provide access to natural gas to a stipulated number of households in all eighteen counties of the Province within seven years. Other changes included eliminating the prohibition against a distributor selling gas. Accordingly, the natural gas distributor is now permitted to bundle the delivery of natural gas with the sale of natural gas in its service options for customers.
[16] In addition, early in the hearing process, the Province tendered a letter dated
October 9, 2002 from the Deputy Minister of Energy to the Applicants (Exhibit N-6) which indicated that the Province intends to allocate $14 million (out of a total of $20 million) from the Nova Scotia Market Development Fund, a fund established in 1999 by the Province and the Sable Offshore Energy Project producers, to assist with “...conversion incentive programs for residential, small commercial and institutional natural gas market development.”3
[17] It is in the context of this new statutory and regulatory framework that the Board has considered the evidence filed in this proceeding. As in its 1999 franchise decision, the
Board has set out the relevant provisions of the Act and GIC Regulations under each section
3Exhibit N-6, p.2
Document : 82360 6 of the decision. The decision is divided into four parts: Part One sets out the background to the hearing; Parts Two and Three deal with the applications by Heritage and Strait, respectively; and Part Four involves other issues which are common to both applicants.
Document : 82360 7
PART TWO
APPLICATION OF HERITAGE GAS LIMITED
1.0 EXISTENCE OF MARKETS
[18] The relevant Section of the Act governing the Board’s responsibility in making a determination on the issue of the existence of markets is as follows:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(a) the existence of m arkets, actual or potential;
1.1 Submissions - Applicant
[19] Heritage stated in its application:
The gas market in the franchise area has been separated into 4 categories of annual consumption as required by the Regulations. The total potential natural gas consumption for the franchise area is approximately 37.5 million GJ/year.4 (Exhibit N-3, Section 2, p.1)
[20] The following table illustrates Heritage’s assessment of the potential market for natural gas, by customer category, and the corresponding consumption projections:
Summary Customer Count and Consumption by Category
# of Customers GJ/yr
<500 GJ/yr 148000 19042500
500 to 9,999 GJ/yr 5000 10782000
10,000 to 99,999 GJ/yr 115 2021000
>100,000 GJ/yr 15 5709000
Sub Total 153130 37554500
Power Plants within 3 38000000 Proposed Franchise Area
4excluding power plants
Document : 82360 8
Total 153133 75554500 (Exhibit N-3, Vol. 1, S. 2, p.4) [21] In addition, Heritage filed a report entitled ‘Residential, Commercial, Institutional and Industrial Market Assessment’ (Exhibit N-5) which sets out the anticipated number of potential customers at different stages of franchise development.
[22] Heritage asserts that the:
...proposed penetration rates and consumption estimates in its Application are appropriate. These estimates are based either on direct discussions with specific potential customers or public consumption data such as that available from Statistics Canada.
(Heritage, Post Hearing Written Submission, p. 8)
1.2 Submissions - Intervenors
[23] There were no substantive issues raised by the Intervenors with respect to the methodology used by Heritage to develop the potential number of customers and the corresponding consumption estimates.
1.3 Findings
[24] The Board is satisfied that Heritage’s assessment of the actual or potential market for natural gas and its methodology and resulting estimates (including average consumption of 120 GJ/yr for residential customers5) are reasonable.
2.0 AVAILABILITY OF ADEQUATE SUPPLY
[25] The relevant Section of the Act governing the Board’s responsibility in making
5Transcript, October 9, 2002, p.494
Document : 82360 9 a determination on the issue of adequate gas supply is as follows:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(b) the availability of adequate gas supplies;
2.1 Submissions - Applicant
[26] Heritage pointed out that Nova Scotia’s gas distribution market is relatively small compared to other more mature markets in North America. Furthermore, a characteristic of a greenfield development is uncertainty of demand. In its application, Heritage states that:
Until additional production is brought on-stream, it is unlikely Heritage Gas would be able to contract for long-term supply (10-15 years). However, for the first few years, the gas supply requirements are very modest, and would be contracted only for the short term on an as needed basis. It is expected the contracting would initially fall under the agreement between the SOEI producers and the Provinces, signed in 1997. Under the terms of the agreement, the Nova Scotia distributor would have up to 10,540 GJ/d (10,000 MMBTU/d) allocated for its use. W hile this allocation was for a three year term, it is expected that the required volumes of gas will be available for extended periods of time.
(Exhibit N-3, Section 3, p. 3)
[27] Heritage also filed a copy of a Memorandum of Understanding (MOU) (Exhibit
N-1) between itself, Emera and NSPI. Sections 2 and 3 of the MOU indicate that Emera is willing to enter into arrangements with Heritage for the supply of gas and that NSPI is willing to enter into arrangements with Maritimes and Northeast Pipeline (“M&NP”) to “backstop” the transportation of gas. The relevant provisions read as follows:
2. Gas Supply and Management Emera Energy, upon receiving full details from Heritage of Heritage’s projected need (including forecast loads and all related information) will present a proposal to Heritage for the provision of gas supply and ancillary services (including load balancing) so as to enable Heritage to have a supply of gas to meet the demands of such of Heritage’s future gas distribution customers as elect to purchase gas supply for Heritage for such period of time and upon such terms and conditions, including price, as may be agreed between Heritage and Emera Energy.
Document : 82360 10
3. M&NP Gas Transportation Provided Heritage has entered an agreement with Emera Energy to purchase gas supply and ancillary services, NSPI confirms its willingness to backstop a Firm Service Agreement (“FSA”) that Heritage may enter into with M&NP for transportation of gas to or for Heritage and its customers over the M&NP system on terms and conditions to be negotiated.
(Exhibit N-1, p.2)
[28] The following exchange took place between Counsel for Irving and Dean Reeve,
Vice President, Development, SaskEnergy:
Q. Is it Heritage Gas' intention to call for proposals or to issue a tendering process for the supply of your gas? I mean, you've indicated here that Heritage [sic] is going to make you a proposal. Are you, at the same time, going to seek proposal from other suppliers?
A. I think quite clearly that we will be looking at potentials for other supplies.
. . . .
Q. Since you’ll be considering this proposal from Em era - - and I take it, then, proposals from other suppliers before the end of the year, before the end of 2002.
A. I think we would anticipate to continue to have discussions with potential suppliers, yes.
(Transcript, October 7, 2002, pp.78-80.)
[29] In commenting on the September, 2002 decision of the National Energy Board
(NEB) in the matter of access to Scotian gas supply by Maritime buyers, Heritage said that:
This conclusion accords with the view of Heritage that sufficient gas supply for a local natural gas distribution system is available. The initial requirements of Heritage will be modest compared to the overall volumes of natural gas available from the current reserves owned by Sable Offshore Energy Inc. ("SOEI"). Moreover, there are encouraging signs that additional reserves will be discovered in this area as well as in deeper water.
This Board considered the availability of adequate gas supplies in the Sempra decision and concluded at page 9:
"In view of the evidence filed with the Board by the various parties in this proceeding, the Board has a reasonable assurance that there will be an adequate natural gas supply to meet both the immediate and long term needs of Nova Scotia natural gas customers. Further, the Board finds that both applicants have met the criteria outlined in the Act in respect of adequate supply."
Heritage submits that there have been no developments in respect of gas supply
Document : 82360 11
since the Sempra decision which would call this conclusion of the Board into doubt.
Heritage believes that its initial requirements for natural gas come within the terms of the "Joint Position on Tolling and Laterals Among: Province of Nova Scotia, Province of New Brunswick, Sable Offshore Energy Project and Maritimes and Northeast Pipeline" ("The Joint Position") which states:
"In order to facilitate early service to local communities in Nova Scotia and New Brunswick, the SOEP Producers undertake to keep available for contracting by local distribution companies on commercially acceptable terms and conditions, 10,000 MMBtu/day of gas for each province (total of 20,000 MMBtu/day) for a period of the initial three (3) years…."
Heritage, through the experience of its shareholders, is confident that there are sufficient supplies of natural gas available for its anticipated needs. Heritage has had discussions with gas marketers concerning the provision of gas supplies and is confident that arrangements for the supply of natural gas to Heritage can be made on commercially acceptable terms:
(Heritage, Post Hearing Written Submission, pp. 12-13)
2.2 Submissions - Intervenors
[30] In addition to the submissions of Heritage with respect to gas supply, Irving indicated, through its witness, Mark Brown, Director of Marketing for Irving Energy Services Limited, that it has the capability to provide natural gas to potential customers in Nova Scotia. Currently,
Irving is marketing and selling natural gas directly to customers connected to the Enbridge distribution system in New Brunswick.
2.3 Findings
[31] In view of the evidence filed with the Board and the known capacity of the Sable
Offshore Energy Project to provide natural gas from Nova Scotia’s offshore reserves, it is reasonable to conclude that there will be an adequate natural gas supply to meet both the immediate and long term needs of Nova Scotia natural gas customers.
Document : 82360 12
[32] Notwithstanding the adequacy of supply, however, the Board believes it is reasonable to expect that potential natural gas customers will want to have some assurance that there will be available contracted natural gas supplies before they are willing to commit to convert existing equipment. Accordingly, prior to the commencement of service, the Board will require confirmation from the franchise holder that gas supply and ancillary services, supplier of last resort and backstopping arrangements are in place.
[33] The Board finds that the criteria outlined in the Act have been met by Heritage with respect to the availability of adequate supply.
3.0 ECONOMIC FEASIBILITY - PLANS FOR SERVICE AND FEASIBILITY TEST
[34] The relevant section of the Act governing the Board’s responsibility in making a determination on the issue of economic feasibility and plans for service is set out below:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(c) the economic feasibility of the proposed gas delivery system;
(f) the plans of the applicant to provide service in the franchise area;
3.1 Submissions - Applicant
[35] The distribution plan proposed by Heritage is characterized in the application as being one to “establish market - then build”.6 The plan for service, which was the subject of considerable discussion at the hearing, is best summarized in Heritage’s post hearing written submission as follows:
6Exhibit N-3, S. 6, p.9
Document : 82360 13
There will be two areas of concentration during the so-called "Initial Development" phase - one geographic and one sectorial. The various geographic areas in which marketing efforts and initial construction are contemplated to be concentrated are described in the Heritage Gas Market Assessment and depicted in pictorial fashion on the maps provided in response to Undertaking #10A. The initial concentration in terms of industry sector will be, as described in the Application, the industrial, institutional and commercial sectors. These are the sectors which have the most significant volumes which, if captured, will enable further expansion of the system.
Heritage will work closely with the respective communities and key community leaders to enable the build out of its system as quickly as possible. The residential sector is very important to Heritage as it provides, over the long term, the greatest opportunity for growth.
If construction during the Initial Development phase were to go exactly as planned by Heritage, there would be service, at the end of year six, to all of those areas described in the "Initial Development" Areas in Undertaking #10 and depicted on the maps provided in Response to Undertaking #10A. There would be service provided to the following categories and numbers of customers:
Initial Development7
Connected Access Rate Class One 9,183 25,500
Rate Class Two 303 382
Rate Class Three 17 17 9,503 25,899
(Schedule C to Heritage Gas Limited Financial Projections, Unaudited - Appendix "C" of Application and "Heritage Gas Market Assessment Report".)
However, it is not possible to predict with certainty which industries will choose to convert to natural gas, when they will choose to convert, and which residential areas or communities will expedite the development of natural gas through community initiatives and a favourable response to marketing. Therefore, although there is a plan in place with respect to the Initial Development phase, this plan will change as the market develops and responds to the presence of this new and competitive fuel. It may well be that a greater area than that depicted in the initial development area will be serviced by year six.
The exact extent and location of development beyond the Initial Development phase is also difficult to predict. It will be driven by market demand. It will occur in those areas where the market has responded favourably to the availability of natural gas.
(Heritage, Post Hearing Written Submission, pp. 29-31)
The service area descriptions were further outlined in Undertaking U-10 as:
7Heritage referred to a potential fourth rate class during the hearing. Transcript, October 7 and 8, 2002, pp. 68 and 280
Document : 82360 14
The initial development area for each county included in the proposed Heritage Gas franchise are described below. The initial development area represents the planned buildout in the first six years of the franchise which is sufficient to sustain the Heritage Gas business model. Heritage Gas expects that market demand will be sufficient to extend distribution beyond the initial development phase. Because the system will be built out on the basis of market demand it is not possible to identify the specific areas of additional development beyond the initial development area.
Amherst Initial Development Area
Includes core areas within the Town of Amherst, such as the industrial park, the downtown commercial district, the South Albion Road area, and the residential areas generally adjacent to and located on the north side of the CN rail. The initial development area also includes parts of the County of Cumberland to serve the new Cum berland Regional Hospital and the Sifto Salt plant (not highlighted on map).
Truro Initial Development Area
Includes core areas within the Town of Truro, such as the industrial park, the downtown commercial district, and the residential areas generally bounded by Willow Street to the west and Young Street to the east. The initial development area also includes parts of the County of Colchester adjacent to the town boundary and the Lafarge Cement Plant in Brookfield (not highlighted on map).
New Glasgow Initial Development Area
Includes core areas within the Town of New Glasgow, and the north end of the Town of Stellarton. Also includes parts of Pictou County such as the Mount W illiam Road area, the Michelin Canada Tire plant in Granton, and the Kimberly Clarke pulp mill at Abercrombie Point (not highlighted on map).
HRM - Initial Development Area
Includes core areas within the boundaries of the former City of Dartmouth, such as the Burnside Industrial Park, the Woodside Industrial Park, the downtown commercial district and the residential areas within the Circumferential Highway. The initial development area also includes core institutional customers on the Peninsula of Halifax, such as hospitals, universities, schools, com munity colleges, museums, National Defence establishments and surrounding residential areas.
East Hants Initial Development Area
Includes the Lantz area of the Municipality of the District of East Hants.
Port Hawkesbury/Point Tupper Initial Development Area
Includes the Point Tupper area of Richmond County and the eastern half of the Town of Port Hawkesbury in Inverness County.
Goldboro Initial Development Area
Includes the area surrounding the offshore pipeline landfall in Goldboro, Guysborough County.
Document : 82360 15
[36] The plan outlines a method to develop the “system backbone”8 before spreading into lower density areas with lower rates of consumption using a committed attachment rate of 35% for potential residential customers as one component of a feasibility test. The purpose of the feasibility test was outlined by Mr. Reeve as follows:
....the feasibility test essentially is a test that is quite common in other jurisdictions across this country regarding the expansion of infrastructure and essentially it sets out the parameters of how that infrastructure – the test to expand infrastructure and how it impacts other customers.
(Transcript, October 7, 2002, p. 31)
[37] The feasibility test is set out in Heritage’s application as follows:
The feasibility for expansion to a community or county is determined using a 25 year Net Present Value (“NPV”) test with a projected revenue to cost ratio of at least 1.0 or 100% by the end of the initial start-up period.
The goal of this economic test will be to demonstrate to the communities involved and the NSUARB that a project can only proceed if its NPV achieves a value of zero (0) in year twenty- five.
(Exhibit N-3, vol.1, s.6, p.24)
[38] The proposal made by Heritage is based on an initial development period of six years during which the investment is estimated to be $120 million. The return on investment is proposed to be 14% with a debt equity ratio of 55:45. Heritage indicated that it expects to pay interest at the rate of 8.75% on its debt during the initial five years of development.
[39] The financial plan treats the cost of gas as a “pass-through” to customers.
Heritage, will earn income from the transportation of gas and related services, not from the sale of natural gas which is intended to be sold at cost.
8Transcript, October 7, 2002, p.30
Document : 82360 16
[40] Heritage proposes to set tolls based upon a five year development plan. The rates would be levelized and would be designed to recover the five year total revenue requirement over this initial period. The rates could be adjusted periodically, however, as required to recover the revenue requirement over the five year period.
[41] In addition, a “deferral account mechanism” would be used to record any annual shortfall in achieving the revenue requirement or any annual revenue in excess of the revenue requirement. Heritage proposes that the deferral recovery period could be extended beyond the initial five year period to ensure stability of rates in the short term, and to provide Heritage with an opportunity to recover the shortfall over a reasonable period of time.9
[42] As set out above, Heritage does not intend to extend service to any area unless its feasibility test is met. The following exchange between Mr. Reeve and Board Counsel illustrates the proposed application of the feasibility test:
Q Okay. All right. Let's look at the feasibility test which is on pages 24 to 26 of the application. Just to be sure that I understand it, in order for a project that you're considering to meet the feasibility test, it has to satisfy two requirements. The first one is that the 25-year net present value must be not worse than zero.
A. That's correct.
Q. And that it has to have a revenue cost ratio of one after five years.
A. That's also correct.
Q. Now, that revenue cost ratio, does it have to in effect balance out at one at the end of five years, or does it mean you have to reach one not on a cumulative basis but on a one-year basis in year five?
A. The way the feasibility test works is we must reach one by year five.
Q. So in other words, you still may be at a loss position in terms of revenues and costs through the five-year period?
9Exhibit N-3, S. 6, p.25
Document : 82360 17
A. Throughout the five-year period?
Q. Yes.
A. That is -- that's possible, although I think really what we're talking about when we talk about the revenue cost ratio of one is that essentially you are very close to that when you start, it's just that that is the ultimate test by year five, you are at one. In some cases what we're saying is one customer class may be at .95, somebody may be at 1.05, and you're really trying to get to year five where everybody is at one.
Q. But the notion is that in terms of your operating costs over that five-year -- first five years of the project, you've broken even in the aggregate. Is that it?
A. The revenues cover the costs.
Q. Okay. And that -- on the cost side of that ratio, you've included your 14-percent ROE, or it would be in this feasibility test.
A. Yes, that's correct.
Q. Is it the experience of AltaGas and SaskEnergy that in a green field gas distribution project, you could generate an average ROE of 14 percent over the first five years of such a project?
A. I think certainly if you look at the model we use around how we invest in Saskatchewan, that basic premise is there, yes.
(Transcript, October 8, 2002, pp. 230-232)
3.2 Submissions - Intervenors
[43] The Province, in its closing submission, made the following general comment on
Heritage’s plans for service and the proposed feasibility test:
W hile the Province does support the proposal as a realistic model of greenfield developm ent, it wishes to provide the Board with comment on specific areas of the Application where modification may be appropriate.
The “Establish Market. Then Build” policy is implicitly cautious in design. Clearly a more aggressive development proposal would have been preferred by the Province. However, having regard to the development experience of the previous franchise holder and the realities of the development in New Brunswick, the Province accepts that the proposed approach is reasonable in the circumstances. (The Province, Closing Submissions, p.4)
[44] The Province’s closing submission specifically addressed the five year recovery period included in the feasibility test:
Document : 82360 18
Having submitted that the codification of a construction feasibility test, as a term and condition of any franchise award would be appropriate, it is necessary to turn to what the precise financial standard ought to be. Heritage Gas has submitted that a five (5) year aggregate revenue to aggregate cost (inclusive of the proposed 14% rate of return on equity), together with a twenty five (25) year net present value of zero is an appropriate threshold standard.
The Province does not support the use of a five (5) year “total cost to total revenue” test. It is submitted that using such a limited period of time ignores the realities of a greenfield market. Commensurate with the right to exclusively distribute natural gas in an area, must come an obligation upon the franchise holder to aggressively pursue development of the marketplace. The Province does not accept that a five (5) year test of aggregate revenue places sufficient incentives before the franchise holder to attempt to expand the breadth of the market, beyond those areas which would clearly have met a more limited 5 year total cost/revenue test. It is not in keeping with the required “long term view” which Heritage itself commented is required in the gas distribution business.9
The use of a five (5) year recovery places an unnecessarily steep hurdle, particularly when the test contemplates the full recovery of the Board allowed rate of return. W hile the Province accepts that the development of the greenfield area brings with it business and financial risks, these risks are mitigated to a large extent by only committing to construct the system is [sic] areas where Heritage Gas has obtained previous “customer commitment”.
. . .
The Province does not wish to see any franchise holder engage in construction of “uneconom ic infrastructure” as that concern was expressed by Mr. Clark.11 However, as stated above, the desire of Heritage Gas to be prudent, cautious and conservative in its build-out, comes at a cost which may be excessive when viewed in the context of the risk being assumed, and having regard to the exclusive twenty five year opportunity provided under the franchise.
Accordingly, the Province respectfully submits that this Board should impose a revised feasibility test, which would include a lengthened period of time under which projected revenues and costs are considered. A lengthened feasibility period, it is submitted, would represent a more even approach to market development; one which more fairly reflects the balancing of the interests of the franchise holder to not bear unnecessary risks of engaging in uneconomic capital construction, and the right of businesses and residents of Nova Scotia to be provided access to greater competition in the energy marketplace.
A lengthened feasibility test period would require that Heritage Gas take a longer term approach to system development and market penetration in a particular area. It would provide an incentive to Heritage Gas to actively market to ensure that the aggregate revenue requirements assumed in the feasibility test are met.
9Heritage Gas Application, Vol 1, Section 9, p1-13 11Hearing Transcript, Day 2, p. 222 (The Province, Closing Submissions, pp.11-12)
[45] Irving made the following submission with respect to Heritage’s plans for system build-out.
Document : 82360 19
Reduced to its most basic terms, the Heritage Gas application contains little substantial com mitment. The guiding principle of “establish market - then build” or “connect and burn” as it was variably referred to during the hearing is clear enough. The outstanding issue and concern to all interested parties should be how this policy will be put into effect and precisely what level of commitment is being made by Heritage Gas.
As IESL understands the proposal, during a preliminary 10 year “initial development period”, Heritage Gas has com mitted to servicing those areas reflected in its initial development plan (subject to local condition variations) provided a certain penetration factor is met. This penetration factor remains an elusive concept. The evidence given at the hearing would suggest that it is a function of volume, or of number of customer attachments, or of cost or, perhaps, all of the above.
IESL submits that this level of commitment (or non-commitment) is insufficient. Clearly, those customers/geographic areas contained in the “initial development areas” are the “best”, “most lucrative” or the “most cost-effectively connected” locations in the franchise area. IESL submits that should the Board see fit to grant Heritage Gas a franchise it should be on the condition of the construction of a minimum amount of infrastructure in the initial development area.
Heritage Gas has sought a distribution franchise, on the basis of a rate of return which contains a significant “greenfield risk premium” and yet Heritage Gas has assumed zero risk. If it does not achieve a penetration factor of its own design, it commits to building nothing.
With due respect to Heritage Gas, they seek to have their proverbial “cake and eat it too”. Heritage Gas should not be allowed to limit its commitment to construct infrastructure entirely to a pre-determined circumstance which ensures the viability of that portion of its system at the same time its financial structure contains a significantly increased rate of return to cover the uncertainties of the greenfield market.
IESL does not advocate an approach that was described at the hearing as the “if you build it, they will come” for the establishment of the “full distribution” network. However, IESL subm its that in the Nova Scotia greenfield market it will be necessary to “kick-start” the marketplace and develop at least some infrastructure to create a marketplace. This will be necessary to establish local expertise and introduce Nova Scotians to the choice of natural gas.
Unless there is some guarantee of a minimal system, gas marketers will not be attracted to the Nova Scotia marketplace. IESL submits it is unreasonable to expect a potential marketer to establish a presence in Nova Scotia with the expense and effort this involves, sign up customers on the basis that the infrastructure to them may or may not ever get built, and be left in limbo about whether the marketer should secure a gas supply to serve those customers provided Heritage Gas’ elusive penetration threshold is met. Unless there is som e minimal reasonable commitment of infrastructure development, competitive marketers are unlikely to be attracted to Nova Scotia and the expansion of the system to the “full development” stage will be delayed, likely significantly.
(Irving, Closing Submissions, pp. 12-14)
[46] WPS made the following observation with respect to Heritage’s approach:
Document : 82360 20
The application and model subm itted by Heritage, proposes that there is a customer commitment, a penetration analysis, customer connection, and then finally connect the customer in order to flow gas. W PS Energy is concerned that this model will be prohibitive to customer acquisitions and in turn, provide Heritage with a customer advantage as customers will be disenfranchised with marketers who attempt to execute agreements, but cannot provide specific datelines of when the customer can get connected to the pipeline. In addition, we believe this model exposes more risk to a marketer for they cannot hedge a customer’s gas load until they specifically secure a date from Heritage on when the customer will be connected. If a supplier hedges a load and that date is not meant [sic], both the customer and marketer are significantly impacted.
(WPS, Written Submission, p.2)
[47] Finally, Strait, in its final submission, stated that:
Heritage Gas have developed a Feasibility Test that they intend to use as a measure of economic viability when deciding whether or not they would roll out a portion of their system. They indicated throughout the hearing that the following acquisition rates in a service area would have to be present prior to moving forward with the roll out of a particular area of the system:
35% Residential Acquisition 50% Commercial Acquisition 70% Industrial Acquisition
Throughout the hearing, various questions were asked of the definition of the feasibility test and its usefulness in the model proposed by Heritage Gas. Questions surrounding the Bedford Basin and Halifax Peninsula helped focus the debate on this issue.
It was apparent from discussion that the proposed acquisition rates that made the model feasible were inaccurate and that the Feasibility Test being proposed by Heritage Gas had little or no use in determining the roll out plans of the distributor. Furthermore, the proposed Feasibility Test was another document that required Board approval causing a further delay in the roll out of the system.
The Feasibility Test coupled with the outright confusion surrounding the initial, full, and ultimate development periods have left a lot of us wondering where and whom they will actually be serving if awarded the franchise.
From the data presented we conclude that the Strait area, although Port Hawkesbury is mentioned in Year 4, would not see gas for at least ten years. By that time, the plans for the Strait Area will have reached full development. W e would not be surprised if Heritage Gas intends to concentrate its resources in the Halifax Regional Municipality, Truro and Amherst. We believe that, for the next ten years, these municipal units will receive preferential treatment and a corresponding disproportionate share of the SOEP Market Development Fund.
(Strait, Final Submission, pp. 16-17)
Document : 82360 21
3.3 Findings
[48] The Board recognizes that the economics must be sound if there is to be a successful gas distribution system in Nova Scotia.
[49] The Board has some concerns regarding the conservative nature of the plans for service proposed by Heritage. While the Board understands the logic of focusing on large
“anchor load” customers, it remains concerned that Heritage has projected a disappointingly low number of approximately 4,000 residential customers by the end of the 10 year development period.10 In view of the cautious approach suggested by Heritage, the Board believes that the strict nature of the feasibility test should be modified somewhat to encourage system expansion. The Board agrees with the submission by the Province that the revenue/cost ratio aspect of the feasibility test should be altered. Accordingly, the Board directs that the period over which the total cost to total revenue component of the feasibility test is applied be extended to seven years from five years.
[50] The Board expects Heritage to aggressively promote the use of natural gas in order to develop the market for gas to residential and small commercial customers as well as industrial and larger commercial users. The Board considers Heritage’s responsibility in this regard to be significant, especially so in light of the decision by the Province to allow a gas distributor to also sell gas to customers.
[51] Witnesses for Heritage appear to acknowledge the important marketing onus which falls on the distributor. Mr. Reeve stated that:
A. (Reeve) I think as a base, to start, it does. I m ean, quite clearly I think that's why there has been somewhat of a conservative approach, because, you know, quite clearly I think you can get a level of customer commitment that quite early can establish that backbone, and from there then you can let the system expand. You know, quite clearly I think we have a firm belief that if we get
10Transcript, October 8, 2002, p. 309
Document : 82360 22
out and market hard, we will be able to anchor this system with customer commitments. And so we won't have to worry about building it and hoping to connect customers. We believe we can market and get the commitment from customers to build the backbone of the infrastructure quickly. (Transcript, October 8, 2002, pp.221-222)
[52] Ron Clark, President and CEO of SaskEnergy, commented as follows:
We’re not interested in coming here and sort of sitting around. W e want to work hard to develop a customer base and put infrastructure in the ground, and if there’s some reason why we’re not doing there [sic], there has to be a very effective explanation for it, and I think it’s reasonable for the Board to ask us that.
(Transcript, October 8, 2002, p. 227)
[53] Heritage made the following commitment:
If Heritage is granted a franchise, it will then engage in an aggressive marketing campaign to build a market for its business. Co-ordinated with that marketing campaign will be the commencement of engineering so that infrastructure can be built as quickly as possible to ensure the rapid development of the system.
(Heritage, Post Hearing Written Submission, p. 55)
[54] In addition, the Board believes that, since Heritage makes no specific commitment to build all or part of its proposed distribution system, ongoing review by the
Board is warranted.
[55] The Board is also concerned with respect to the level of commitment from prospective residential and small commercial customers required by Heritage as part of its feasibility test. The Board understands from the evidence that Heritage defines customer commitment as a signed agreement to take service prior to conducting the feasibility test.11
The Province, in its closing submission, argues that requiring residential customers to enter into binding contracts may impose too high a hurdle with respect to the feasibility test, thus hampering all gas marketers and, ultimately, system roll-out. The Province also submits that,
11Transcript, October 7, 2002 p. 29
Document : 82360 23 for residential customers, any contractual commitment to take gas should be voidable at the option of the customer after 12 months if actual gas service has not begun by that time.
[56] The Board agrees with both of these submissions. The Board understands the concerns of the Province and marketers with respect to the requirement for a signed contract as an indication of customer commitment to take gas for the purposes of the feasibility test.
The Board also recognizes the legitimate need on the part of Heritage to obtain a meaningful and binding commitment from customers to take gas prior to putting pipe in the ground and the Board finds that a contract signed by residential customers is a reasonable requirement under these circumstances. For purposes of the feasibility test, however, it is the Board’s view that something less than a signed contract should be acceptable for prospective residential customers.
[57] With respect to the ongoing residential service contracts, the Board expects that the question of exit fees will be reviewed at the Tolls and Tariff’s proceeding.
[58] Further, while the Board accepts the concept of applying a feasibility test to determine whether a system should be constructed, the Board is not at all sure it understands the details of the criteria or how they will be applied. Accordingly, the Board directs that, as part of Heritage’s Tolls and Tariffs proceeding, Heritage is to provide a detailed description of the feasibility test and specific examples of its application to be available for discussion and comment by all parties at that time.
[59] The Board does not wish to second guess Heritage’s business decisions or micro-manage the company. However, should Heritage decide not to extend service to areas within its franchise where the feasibility test otherwise appears to be met, the Board reserves
Document : 82360 24 the right to review the decision of Heritage not to build and may order Heritage to extend service if it finds that it is justifiable to do so.
4.0 FINANCIAL CAPABILITY AND RELATED EXPERIENCE
[60] The relevant Section of the Act governing the Board’s responsibility in making a determination on the issue of financial capability and experience is set out below:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration......
(d) the financial capability of the applicant;
(e) related experience of the applicant in the delivery of gas;
4.1 Submissions - Applicant
[61] According to its evidence, Heritage is:
...a corporation, incorporated under the Canada Business Corporation Act, with its head office at Halifax Regional Municipality. It is owned by three shareholders being SaskEnergy International Incorporated (50.1%), Scotia Investments Limited (25%) and AltaGas Services Inc. (24.9%) or a controlled subsidiary or affiliate of one or m ore of them respectively.
(Exhibit N-3, Section 1, p.1)
[62] In its evidence Heritage states that:
The Heritage Gas owners are committed to meeting the costs associated with securing the natural gas distribution franchise rights for Nova Scotia. These costs are estimated to be in the range of two to three million dollars through the conclusion of the NSUARB hearing. These costs will be incorporated into the Heritage Gas capital rate base.
The following sections describe the previous franchise holder’s assets proposed to be acquired by Heritage Gas.
Upon receipt of the Franchise, Heritage Gas will immediately enter into negotiations for the purchase of the previous franchise holder’s physical assets as described in the NSUARB’S decision of February 26, 2002.
Document : 82360 25
SaskEnergy has held discussions with the previous franchise holder concerning the purchase of its remaining soft assets from the surrender process. These assets include engineering designs, drawings, GIS information and marketing information. (Exhibit N-3, Section 4, pp. 7-8)
[63] Further, Heritage confirms that:
The shareholders of Heritage Gas will fund all necessary capital to meet the anticipated development requirements. The Business Plan currently anticipates a total capital requirement in excess of $120 million over the initial 10 years.
Heritage Gas will raise additional capital if the market demands exceed the initial expectations of the Business Plan. A num ber of scenarios have been considered that would result in a more robust distribution company being developed over the initial 10 years.
The three shareholders have the commitment and wherewithal to raise the necessary capital to build the business of Heritage Gas.
(Exhibit N-3, Section 4, pp. 8-9)
[64] The financial capability of Heritage’s owners is set out as follows:
SaskEnergy derives its financial strength from the ownership and operation of a mature natural gas utility and from its status as a Saskatchewan Crown corporation. It has the ability to fund its share of the capital construction costs of this project should a franchise be granted. Necessary approvals are in place in regard to the expenditure of these monies.
Scotia Investments is a well known and well established Nova Scotian company. It has extensive holdings as set out at pages 3 to 6 of Section 4 of the Application. It has the capability and com mitment to fund the capital costs of this project.
AltaGas is a strong, financially stable com pany which also has the capability of providing the resources required to fund the capital costs of this project. The details of AltaGas’ financial capability are found in Heritage’s Application, Section 4, page 7.
(Heritage, Post Hearing Written Submission, p. 24)
[65] In terms of experience in building a distribution system and delivering gas to customers, Heritage submits that:
During the course of the hearing, there was little, if any, challenge to the ability of Heritage to operate a natural gas distribution system in the proposed franchise area.
. . .
More generally, SaskEnergy and AltaGas have provided to the Board, on a confidential basis, the various operating and other manuals which those companies have developed for their operations in Saskatchewan and Alberta. A review of those materials demonstrates that the owners of Heritage have the necessary experience and skills to operate a natural gas distribution com pany.
Document : 82360 26
Both SaskEnergy and AltaGas have indicated that they are more than prepared to provide that knowledge and expertise to Heritage.
Heritage therefore submits that it has, through its owners, the required experience to operate the natural gas delivery system proposed in its Application.
(Heritage, Post Hearing Written Submission, pp. 26-28)
4.2 Submissions - Intervenors
[66] No substantive concerns were expressed by Intervenors concerning the financial capability or related natural gas experience of Heritage.
4.3 Findings
[67] In the Board’s view, two of the three partners in Heritage have shown through the financial statements filed with the Board that they are financially stable entities with the ability to support this undertaking. These two partners currently own and operate viable distribution operations in other parts of Canada. Scotia Investments, a large, well known company based in Nova Scotia, did not file financial statements with the Board. In view of the financial strength of SaskEnergy and AltaGas, the Board finds that Heritage has met the regulatory requirement relating to financial capability and related experience.
5.0 FINANCIAL PLAN
5.1 Submissions - Applicant
[68] Heritage outlined the basic principles of its financial plan as follows:
The development of an economically viable gas distribution system is in the best interests of potential customers, the Province of Nova Scotia and the distributor. In doing so, balance must be struck between the costs borne by the customer, through service rates, and the opportunity for the distributor to earn a fair return on its investment.
Document : 82360 27
Heritage Gas is committed to the prudent and responsible development of the gas distribution system in its proposed franchise area. There is a clear understanding that the nature of the gas distribution business requires a long-term view from the distributor. However, in a greenfield market, the long-term view must be tempered by the significant effort and capital investment required to begin to bring natural gas service to the market.
Inherent in the business model is the recognition that even a prudent approach is not without risk to the distributor in a greenfield market. Up-front investment in market development, customer sign-up and the initial infrastructure build-out presents a far different level of investment risk than is faced by well established, mature distribution systems in Canada.
The Heritage Gas business model reflects an approach that is consistent with traditional cost-of- service principles found in many other jurisdictions in Canada. It is a recognition that customers must pay their appropriate allocation of the costs of providing service and the distributor must have the opportunity to earn a fair, risk adjusted return on the capital employed.
The overriding principle of the business model is that the resulting customer rate structure must produce competitive natural gas service costs versus existing fuels. Without a competitive rate structure, customers will be unable to justify economic conversions to natural gas. Simply stated, the business model must work in tandem with conversion economics to produce the number of customers, volumes and revenue base that are reflected in the pro forma Income Statement, Balance Sheet and Statement of Cash Flows. These ProForma Statements for the first ten years of operation are included in Appendix C.
The business model does not rely on significant deferral accounts or cross-generational allocation of costs. It is however based on the principle that the distributor should expect to earn a 14% rate of return on invested equity capital, on a simple average basis, over the first five years of operation. This will require rate levelization over the initial years of operation to achieve this result. This approach avoids the typical front-end loaded cost of service scenario in which the initial customers, generally speaking, pay higher rates than tomorrow’s customers. Subsequent to the five-year period, the business model is designed to produce a consistent level of return on equity of 14%.
Heritage Gas’s intended approach is to initially establish a five (5) year delivery service rate that is designed to recover the five (5) year total revenue requirem ent over the initial five (5) year period. In the early period of development this will result in Heritage Gas’s earnings, before the deficiency accrual, being less than the required fourteen (14%) percent return on equity. Earnings before the deficiency drawdown would be more than the revenue requirements in the latter part of the five (5) year period.
Variations from the underlying business plan would be approached in the following ways. First, the initial five (5) year rate may be adjusted periodically as required to recover the five (5) year revenue requirement over the five (5) year period. Secondly, a deferral account mechanism will be used to record any annual shortfall in achieving the revenue requirement or any annual revenue in excess of the revenue requirement. If required, the deficiency recovery period will be extended beyond the initial five (5) year period to ensure stability of delivery rates in the short term but to provide Heritage Gas with the opportunity to recover the return shortfall over a reasonable period of time. Heritage Gas would advise the NSUARB of any adjustments required to the approved delivery service rate or to the deficiency/recovery period.
(Exhibit N-3, Section 9, pp.1-3)
Document : 82360 28
[69] As noted above, Heritage is requesting approval of a deferral account mechanism, a debt equity ratio of 55:45, and a 14% rate of return on equity (ROE) over the first five years of operation.
[70] Heritage did not address the specific details of the operation of the proposed deferral account in its application.12 Under cross-examination by Counsel for Irving, Mr. Reeve made the following comment with respect to the details of the deferral account:
I would expect that those are things that we would deal with in a rate application where we would talk about the specific mechanisms of the deferral account, Mr. Chair.
(Transcript, October 10, 2002, p. 630)
[71] With respect to the requested ROE of 14%, Heritage’s expert witness, Kathleen
McShane, Senior Vice-President and Senior Consultant with Foster & Associates, a U.S. based consulting firm, testified that, in her opinion, a 14% ROE is reasonable. The following table shows the development of the proposed rate of return:
“Risk Adjusted”
Return on Equity in %
Government of Canada Long Bond Rate 5.75 - 6.00
Utility Equity Risk Premium 3.75 - 5.50
9.50-11.50
Greenfield Risk Premium 2.50 - 4.50
Risk Adjusted Return on Equity 14.00%
(Exhibit N-3, Section 9, p.11)
12Transcript, October 10, 2002, p. 629
Document : 82360 29
[72] Under questioning by Board Counsel, Ms. McShane explained the process she followed in determining whether 14% is an appropriate ROE for Heritage in this greenfield environment.
A. So, you have a base of market data for mature utilities which are publicly traded from which to make a relatively accurate estimate of the required rate of return on common equity. So, the base numbers here represent on the low end simply what the allowed returns have been in Canada. On the high end they represent effectively two things. One is the average allowed return in the US, which from the point of view of a potential investor would represent a perspective on the return available from an alternative investment in a mature utility, and it also represents, in my view, a relatively good estimate of what the required return for a mature Canadian utility is based on the types of analyses that I would normally do for a mature utility. The premium above the returns for mature utilities is more of a judgm ental exercise inasmuch as there are no market data available for greenfield utilities. What we have are some more indirect measures of what the premium might be by reference to, for example, what other greenfield utilities are able to earn and by reference to what kind of a return I might be able to expect in -- for example, if I were looking at a portfolio of equities, what would I expect to earn from a portfolio of average-risk equities, would I require anything less or more from this kind of an investment? That's the type of information I would look at to determine what the differential would be between the mature utility return and what would be required to make an investm ent like this in a greenfield utility.
Q. And your conclusion with respect to that issue is that there's a range of between 250 basis points and 450 basis points?
A. Depending on what -- to what number you're adding that. In my opinion, if you -- you can't simply take the lower end of the range and add it to the 9 ½ percent and say that, "W ell, this is a return that would be reflective of an equity requirement in a greenfield utility," because if you simply add those two numbers together, you're at a 12 percent return which there are a number of mature utilities in the US that I could invest in with stronger capital structures than I'm looking at here that I could get a 12 percent return in.
(Transcript, October 11, 2002, pp. 834-836)
[73] With respect to the proposed capital structure, Ms. McShane stated that:
In my opinion, there are different capital structures that might be just as appropriate as the 45 percent that has been proposed. Going back to first principles, there is a relationship between the rate of return on common equity and the level of capital -- of common equity. The common equity -- let me back up and make sure I said that correctly. There is a relationship between the level of common equity and the appropriate return on common equity. If the company had chosen to apply for a somewhat thicker common equity ratio, that certainly would have been, in my mind, appropriate. The typical common equity ratio for an LDC, a mature LDC, is around 50 percent in the US. Enbridge Gas, New Brunswick, has an allowed common equity ratio of 50 percent. There are a num ber of mature small utilities in Ontario which have allowed common equity ratios of 50 percent. There are both electric distribution
Document : 82360 30
companies and a mature small LDC. If the company had chosen to have a somewhat thicker common equity ratio, then the offset to that would have been, in my view, a somewhat lower common equity return. But the combination of the 45 percent common equity ratio and the 14 percent return on equity is, in my view, reasonable, and is, at the same time, virtually identical to the combination that was approved in New Brunswick, which was a 13 percent return on common equity and a 50 percent common equity ratio.
(Transcript, October 11, 2002, pp. 862-863)
[74] Heritage made the following comments with respect to “risk”:
There was discussion during the course of the hearing of the concept of "risk". Ms. McShane took a view of "risk" from the perspective of a potential investor. Such an investor might have considerably less "risk" should they choose to invest in a "bundle of equities" which might provide them only a marginally lesser amount of return with substantially less risk than an investment in a greenfield venture of this type.
A second manner in which to analyze the degree of risk inherent in this project is to consider the number of applicants or, more particularly, the lack of applicants, who have come forward seeking a natural gas distribution franchise in Nova Scotia. It is also significant that the previous franchise holder chose, for various reasons, to surrender its franchise. This would appear to be a highly unusual situation and one which highlights some of the difficulties inherent in the establishment and development of this greenfield market.
A final method of analysis of the risk involved in this project is to examine the particular approach adopted by Heritage. There is no question that it will be market driven and will not rely upon a "field of dream s" approach. The infrastructure will not be built in the hope that "they will come".
However, there is still substantial risk to Heritage. Included in that risk are the not inconsiderable costs of this proceeding. If Heritage is granted a franchise, it will then engage in an aggressive marketing campaign to build a market for its business. Co-ordinated with that marketing campaign will be the commencement of engineering so that infrastructure can be built as quickly as possible to ensure the rapid development of the system. While these may be referred to as so-called "soft" costs, they are substantial costs nonetheless. Moreover, it is of interest to note the experience of the previous franchise holder who was able to construct relatively little infrastructure and secure no distribution revenue, but is still reported to have incurred costs in the neighbourhood of $50 million.
As previously noted, Heritage is in discussions with Sempra for the purchase of both its "hard" and "soft" assets in Nova Scotia. If those discussions are successfully concluded, Heritage will incur a significant cost - prior to signing up its first customers.
The business plan of Heritage requires it to persuade consumers of other energy sources to convert to natural gas. There is an inherent "conversion risk" to be borne by Heritage - i.e. consumers may not convert to natural gas at the rate or in the number contemplated by the business model. The rate of conversions may be impacted by factors totally outside the control of Heritage such as the relative price of natural gas as compared to fuel oil. Therefore the business plan of Heritage, while prudent, is still not without considerable risk.
In light of the foregoing, Heritage submits that a rate of return of 14% is appropriate within the context of this marketplace and submits that its proposed capital structure is reflective of the nature of the Nova Scotia market.
Document : 82360 31
(Heritage, Post Hearing Written Submission, pp. 54-56)
5.2 Submissions - Intervenors
[75] The Province indicated, in its closing submission, that it believes Heritage’s proposed 8.75% debt cost during the first three to five years is reasonable. The Province also indicated that after reviewing Undertaking U-23, which contained a list of approved common equity ratios for Canadian local gas distribution companies (LDC’s), it was satisfied that the proposed debt equity ratio is “...generally consistent with greenfield LDC’s throughout the country.”13 The Province also notes that it has no conceptual objection to an initial deferral account. However, the Province does take issue with the proposed 14% ROE, noting that the approved ROE in New Brunswick is 13%, and also submits that:
The Province of Nova Scotia maintains that much has been done through regulatory change to reduce the overall business risk to a natural gas franchise distributor in this Province. For its part as well, Heritage Gas has taken significant steps towards reducing its “inherent risk”. In support of this assertion, the Province would refer this Board to:
a. The “Establish market. Then build” principle where Heritage Gas will only build infrastructure to “identified and committed markets”;
b. The initial targeting of commercial-institutional and industrial customers, which in the words of the company was designed to “ensure the financial success of Heritage Gas”;
c. The establishment of a “feasibility test” designed to ensure that build out of the system (even where there are committed customers) only occurs within areas of proven economic viability;
d. The commitment of the Province of Nova Scotia to direct Fourteen Million ($14,000,000.00) Dollars to assist in market development in all provincial franchise areas.
The Province acknowledges that even with the adoption of the foregoing principles and factors within the Heritage Gas business plan, there remains some degree of “inherent risk”. However by its own evidence, Heritage Gas has referred to its application as “prudent”, “conservative”,
13The Province, Closing Submissions, p. 18
Document : 82360 32
“sensible” and “sustainable”. The Province would also note that all of these references to the business plan were made by the applicant without the specific knowledge of what, if any, access their potential customers may have to the Gas Market Development Fund. As was acknowledged during oral evidence, a contribution to overall market development, in the provincial franchise areas, of $14 million can only be characterized as substantial. On this basis alone, the Province of Nova Scotia submits that a return on equity in the order of 14% exceeds the reasonable greenfield risk premium adjusted rate of return required.
Furthermore, given the direct effect of the actual equity return on the burner tip price of gas, and ultimately the market penetration rates which it will draw, the Province submits that the Board must be cautious in its approval of a significant greenfield risk premium on equity. Clearly, at some point in time, adjusting the equity returns for the associated risk (due to the unknown market take up) becomes a “vicious circle” whereby further increasing the equity return to com pensate for the unknown market penetration only serves to render the final product offering less attractive to customers.
Having regard to all of the foregoing, the Province respectfully submits that an appropriate rate of return on shareholder equity for the initial five year period of the Heritage Gas franchise is 13%. Heritage Gas confirmed that a five (5) year approved rate of return was acceptable and it would be appropriate for the Board to review the rate of return at the conclusion of that period. This comment was made by Mr. Dean Reeve in his examination by Commissioner Harris:
Q. Yeah. I guess I’m wondering if there’s any implicit regulatory compact, so to speak, between us as the regulator and you as the franchisee, if you’re successful, that the rate of return continue at that level for some period of time.
A. (Reeve) No. I think that, in fairness, Mr. Harris, we’ve asked for that rate over the first five years and at that point I think it would be reasonable to sit down and see whether that’s still appropriate, whether you’d want to – the Board would want to incentifize [sic] us by taking some incentive based approach and saying , look, we think you can do some things better. The customer can win, the com pany can win. That’s certainly the case, I think, in Alberta. And so there might be another – a number of mechanisms or reconsiderations that may be appropriate then. I wouldn’t dismiss them at all.
(The Province, Closing Submissions, pp. 21-23 emphasis added)
[2] COHA, in its final submission, states that:
W hile COHA-NS recognizes that it is beyond the power of the Board to deny Heritage Gas access to the Fund, it is within the power of the Board to deny Heritage Gas’ requested 14% rate of return, a return that includes a “risk prem ium”. The risk premium is included despite the fact that the Nova Scotia government is contributing $14 million toward conversions at no cost to Heritage Gas. This is also in spite of the fact that Heritage Gas will not lay a metre of pipe nor flow a gigajoule of gas without firm, signed commitments from customers, customers whom they will penalize if they ultimately decide not to use gas or choose to leave the system because they received poor service. COHA-NS respectfully requests that the Board deny Heritage Gas’ request for a 14% return.
(COHA, Written Brief, p. 2)
Document : 82360 33
[3] Strait, in its final submission, also takes issue with the proposed 14% ROE.14
5.3 Findings
[4] The Board finds that the proposed debt equity ratio of 55:45, and the proposed
8.75% for the cost of debt, are reasonable and approves them as proposed. The Board has some concerns regarding the details surrounding the nature of the proposed deferral account.
It is unclear to the Board, even after a review of the evidence, which items are included in the deferral account for subsequent recovery from ratepayers. In fairness, Heritage acknowledged that its description of the deferral account was quite general and that details would be worked out in a future proceeding.
[5] The Board recognizes that Heritage has proposed a traditional cost of service model. The use of a deferral account is, evidently, not uncommon in other Canadian jurisdictions.
[6] The Board is not opposed, in principle, to the establishment of a deferral account. However, it does believe that this issue would be more appropriately dealt with at the Tolls and Tariffs hearing at which time Heritage would be expected to provide a detailed explanation of those costs proposed for inclusion; the manner in which the account would operate; the term of the deferral account; and other issues relating to the account.
[7] The Board has carefully reviewed the evidence presented by Heritage in support of the proposed 14% ROE. The Board finds that, on balance, the proposed rate is too high.
14Strait, Final Submission, p. 20
Document : 82360 34
[8] The Board certainly recognizes that there is significant risk in developing a natural gas distribution system in a greenfield environment. The Board believes that, in framing its application, Heritage has taken every opportunity to minimize this risk. The deferral account reduces Heritage’s risk as does the application of the feasibility test. Heritage provides no assurance that it will build any part of its system, including its “base plan”, without customer commitments to take gas. As noted during the hearing there are several terms used to describe the build-out of the system. They include initial system, gas delivery backbone, base system, initial development phase, etc. They all have a common denominator - without specific customer commitment, the system, however it is described, will not be built.
[9] In addition to the steps taken by Heritage to insulate itself from risk, the amendments to the Act and the GIC Regulations further lower the risk to a distributor.
Heritage acknowledges that the ability to bundle gas sales with delivery is an important change in this regard. In addition, the decision by the Province to make $14 million available to assist with customer conversions to natural gas from existing fuel sources reduces the risk involved in this venture.
[10] The Board believes that a 13% ROE is more reasonable than the requested 14% in these circumstances and, accordingly, reduces the ROE to 13%. The Board notes that the approved ROE and debt equity ratio will be subject to review at the conclusion of the five year initial period in any event and possibly earlier should circumstances warrant.
Document : 82360 35
6.0 SOCIO-ECONOMIC IMPACT STATEMENT AND BENEFITS PLAN
[11] The relevant sections of the GIC Regulations governing the Board’s responsibility with respect to the socio-economic impact statements and benefits plans are set out below.
Franchise evaluation 5 Subject to Section 6, the Board shall not grant a franchise over an area unless
(c)the applicant has submitted to the Board a Socio-Economic Im pact Statement that shall include
(i) a benefits plan, together with a written undertaking that if the applicant is granted a franchise, the applicant will take all reasonable measures to implement the benefits plan,
(ii) evidence that the applicant is fully aware of any significant socio-economic effects of the proposed franchise, has measures in place to mitigate adverse socio-economic impacts and prom ote positive outcomes, and is committed to carrying out those measures in order to ensure that the franchise benefits the people directly affected by it with minimal disturbance to desirable aspects of their way of life,
(iii) the probable benefits of the construction and operation of the delivery system, and
(iv) the nature and extent of the impact of the sale and consumption of natural gas within the proposed franchise area;
(d) the benefits plan has been approved by the Board;
(e) the applicant has provided commitments satisfactory to the Board to encourage competition among agents, gas marketers and brokers in the sale of gas within the proposed franchise area by specifying,
(i) in a code of conduct filed with the Board, the steps the applicant proposes to take to eliminate any undue competitive advantage as a result of its being a bundled service provider,
(ii) the availability to all gas marketers of detailed market information including names, addresses and telephone numbers of customers and potential customers in the proposed franchise area, and
(iii) information relating to the existing distribution system and such other information, including anticipated construction and build-out plans, as may be determined by the Board;
(ea) where the applicant is a public utility as defined in the Public Utilities Act, the applicant can demonstrate to the Board how it shall promote competition with respect to the energy products it distributes; and
(f) the applicant has provided such further information as the Board determines.
Document : 82360 36
6 The Board may grant a franchise without the applicant submitting a Socio-Economic Impact Statem ent, a benefits plan, or both if
(a) the gas delivery system to which the application relates is less than 5 km long;
(b) the franchise to which the application relates belongs to a class of franchise exempted from the provisions of these regulations pursuant to Section 10;
(c) the application is made pursuant to Section 10 of the Act; or
(d) in the opinion of the Board, the application is for a minor amendment to a franchise.
7 (1) The Board shall not approve a benefits plan unless the plan provides that
(a) the applicant will establish in the Province an office where decisions are made at a level of authority that the Board considers appropriate;
(b) the applicant and its contractors shall train and employ persons residing in the Province unless the applicant can demonstrate that all reasonable efforts to employ and train persons residing in Nova Scotia have been explored and exhausted requiring the recruitment and hiring of persons residing outside the Province;
(c) where the Board considers appropriate, the applicant will carry out a program and make expenditures for the promotion of education and training in the Province;
(d) the applicant and its contractors will contract for services to be provided from within the Province and procure goods manufactured in the Province, where those services and goods are competitive in terms of fair market price, quality, performance and delivery;
(e) the majority of the applicant’s Board of Directors are residents of Nova Scotia; and
(f) if the applicant is not a municipality, residents of Nova Scotia shall have a meaningful and significant opportunity to participate in the ownership of the applicant by the end of the tenth year of the franchise.
(2) Subject to subsection (1), the Board may approve a benefits plan if, in the Board’s opinion, it would be in the public interest to do so.
(3) The Board may make the approval of a benefits plan subject to such terms and conditions as are specified by the Board at the time the benefits plan is approved.
6.1 Submissions - Applicant
[12] Heritage Gas commissioned Gardner Pinfold Consulting Economists Limited
(Gardner Pinfold) to provide an independent assessment of the socio-economic benefits which
Document : 82360 37 would result from Heritage’s proposed natural gas distribution system. The study (Exhibit N-3,
Volume 2, Appendix D) concludes that:
The Heritage Gas proposal will have a generally positive impact. Achieving this impact hinges on the ability of the company to build and operate the system in a manner consistent with market principles.
The Heritage Gas proposal will provide a range of supply and employment opportunities for Nova Scotians during system development, and contribute to diversity of energy supply during operations. Adverse impacts during system development will be minor, generally ones associated with traffic congestion and construction noise in an urban environment. Heritage Gas contractors will minimize these through adoption of industry best practices.
Among the impact highlights during the initial development phase:
•An estimated 75% of total development expenditures ($116.3 million) is met by goods and services supplied by Nova Scotian companies and individuals; •An increase in provincial GDP of $102 million; •An increase of 1,230 person-years of employment in Nova Scotia; •An increase in $41 million in provincial and federal tax revenues in Nova Scotia; •Constraints on land use and nuisance arising from construction are minor and temporary in most cases; compensation will be provided where land rights are acquired by Heritage Gas.
Among the impacts arising from operations during the initial development phase:
•An estimated 80% of annual operating expenditures ($5.7 million) is met by goods and services supplied by Nova Scotian companies and individuals; •Annual wages and salaries in Nova Scotia rise to $4.1 million by year 10; •Savings arising from lower energy spending by customers reaches $15-16 million annually (cumulative total of about $120 million by year 10); •Greater inter-fuel competition benefits all energy consumers; some potential for job losses as natural gas displaces fuel oil;
•Environmental benefits arising from reduced SO2, CO2 and NOx emissions, and also reduced risk of oil spills as natural gas market share increases; •Minor constraints on land use arising from Heritage Gas service personnel crossing land to conduct inspections and hook-up customers.
(Exhibit N-3, Vol. 2, App. D, p.i)
[13] Heritage has also developed an eight part Nova Scotia benefits plan. The plan deals with the following topics:
1. Procurement Process- “Buy Nova Scotia” Commitment 2. Supplier/Dealer Development 3. Capability Transfer 4. Workforce Training
Document : 82360 38
5. Community Involvement 6. Corporate Leadership 7. Research and Development 8. Reporting
(Exhibit N-3, Vol. 1, S.7, p.2)
[14] Heritage commits to a “Buy Nova Scotia” approach to procurement and estimates that Nova Scotia content will comprise the vast majority of purchases. Formal tenders will be called for purchases over $50,000. Heritage intends to adopt successful
SaskEnergy practices which encourage local purchasing and the development of supplier/dealer networks. Heritage initially plans to utilize the knowledge and expertise of its partners to develop the business. The President of Heritage will be “a Nova Scotia hire”15 and
Heritage estimates that within five years all the core staff will be Nova Scotia residents.16
6.2 Submissions - Intervenors
[15] COHA, in its final submission, noted that:
During cross-examination, the applicants, through their evidence, suggested that their primary interest is in servicing the most lucrative and high-density markets. Presumably, Nova Scotians are looking to have a natural gas distribution and marketing company who is interested in serving all Nova Scotians. If public policy dictates that the benefits of natural gas should be available to all residents how does the applicant’s business plans accomplish this objective? While there may be short-term benefits in the construction phase, the long-term socio-economic benefit plan proposed by Heritage Gas is weak and provides no clear long-term benefits in the operational phase. It is important to note that this hearing is about achieving a lasting benefit for the people of Nova Scotia, not the applicants.
(COHA, Written Brief, p. 2)
15Exhibit N-3, Vol. 1, S.6, p.5
16Transcript, October 18, 2002, pp. 1887-1894
Document : 82360 39
[16] The Province asserts that the Board should require Heritage to meet certain reporting requirements:
The Province subm its, it would be appropriate in this instance, given the planned reliance upon a Shared Services Agreement, that the Board impose a further condition upon Heritage Gas requiring regular and ongoing reports detailing local procurement of goods and services during the initial years of system development. From these reports the Board will be in a position to respond to any material deviations from the projected Nova Scotia content estimates contained at Table IV-4 of the Heritage Gas Socio-Economic Impact Assessment.
. . .
In relation to supplier development, the Province would respectfully request that the Board require Heritage Gas to detail the pro-active steps taken to encourage supplier development in Nova Scotia in their required six month benefits plan reports.
(The Province, Closing Submissions, p. 28)
6.3 Findings
[17] The Board is satisfied that the socio-economic impact statement and benefits plan presented by Heritage satisfies the requirements of the GIC Regulations. The Board agrees with the points raised by the Province with respect to compliance reporting to improve accountability and transparency. Accordingly, as part of the reporting required by s. 9 of the
GIC Regulations, Heritage shall:
(a) provide details of local procurement of goods and services during the initial years of system development; and
(b) set out the specific measures taken to encourage supplier development in Nova Scotia.
[18] The Board intends to review with the Department of Energy the process by which these reports are analyzed with a view to having department staff perform this function and report the results of their analysis to the Board. This practice was followed in analyzing
Document : 82360 40 benefits reports filed by the previous franchise holder, and in the Board’s view, was a helpful arrangement.
7.0 CONCLUSIONS - HERITAGE
[19] After careful review of the evidence and for the reasons given above, the Board has determined that, subject to the conditions noted, it is appropriate to grant to Heritage a full regulation class franchise for a period of 25 years, subject to the approval of the Governor in
Council. The franchise area will consist of five of the eight areas applied for by Heritage and is more specifically described as Cumberland, Colchester, Pictou and Halifax Counties, the
Municipality of the District of East Hants and the Goldboro area of Guysbourough County.
[20] For reasons which are noted in the following section, the Board has approved, in principle, the grant of a franchise to Strait and the Board has included Inverness, Richmond and Guysborough Counties (excluding Goldboro) in Strait’s franchise area rather than
Heritage’s franchise area.
Document : 82360 41
PART THREE
APPLICATION BY STRAIT AREA GAS CORPORATION
8.0 EXISTENCE OF MARKETS
[21] The relevant Section of the Act governing the Board’s responsibility in making a determination on the issue of the existence of markets is as follows:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(a) the existence of m arkets, actual or potential;
8.1 Submissions - Applicant
[22] Strait, in its application (Exhibit N-10), outlined the market potential for natural gas in its proposed franchise area. Strait indicated that the number of existing potential customers was identified by using municipal water records (for Port Hawkesbury and
Mulgrave), and also through field counts, telephone interviews, Statistics Canada information and other available information.
[23] Strait states that:
Strait Area Gas system intends to provide access to natural gas to a majority of the existing residents and business in the franchise area within 5 years provided the economics of the roll out remain positive. The system will continue to expand based on a positive economic analysis of serving new customers. Proceeds from the system will be used to stim ulate economic development, to expand the system and to encourage conversions.
It is anticipated that the system will have approximately 350 customers within five years and almost 1500 by Year 25. Customer acquisition figures and total anticipated loads are shown in Table 1. Loads of less than 500 gigajoules (GJ) per year are grouped as “residential type”. There are two existing loads greater than 10,000 GJ but less than 100,000 GJ per year. The remainder of the loads fall within 500 to 10,000 GJ per year.
(Exhibit N-10, p.5)
Document : 82360 42
[24] Strait also factored new construction into its model assuming growth levels experienced over the past five years. Growth assumptions are as follows:
Housing starts in each community have been fairly consistent over the past five years. As the cyclical trends of housing and business starts is difficult to accurately predict, a constant growth rate was assumed. Proposed subdivision plans and economic development estimates were considered in the development of these numbers, as was the traditional industrial-based economy of the area.
An annual growth rate of 15 homes, 2 small businesses and 2 larger businesses was used for Port Hawkesbury. Growth rates of 3 homes per year, 1 small business every two years and 1 larger business every 5 years was used for Mulgrave. Growth rates of 3 homes per year, 1 small business every three years and 1 larger business every seven years was used for Port Hastings.
It was assum ed that 1 large com mercial/sm all industrial load would be added every ten years in both Port Hawkesbury and Port Hastings and 1 every seven years in Mulgrave.
(Exhibit N-10, p.6)
[25] Strait indicated in its application17 that no estimate was made of the market in
Auld’s Cove as expansion of the system to Antigonish County will only occur if economically feasible and this area is not expected to be served in the short term. Similarly, potential customers in Point Tupper were not included as “...the load is not significant. The basic infrastructure through Point Tupper is required anyway and customer connections will be as requested.”18
[26] Strait’s plan includes service to a proposed energy park in Mulgrave and anticipated expansion of port facilities in the Strait of Canso area. While witnesses for Strait gave evidence of potential for significant growth in high volume customers, the financial model only reflects one - a new 15 to 20 megawatt (MW) combined cycle generation facility in year
3, to be located in the proposed energy park. Strait indicated in its evidence that:
17Exhibit N-10, p.5
18Exhibit N-10, p.5
Document : 82360 43
...existing funds like the Nova Scotia Market Development Fund will be requested to lower the overall delivery price to the consumer.
(Exhibit N-10, p.9)
8.2 Submissions - Intervenors
[27] Heritage argues that while it believes that:
...a viable natural gas distribution system can be developed in the Strait of Canso area, it does not appear that the potential m arket proposed to be served by SAG either currently exists or is likely to exist in the future.
The significance of the potential “co-generation” or “combined cycle” facility (“the co-generation facility”) to be located in the “Mulgrave Energy Park” will be discussed further below.
. . .
In summary on this point, while Heritage believes that there is a potential market for natural gas distribution in the Strait of Canso area, the financial model of SAG requires, in order to be viable, expansion which is unlikely to occur. As such, the economic feasibility of the proposal must be seriously questioned.
(Heritage, Post Hearing Written Submission, pp. 76-79)
[28] The Province, in its closing submission, also emphasized Strait’s reliance on the gas to be consumed by the proposed combined cycle generation facility.
The filed evidence of Strait Area Gas indicates that there are presently 12 identified and existing large commercial customers within the franchise area. Strait Area Gas submits that this number will increase by 8, or a factor of 67% (over the first five years of the franchise). The anticipated large commercial customers are on average projected to consume 3,170 Gigajoules per year. Strait Area Gas also projects the addition of one “extraordinary commercial” customer coming on stream in year 3 consuming on average 1,140,000 Gigajoules per year. This is a combined cycle facility which Strait Area Gas has acknowledged is presently merely a concept for the yet to be developed Mulgrave Industrial Park. Of particular concern to the Province of Nova Scotia is the overall significance attached to this proposed combined cycle facility (at year 5, representing 90.5% of the total cumulative load of the system). This projection was made, notwithstanding an acknowledgment by Strait Area Gas that the proposed facility has not yet moved beyond the “discussion stage”.
. . .
In response to Nova Scotia Power IR No. 4, Strait Area Gas responded to the Interrogatory “What markets would the plant serve?” with the answer “Various market opportunities”. Under cross- examination, Strait Area Gas acknowledged that one of the most likely markets of the combined cycle plant output, would be other industries located in the Mulgrave Industrial Park. In relation to the proposed utilization of the combined cycle output, the following exchange took place:
Document : 82360 44
Q: So, the concept of the plan is that this co-generation [sic] facility will be built to serve other industries in the park?
A: (Murray) Yes, it will.
Q: Okay. But just so I’m clear, today there is no park and there are no other industries?
A: (Murray) We have been in discussions with other industries who have expressed an interest in the combined cycle plant. However, there is no park. You are correct.
Q: Right. And no other potential loads?
A: (Murray) As of now, no.
Pursuant to paragraphs 8(2)(a) and (c), this Board is required to take into consideration the existence of markets, actual and potential, and the economic feasibility of the proposed gas distribution system. Respectfully, the Province would submit that having regard to the filed application of Strait Area Gas, and the inclusion of the proposed combined cycle facility, there is little if any evidence before this Board which could lead it to reasonably believe that the projected combined cycle load will materialize as contemplated within the application. Moreover, Strait Area Gas has acknowledged the obvious, namely that the removal of this potential load from its business plan would be both material and fatal. This is acknowledged in an exchange with Mr. Phillip Read, financial advisor to Strait Area Gas:
Q: ...And looking at that Notice to Reader, it contains the statement that:
The selections of assumptions requires the exercise of judgement and is subject to uncertainty and the changes in the economy and other circumstances may have on future events. Variations of such assumptions could significantly effect the projections to the extent that the assumed events do not materialize. The outcome may vary substantially from the project.
And I believe it’s Mr. Read then indicates he’s not expressing any opinion concerning the credibility of the assumptions. I take it that, as indicated previously, clearly one of those assumptions is the co-generation plant?
A: (Read) The assumption of load use of the million plus – I have – “Gigajoules” I think is the right word – is a critical component.
Q: Right. And the failure of that plant to materialize would have a significant impact on these particular statements?
A: (Read) The failure of that load would have a critical impact. If the load is replaced through another avenue, whether it be a co-generation plant or another user or group of users that can replace that load number or equivalent.
Q: Sure. But if that load does not materialize, it would have, as you characterize it, a critical impact?
Document : 82360 45
A: (Read) That’s correct.
Q: Would it be overstating it to say it would have a fatal impact?
A: (Read) That is correct.
Q: It would?
A: (Read) That’s correct.(emphasis added)
Having regard to the foregoing, the Province respectfully submits that the scant evidence before the Board with respect to the likely materialization of the combined cycle plant, together with its acknowledged critical impact on the overall business model, necessarily requires that:
i. Strait Area Gas provide further evidence as to the likely development of this facility; or; ii. the business plan be evaluated without the affects of the combined cycle costs and revenues.
The Province does acknowledge however, that during oral evidence, the proposed BOOT operator did indicate, that he would be prepared to continue discussions surrounding possible construction of the system absent this combined cycle load.
(The Province, Closing Subm issions, pp. 34-37, em phasis in original)
8.3 Findings
[30] The Board is concerned that Strait’s application relies heavily on the development of a combined cycle generation facility which may or may not materialize in the future. It would be imprudent, in view of the requirements of the Act and GIC Regulations, to conclude that Strait has complied with the requirement to demonstrate the existence of markets by virtue of the business model which has been presented.
[31] However, it is reasonable, in the Board’s view, to conclude that a viable market for natural gas may well exist in the Strait area. Under cross-examination by the Province, Ken
Teague, of ARB Incorporated (“ARB”), a California based pipeline construction company which is a prospective Build, Own, Operate and Transfer (“BOOT”) operator, testified that the combined cycle generating plant was not necessarily essential to the distribution of gas in the
Document : 82360 46
Strait area:
Q. I'll ask you a question, Mr. Teague, in relation to the application you have here. And you've -- I take it you've had an opportunity to review the assumptions that have been made in this business model.
A. Yes, sir.
Q. Particularly with respect to the bringing on of an extraordinary load in extraordinarily large customer and hence extra large load in year 3, if I ask you in your opinion as a potential BOOT operator of this system, would you be prepared to undertake commitment of -- would you be prepared to undertake a rollout of this franchise without ensuring that extraordinarily large customer was secured and ready to be brought on in year 3?
A. The extra -- the customer, as it stands right now, would have a specific line going out there toward him that would allow us to serve other residential customers going out that way. If that customer was not guaranteed he's going to be there, we would not build that portion of the line. Now, therefore, the cost of the system would go down and if you're saying, hey, is there a plan B that if this customer doesn't come in and, therefore, you could continue to serve the majority of the town, we don't have those numbers today. We don't have that business model and business plan put together. Yes, I think there is a potential here that we can continue to serve a group, but there's not -- there is another group that would not get served.
Q. But you've had an opportunity to look at the assum ptions in this business -- sorry. You've had an opportunity to look at the assumptions in this business model and the projected loads.
A. Yes.
Q. Are you stating that, as a potential BOOT operator, you will be prepared to at least review the possible rollout if that extraordinary load in year 3 wasn't committed and in place?
A. Yes.
Q. The system may be modified, but it wouldn't preclude development.
A. It wouldn't preclude development to the communities.
Q. And I take it when you're giving me that response, you're having regard to the effect that that will have on the bottom line, that you still believe there would be sufficient operating cash flows available to repay the BOOT fee.
A. To be reviewed, yes. We're willing to review that and go through those process.
A. (Murray) Hopefully, Mr. Gogan, after the panel does a review of the undertaking N-30, the Board will have a better appreciation of the combined cycle plant and it's not just wishful thinking, I guess, as to what some of the comments might
Document : 82360 47
have been leading to and that the business case and, therefore, the assumptions used in the pro forma statements are realistic. And I think, you know, without the combined cycle plant we have stated that we'll look -- we will try -- we are anticipating future industrial loads in the Strait area within a timeframe of three to five years but, at the same time, you know, we would have to revise our business submission, our model, to have a look at that to properly answer your question.
(Transcript, October 16, 2002, pp. 1354-1356)
[32] Under the circumstances, the Board believes it is reasonable to consider the revised financial model filed in Undertaking U-37 which outlines the financial impact of the removal of the combined cycle generation facility. It is clear from this filing that Strait faces a considerable challenge in developing a viable distribution system.
[33] The Board is concerned that the record is far from complete as to whether Strait meets the statutory test relating to the existence of markets. Undertaking U-37 was not filed until after the close of the hearing and, as a result, neither the Board nor other Intervenors had an opportunity to question Mr. Read, Strait’s chief financial witness, with respect to it. The financial model available to the Board during the hearing does not present, in the Board’s view, the most likely scenario in terms of gas consumption in the franchise area. Further,
Undertaking U-37 does not adequately address the Board’s concern in this regard.
Accordingly, the Board is not satisfied that Strait has met the statutory test with respect to the actual or potential market for natural gas in its proposed franchise area.
[34] However, the Board is mindful of the effort which has been made by Strait and is generally cognizant of the potential for a natural gas market in the Strait area. The prospective BOOT operator has indicated a willingness to continue to negotiate in the absence of the combined cycle generation facility and the Board finds that it is reasonable to allow an opportunity for such a process to occur. As is noted in this decision, a number of conditions
Document : 82360 48 have been attached to the Board’s approval, in principle, of Strait’s application. The conditions applicable to the BOOT process are discussed in Section 10 of this decision.
[35] The Board is of the view that allowing Strait the opportunity to come to an agreement with the BOOT operator is very unlikely to have a negative impact on area customers. After all, under Heritage’s plans for service to this area, customers would not receive gas service until several years after the start of system build-out.
9.0 AVAILABILITY OF ADEQUATE SUPPLY
[36] The relevant Section of the Act governing the Board’s responsibility in making a determination on the issue of adequate gas supply is as follows:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(b) the availability of adequate gas supplies;
9.1 Submissions - Applicant
[37] Strait did not provide specific evidence regarding the availability of natural gas supply for its requirements, as it relies upon natural gas marketers to provide all related supply services, including that of supplier of last resort. While Strait has not entered into any formal discussions or supply arrangements with marketers, in its response to UARB IR-27, Strait stated that it has had discussions with Irving and WPS with respect to supplying residential and commercial customers with gas. Following the hearing, Strait filed a letter from Stora
(Undertaking U-51) in which Stora indicates its willingness to supply gas to “an approved marketer”.
Document : 82360 49
9.2 Submissions - Intervenors
[38] Irving, in its closing submission, indicated that:
Strait Area Gas has indicated that it does not wish to enter the commodity market and should it be granted a franchise, IESL looks forward to working in its franchise area.
(Irving, Closing Submissions, p.3)
[39] Heritage submits that:
Heritage believes, in general, that there are available adequate gas supplies for a local distributor of natural gas in Nova Scotia, including the Strait of Canso area.
However, Heritage has concerns in respect of the arrangements which SAG proposes to put in place to access sufficient quantities of natural gas to supply its customers. In that regard, SAG appears to be relying heavily on the activities of gas marketers in the Strait of Canso area to provide sufficient supplies of gas to its customers. There was little, if any, evidence that in fact gas marketers would vigorously pursue the development of the natural gas markets in the Strait of Canso. This is understandable particularly for residential custom ers in this relatively small market.
The second concern in regard to the adequacy of gas supply relates to arrangements for "back stopping" and obtaining sufficient natural gas supplies to be the "supplier of last resort". As the local distributor, SAG would be required to provide such services. However, it is evident that no allowance has been made for the provision of such services in its financial model. This is a significant concern given the real possibility of a lack of gas marketer presence in the area or the possible failure of the marketer.
(Heritage, Post Hearing Written Submission, pp. 79-80)
9.3 Findings
[40] The Board finds that it is more likely than not that Strait will have access to adequate gas supply as a franchise holder. While the Board understands that Strait does not plan to participate in gas sales, the Board believes that it is necessary for the distributor to ensure that it can, if necessary, supply gas to customers as a supplier of last resort.
[41] Accordingly, as a condition of franchise approval, Strait will be required to demonstrate to the Board that it or its gas marketer has access to sufficient gas supply to
Document : 82360 50 provide service under its franchise, and that supplier of last resort, ancillary services and backstopping arrangements are in place.
10.0 ECONOMIC FEASIBILITY - PLANS FOR SERVICE AND BOOT PROPOSAL
[42] The relevant sections of the Act governing the Board’s responsibility in making a determination on the issue of economic feasibility and plans for service are set out below:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(c) the economic feasibility of the proposed gas delivery system;
(f) the plans of the applicant to provide service in the franchise area;
10.1 Submissions - Applicant
[43] Strait’s proposed distribution plan includes service to several areas within the
Strait region. The areas to be served and the proposed routings are set out on a map attached to Strait’s response to Province IR-2.
[44] According to its application, the distribution system proposed by Strait “...will consist of approximately 68 km of NPS 6, 4 and 2 polyethylene (PE) and steel pipe providing access to natural gas to the majority of the residents and businesses in the franchise area within five years.”19 Two supply points off the M&NP Point Tupper Lateral are proposed to feed the distribution system. One will be on the south side of the Strait of Canso Crossing to supply the Mulgrave side of the franchise area. The other connection will be in Point Tupper, at or near the existing Stora custody transfer station. This connection will supply the Port
19Exhibit N-10, p. 13
Document : 82360 51
Hawkesbury side of the franchise area. The total estimated cost of the system is $4.4 million.
[45] Strait indicated that as part of preparing its application it has carefully reviewed the Board’s 1999 decision which denied franchise applications by municipal applicants. It particularly noted the Board’s concerns regarding the potential financial risk to municipal ratepayers under those proposals.
[46] In order to avoid financial risk to ratepayers, Strait states that:
After careful consideration of a number of options Strait Area Gas foresees the utilization of private sector financing through a build, own, operate and transfer (BOOT) system as the best alternative for the municipalities.
This approach will ensure the economic feasibility of each stage of development. It will also provide Strait Area Gas with more flexible payment options and more consistent cash flows.
(Exhibit N-10, p. 13)
[47] The BOOT concept was described in Strait’s response to UARB IR-38 and in evidence at the hearing. Mr. Teague has been involved in the application process and, according to Mayor MacDonald, ARB is the likely choice as BOOT operator if a satisfactory agreement can be reached.
[48] In UARB IR-38, Strait describes the BOOT concept as follows:
BOOT The BOOT system is simple in concept and application. The development of the system occurs as each commercial application (contract) is engaged. A marketer approaches Strait Area Gas, the franchise holder, and Strait Area Gas through its’ BOOT operator then provides gas distribution lines to the customers. Strait Area Gas then charges a tariff for each Mcf of gas transported over this distribution line. This tariff pays down the capital purchase of the BOOT and provides a profit to Strait Area Gas, the franchise holder. These revenues in turn are used in the respective municipal development policies.
BOOT (Build-Own-Operate-Transfer) schemes are becoming an increasingly popular means of financing large-scale infrastructure development such as roads, bridges, and water and wastewater treatment systems. Under a BOOT scheme, the private sector accesses the necessary capital for construction, builds and operates the infrastructure for an agreed period of time and then transfers ownership back to the relevant governm ent. BOOT projects reduce the drain on the public purse while allowing for the efficient provision of services as the system
Document : 82360 52
operates on a commercial basis. BOOT projects allow host governments to gain access to industrial infrastructure without having to should [sic] the cost of construction.
In a BOOT contract, the owner gives a concession to an operator to construct and operate an [sic] asset for a period of time (concession period is usually 15-25 years) but does not provide the funds to construct the asset. The BOOT contract has the operator handing back the asset to the owner at the end of the concession period.
Build The system will be built upon obligations as set out in the contract between the owner (as represented by the Board of Directors) and the BOOT partner. The sole objective of the contract will be to connect the supplier of gas to the consumer through a constructed infrastructure.
Owns BOOT partner leases (capital lease) infrastructure to the Strait Area Gas Corporation. The shareholders of Strait Area Gas Corporation will own the gas franchise and the assets and the expiration of the contractual agreement. The Strait Area Gas Corporation may use tariff revenues to construct other facilities (e.g., community center, residential distribution, etc.).
Operate BOOT partner operates the gas utility until the Strait Area Gas Corporation wants to assume control. The BOOT partner is responsible for routine functions such as call before digging, meter reading, invoicing, collections, disconnections, repairs and maintenance, etc. Marketing under this system will be conducted by 3rd party interests.
Transfer The Strait Area Gas Corporation will honour its commitment to the BOOT partner by paying down (over time) the Capital Lease. At a mutually agreeable future date, the Strait Area Gas Corporation can assume full ownership/operation rights of the natural gas distribution system from the BOOT partner. At the time of the transfer, the Strait Area Gas Corporation will be assuming little/no risk because customers are connected and consumption levels are known and has a positive cash flow (appears in Year 3).
Results Achieved
• The Strait Area Gas Corporation gains a viable natural gas distribution utility that is used to grow its municipal economic development base.
• The constituent municipal members of the Strait Area Gas Corporation assume a minimum (or non existent) level of risk in acquiring the utility.
• All constituent members of the Strait Area Gas Corporation will experience increases in their respective municipal tax base.
• New business locating within the Strait Area “Development Zone” will greatly increase the municipal tax base.
(Exhibit N-11, UARB IR-38)
Document : 82360 53
10.2 Submissions - Intervenors
[49] Heritage and the Province both raised concerns relating to the proposed BOOT agreement. Heritage noted that, under the proposed BOOT agreement, Strait would not be the beneficial owner of the distribution facility for 20 years after the grant of franchise.20 In these circumstances, Heritage questioned whether Strait should benefit from the application fee exemption enjoyed by municipal and co-operative applicants.
[50] Heritage also submitted that Strait has no plan to service Auld’s Cove, which is the only area of Antigonish County included in the franchise application. Heritage questions whether Strait meets the “four county” criteria for applicants set out in the Board’s Directions on Procedure (attached as Appendix ‘D’).
[51] Heritage further asserts that Strait’s application does not meet the statutory and regulatory requirements for a franchise. It notes the optimistic growth estimates used in
Strait’s application; the lack of arrangements for backstopping and supplier of last resort; the speculative nature of the combined cycle generation facility which Strait’s financial advisor described in evidence as “fatal” to the feasibility of the application if it did not materialize; the dependence of Strait on the financial capability of a BOOT operator when there is no detailed agreement as to plans for service, staffing, funding, etc. Heritage summarizes its critique of
Strait’s application by stating:
Heritage respectfully submits that, in light of the foregoing, it would not be in the public interest to grant a full regulation class franchise for the distribution of natural gas to SAG. Heritage has every intention of servicing this area in accordance with the economic parameters set forth in its Application. Heritage will work with all interested stakeholders in the area to endeavour to bring about natural gas distribution as soon as is feasible. Heritage believes that because of its broader based Application that it will be in position to effectively service this area.
(Heritage, Post Hearing Written Submission, p. 97)
20Heritage Post Hearing Written Submission, p. 69
Document : 82360 54
[52] The Province also expresses concerns and reservations regarding Strait’s proposal but has a different view as to whether a franchise should be granted to Strait.
[53] The Province’s position is as follows:
Heritage Gas has acknowledged that their service to the Strait area, while within the “initial development period” will not likely begin before 2008. Heritage Gas acknowledged that unlike the Municipalities of Halifax and Amherst, there has been no attempt to negotiate Memorandas of Understanding with any of the Counties of Richmond, Guysborough, Antigonish or Inverness. In addition, Heritage Gas acknowledged that its initial development plan does not anticipate service into Mulgrave.
W hile the Province in no way wishes to imply that the Heritage Gas proposed service to the Strait and surrounding area does not meet the present requirements under the Gas Distribution Act and Regulations, it is obvious from the evidence that service will not likely be extended to this area for a num ber of years. As will be discussed further, in the Province’s submission, the Province submits that this “lag” in the tim e between franchise award and a commencement of service to this area, provides an opportunity for Strait Area Gas to potentially accelerate the timing of natural gas service to this area.
Therefore, subject to Strait Area Gas fulfilling the conditions precedent as proposed herein, the Province would support the severing of the Strait Area Gas franchise area from any franchise award to Heritage Gas.
The Province submits there is no evidence before this Board which would suggest that the viability of the resulting franchise would, in any way, be com prom ised by the rem oval of this geographic area. Furthermore, due to the proposed service date by Strait Area Gas, there remains an opportunity to amalgamate this area with the overall Heritage Gas franchise area, in the event that the Strait Area Gas business plan does not come to fruition.
(The Province, Closing Submissions, pp. 29-30)
[54] The Province asserts that while the BOOT system has the potential to shield municipal ratepayers from financial risk, “it is not yet at a stage where a full evaluation of the application can be completed.”21
[55] The Province went on to suggest that:
As will be discussed further in this submission, the Province submits that any final evaluation of this Application is necessarily predicated upon the Board being satisfied with the final terms and conditions of the proposed BOOT arrangement. It is the submission of the Province of Nova
21The Province, Closing Submissions, p. 31
Document : 82360 55
Scotia that the proposed BOOT arrangement is of such significance and consequence to the overall strategy of Strait Area Gas, and so comprehensive in scope, that the actual agreement must be reviewed and approved as a precondition to the grant of any franchise. As support for this point the Province would note that many of the factors required to be reviewed by this Board before granting a franchise are directly linked to the actual BOOT agreement, including:
1. The economic feasibility of the proposed gas delivery system.
2. The financial capability of the applicant.
3. Related experience of the applicant in the delivery of natural gas.
4. Plans of the applicant to provide service in the franchise area.
It is respectfully submitted that it is not possible to conduct a complete analysis of the Strait Area Gas application absent a review of the actual executed BOOT Agreement entered into with its preferred BOOT operator.
(The Province, Closing Submissions, pp. 32-33)
[56] With respect to the inclusion of the proposed combined cycle generation facility in Strait’s financial model, the Province commented that:
Respectfully, the Province would submit that having regard to the filed application of Strait Area Gas, and the inclusion of the proposed combined cycle facility, there is little if any evidence before this Board which could lead it to reasonably believe that the projected combined cycle load will materialize as contemplated within the application. Moreover, Strait Area Gas has acknowledged the obvious, namely that the removal of this potential load from its business plan would be both material and fatal.
. . .
Having regard to the foregoing, the Province respectfully submits that the scant evidence before the Board with respect to the likely materialization of the combined cycle plant, together with its acknowledged critical impact on the overall business model, necessarily requires that:
i. Strait Area Gas provide further evidence as to the likely development of this facility; or ii. the business plan be evaluated without the affects of the combined cycle costs and revenues.
The Province does acknowledge however, that during oral evidence, the proposed BOOT operator did indicate, that he would be prepared to continue discussions surrounding possible construction of the system absent this combined cycle load.
(The Province, Closing Submissions, pp. 36-37)
[57] The Province also submitted that:
Notwithstanding this Information Request response, the oral evidence during the hearing demonstrated that there is a decided lack of certainty as to which functions under the “build, own,
Document : 82360 56
operate and transfer” model are assum ed by the BOOT operator and which under this model, would be assumed by Strait Area Gas. As support for this proposition, the Province directs the Board to a number of areas of clear uncertainty or ambiguity in relation to the agreement yet to be negotiated.
1. BOOT Fee... 2. Bridge Financing... 3. Operating Costs... 4. Initial Build Out... 5. System Maintenance... 6. Safety/Emergency Response
(The Province, Closing Submissions, pp. 38-45)
[58] The Province concluded that:
The Province does not accept that Strait Area Gas was precluded from negotiating a full and com plete agreement with a BOOT operator prior to the hearing of this Application. W hile it is acknowledged that there are a number of unknown factors, as alluded to in the evidence of Mayor MacLean, it is incumbent upon the franchise applicant to present a full and complete application to the Board. Given the nature of the BOOT proposal subm itted by Strait Area Gas, the necessity for a comprehensive agreement as it relates to financial issues, assignment of responsibility and construction plans, is essential.
From the evidence put forth at the hearing it is unlikely that Heritage Gas will be serving the Strait area for a significant period of time, and likely in no event before 5 years. This, in the opinion of the Province, allows a window of opportunity for Strait Area Gas to attempt to pursue its distribution system. This must be predicated however, upon the submission of a legally binding and executed construction and operating agreement between Strait Area Gas and its chosen BOOT operator. This agreem ent, must be reviewed and deemed satisfactory by this Board prior to the granting a final Full Regulation Class Franchise. In essence, the Province supports the granting of a “conditional franchise”, subject to delivery of final Board-approved BOOT operating agreement.
So as not to unduly delay the development of the system, the Province submits that it would be appropriate to allow a six (6) month period in which Strait Area Gas and its chosen BOOT operator to conclude a contractual agreement.
. . .
Subsequent to the filing of the contract, the Province submits that it would be appropriate for the Board to conduct a review of the agreement to assess whether it meets the concerns raised during this hearing. The review, in the Provinces’ submission, should allow an opportunity for intervenors and Heritage Gas, to provide their written comments on the agreement to the Board. The Province would not support any extension of the negotiating time beyond the six (6) month period.
Should the parties fail to reach a negotiated agreem ent within this period of time, or should the negotiated agreement be deemed unsatisfactory for whatever reason, in the sole discretion of this Board, the Province would subm it that the franchise area sought by Strait Area Gas revert, without further hearing, to Heritage Gas for inclusion in its franchise area.
Document : 82360 57
Under this proposal, Strait Area Gas would be provided a reasonable opportunity to conclude its negotiations with the BOOT operator, and, if successful, to proceed further with its development. However, in the event a satisfactory agreement cannot be reached, the fixed time lines and autom atic reversion of the franchise area to Heritage Gas, would ensure that the residents of the Strait area will not be unduly disadvantaged. (The Province, Closing Submissions, pp. 48-50)
10.3 Findings
[59] The Board has carefully considered the proposal by Strait to use the BOOT concept to facilitate the construction and operation of a gas distribution system. The Board appreciates that Strait has formulated its plan in large part based on the Board’s decision in the 1999 franchise hearing relating to municipal applicants.
[60] The Board would note that, in its 1999 decision, its reasons for denying the municipal/co-operative applications were not limited to the financial risk to area residents. The
Board also had concerns regarding market estimates, operational capability and the overall economic viability of the proposals.
[61] In the present situation, the Board is unable, based on the information before it, to find that Strait has met the test of economic feasibility. Similarly, its plans for service are uncertain as they will ultimately be determined by the final BOOT agreement which does not yet exist.
[62] The Board agrees with the concerns raised by the Province and Heritage with respect to the indefinite nature of the BOOT proposal which is before the Board. It is not possible to properly evaluate Strait’s plan as salient aspects of it have yet to be determined.
[63] As noted earlier, Strait’s application is preliminary in many respects. However, the Board believes that, in this case, it is reasonable to allow Strait an opportunity, using a revised financial model, to negotiate a BOOT agreement which would meet with the approval
Document : 82360 58 of the Board. The Applicant has invested considerable time, effort and money in an attempt to bring natural gas to the Strait area on an accelerated schedule by means of a system which will be owned by the community at some future date. While it is concerned that Strait’s application has a number of deficiencies, on balance, the Board believes it is reasonable and in the public interest to give Strait an opportunity to succeed. This conclusion is further justified, in the Board’s view, because it seems clear that the Strait area is not essential to
Heritage’s plan and this area would not be served until the later stages of Heritage’s initial development phase.
[64] Since the application by Strait is preliminary in a number of respects, the Board finds it is reasonable to approve the granting of a franchise to Strait on an “in principle” basis.
The conditions applicable to such approval, as it relates to the BOOT agreement, are as follows:
1. Strait shall provide to the Board, within six months from the date of acceptance of the
Board’s recommendation by the Governor in Council, an executed and legally binding
copy of a BOOT agreement. The Board will review the agreement, and supporting
documentation, to determine whether the agreement is reasonable, adequate, and in
compliance with the requirements of the Act and GIC Regulations. In particular, the
Board will look for clarification and specifics concerning:
(a) the BOOT fee/schedule of payments (b) bridge financing (c) operating costs (d) regulatory costs (e) decision making - in particular with respect to system build-out (f) staffing (g) maintenance of the system (h) public safety
Document : 82360 59
(i) insurance (j) responsibility for financial losses (k) contractor selection/NS content (l) bidding process (m) transfer of assets to Strait
The above is not intended to be an all-inclusive list. There may be other issues that require review and Strait will be required to provide such additional information as may be necessary.
The Board agrees with the Province that the filing by Strait should be the subject of review and comment by the Intervenors. Strait should be aware that, as the applicant for a franchise, it will be expected to cover the Board’s regulatory costs as a result of this proceeding. The practical result of this finding is that the Board will be conducting a second phase of the hearing into Strait’s application. The Board may well determine that it requires the services of experts in the areas of BOOT agreements and small gas utility operations to give evidence during this phase of the hearing.
[65] The Board will also require Strait to file a copy of a shareholders’ agreement and the operating agreement governing the relationship between the Towns and Strait and the
BOOT operator.
11.0 FINANCIAL CAPABILITY AND RELATED EXPERIENCE
[66] The relevant statutory provisions governing the Board’s responsibility in making a determination on the issues of financial capability and experience in the Act are as follows:
8(2) Before granting a franchise, the Board shall be satisfied that the granting of the franchise is in the public interest and shall take into consideration....
(d) the financial capability of the applicant;
(e) related experience of the applicant in the delivery of gas;
Document : 82360 60
11.1 Submissions - Applicant
[67] As noted in the previous section, Strait relies on the financial capability of the
BOOT operator to build and operate its gas distribution system. While other means of financing were discussed at the hearing, Strait’s preferred option appears to be one where the
BOOT operator finances the system.
[68] Strait indicated that it has joined the Federation of Alberta Gas Co-ops
(confirmed by Undertaking U-40) and intends to draw on the expertise of that organization to assist it in developing the system and training staff. In Undertaking U-52, Strait filed, in confidence, a copy of the Co-op’s Operation and Maintenance Guidelines.
[69] Strait also stated that:
Strait Area Gas intends to hire a full time general manager experienced in the natural gas industry. That person must have significant experience in the administration and maintenance of a gas utility. There are several Nova Scotia residents who may also be qualified for the position [sic] and they will be given every opportunity to fill the position should they be interested and qualified. Several present managers of gas utilities in Alberta have also expressed an interest in the job.
The General Manager will be supported by other staff as required. Strait Area Gas is committed to hiring the support staff from the Strait Area. The experience of these people would be supplemented either by business administration training, completion of the Northern Alberta Institute of Technology’s (NAIT) “Gas Utility Operator” program, or by being a certified “Gas Fitters” or both, depending on the position.
(Exhibit N-10, p. 11)
[70] Strait’s expectations of its General Manager were outlined in the following exchange between David Keeling, a consulting engineer with CBCL Ltd., who assisted Strait in preparing its application, and Counsel for Heritage:
Q. Another element of the diverse job duties of the General Manager appears to be after hours monitoring and systems control, is that correct?
A. A portion of that, yes.
Q. Okay, a portion of that. And perhaps that's -- you can explain that to m e because in Heritage Gas 12(b) the question was asked how Strait Area Gas intends to provide after
Document : 82360 61
hours monitoring and system control, and the answer was that: "The operational side of the tasks will be the responsibility of the Strait Area Gas General Manager. The work will be carried out by the BOOT operator."
And I didn't understand that division of responsibility.
A. If I could just read that response for a moment.
Q. Sure.
A. Perhaps if you could just re-read it. I just didn't catch it, that was all.
Q. Sure. It says: "The operational side of these tasks..."That's after hours monitoring and system control: "...will be the responsibility of the Strait Area Gas General Manager. The work will be carried out by the BOOT operator."
A. Again, the logistics need to be worked out. What was referred to is the fact that depending on the situation it is the BOOT operator's responsibility. Whether it was actually physically [sic] his person that did that, or whether it was in conjunction with Strait Area Gas would depend on again the time and location of who was where.
Q. Okay. I guess what I'm coming to with this line of questioning, Mr. Keeling, or others on the panel, is that it seems to be quite a large basket of tasks for one person, the General Manager. And I'm just wondering whether you're confident that, in fact, one employee through to year 15 is sufficient.
A. I guess my personal response to that is yes, absolutely. I've seen a number of other small utilities that operate on that basis. Keeping in mind that this is a relatively new system that's going in, so the operation, the routine operation and maintenance tasks are not that significant. There are certain tests that need to be done every year, certain -- you need to review the system for leak detection, that sort of thing, on a rotating basis. Often that's every 5 years. Cathodic protection of the steel system is done on a certain frequency. Those are not -- in a small utility, those are not huge time-consuming tasks. As well, the reporting and so on, once that's been formalized again is not a huge tim e consumer. So we're very confident that the one person is able to handle all those tasks in conjunction, as we stated earlier, with the BOOT operator's responsibility for doing a number of those things. And, quite frankly, we envision that Strait Area Gas staff may be able to take over a number of those responsibilities for the BOOT operator, which, of course, always relates back to the cost.
(Transcript, October 17, 2002, pp. 1488-1490)
[71] In addition, Strait relies on the expertise of its BOOT operator to construct and operate a safe distribution system.
Document : 82360 62
11.2 Submissions - Intervenors
[72] Both Heritage and the Province indicated that there is insufficient information on the record in this proceeding concerning the financial capability and experience of the possible
BOOT operator with respect to constructing and operating a distribution system.
11.3 Findings
[73] In the Board’s view, Strait’s application is deficient with respect to financial capability. Also, as noted earlier, without a completed BOOT agreement, fundamental information is unavailable to the Board and, consequently, the Board cannot form an opinion as to whether the application is economically viable.
[74] As indicated above, despite its reservations, the Board has decided to approve the grant of franchise to Strait on an “in principle” basis. Accordingly, Strait will be required to file detailed information with respect to the experience and financial capability of the BOOT operator ultimately selected by Strait. This information should be filed at the same time as the executed BOOT agreement is filed. This information will also be subject to review and comment by Intervenors at the second phase of the hearing into Strait’s application.
12.0 SOCIO-ECONOMIC IMPACT STATEMENT AND BENEFITS PLAN
[75] The relevant sections of the GIC Regulations governing the Board’s responsibility with respect to socio-economic impact statements and benefits plans are set out below:
Document : 82360 63
Franchise evaluation 5 Subject to Section 6, the Board shall not grant a franchise over an area unless
(c) the applicant has submitted to the Board a Socio-Econom ic Im pact Statement that shall include
(i) a benefits plan, together with a written undertaking that if the applicant is granted a franchise, the applicant will take all reasonable measures to implement the benefits plan,
(ii) evidence that the applicant is fully aware of any significant socio-economic effects of the proposed franchise, has measures in place to mitigate adverse socio-economic impacts and prom ote positive outcomes, and is committed to carrying out those measures in order to ensure that the franchise benefits the people directly affected by it with minimal disturbance to desirable aspects of their way of life,
(iii) the probable benefits of the construction and operation of the delivery system, and
(iv) the nature and extent of the impact of the sale and consumption of natural gas within the proposed franchise area;
(d) the benefits plan has been approved by the Board;
(e) the applicant has provided commitments satisfactory to the Board to encourage competition among agents, gas marketers and brokers in the sale of gas within the proposed franchise area by specifying,
(i) in a code of conduct filed with the Board, the steps the applicant proposes to take to eliminate any undue competitive advantage as a result of its being a bundled service provider,
(ii) the availability to all gas marketers of detailed market information including names, addresses and telephone numbers of customers and potential customers in the proposed franchise area, and
(iii) information relating to the existing distribution system and such other information, including anticipated construction and build-out plans, as may be determined by the Board;
(ea) where the applicant is a public utility as defined in the Public Utilities Act, the applicant can demonstrate to the Board how it shall promote competition with respect to the energy products it distributes; and
(f) the applicant has provided such further information as the Board determines.
6 The Board may grant a franchise without the applicant submitting a Socio-Economic Impact Statem ent, a benefits plan, or both if
(a) the gas delivery system to which the application relates is less than 5 km long;
(b) the franchise to which the application relates belongs to a class of franchise exempted from the provisions of these regulations pursuant to Section 10;
(c) the application is made pursuant to Section 10 of the Act; or
(d) in the opinion of the Board, the application is for a minor amendment to a franchise.
Document : 82360 64
7 (1) The Board shall not approve a benefits plan unless the plan provides that
(a) the applicant will establish in the Province an office where decisions are made at a level of authority that the Board considers appropriate;
(b) the applicant and its contractors shall train and employ persons residing in the Province unless the applicant can demonstrate that all reasonable efforts to employ and train persons residing in Nova Scotia have been explored and exhausted requiring the recruitment and hiring of persons residing outside the Province;
(c) where the Board considers appropriate, the applicant will carry out a program and make expenditures for the promotion of education and training in the Province;
(d) the applicant and its contractors will contract for services to be provided from within the Province and procure goods manufactured in the Province, where those services and goods are competitive in terms of fair market price, quality, performance and delivery;
(e) the majority of the applicant’s Board of Directors are residents of Nova Scotia; and
(f) if the applicant is not a municipality, residents of Nova Scotia shall have a meaningful and significant opportunity to participate in the ownership of the applicant by the end of the tenth year of the franchise.
(2) Subject to subsection (1), the Board may approve a benefits plan if, in the Board’s opinion, it would be in the public interest to do so.
(3) The Board m ay make the approval of a benefits plan subject to such terms and conditions as are specified by the Board at the time the benefits plan is approved.
12.1 Submissions - Applicant
[76] In its application, Strait makes the point that it is a community-based gas distribution utility. It states that:
Strait Area Gas Corporation, (Strait Area Gas) is a joint venture between the Towns of Port Hawkesbury and Mulgrave formed specifically to seek the right to, and subsequently to provide natural gas to the communities of the Strait Area. The Towns of Port Hawkesbury and Mulgrave will jointly own the Utility. An agreement is in place between the two towns outlining the structure of the company. The name Strait Area Gas Corporation has been reserved and the intention of the Towns is to incorporate Strait Area Gas as a separate entity once granted the franchise.
Strait Area Gas will be based in the Strait Area. The Board of Directors will initially consist of representatives of each of the Town Councils.
(Exhibit N-10, p. 4)
Document : 82360 65
[77] Strait indicated in its application that it intends to retain as many benefits as possible for the Strait Area. These are outlined as:
The Strait Area would receive a number of benefits with the implementation of a natural gas distribution system that is locally owned and operated. These would include:
• long-term jobs created;
• several local support jobs created;
• wages and local purchasing over 25 years (buy local, hire local);
• environmental benefits;
• local control over the distribution of natural gas;
• creation of a new skill set within the communities;
• ”profits” stay in the communities;
• pride in the communities ~First in Nova Scotia~
• opportunity to take advantage of enhancing existing municipal infrastructure; and,
• being able to provide a sable [sic] and competitive fuel source to the Strait Area.
(Exhibit N-10, p. 20)
[78] Strait also filed Exhibit N-7, which sets out its benefits plan and socio-economic impact statement. The document, entitled ‘Buy Local, Hire Local’ was prepared by Ashley
Bouchie, of the Guysborough County Regional Development Authority with the assistance of
Sam Murray, Chief Administrative Officer for the Town of Mulgrave.
[79] Strait’s benefits plan states that:
The Strait Area Gas project will provide economic benefits throughout the development and distribution phases, both directly and indirectly. The main goal and mantra of Strait Area Gas is “Buy local, Hire local”. This project will contribute not only to the Strait Area but also the province of Nova Scotia as a whole. Jobs created in the Strait Area as a result of the distribution system and the “Development Zone” that availability to reasonably priced natural gas can provide will increase tax revenues for the Province as well as the tax base of the municipalities and counties within the region. These impacts will be seen as economic opportunities and/or direct expenditures and revenues. One very lucrative example of this being that the proceeds from the system will be used to stimulate economic development in the region.
. . .
Document : 82360 66
Project employment in some ways mirrors the economic effects of the project expenditures. As is the case in similar situations the long-term employment activity is a result of the distribution phase which is in itself long term. All discussion of employment opportunities is done so in person years, the equivalent of one person working for one year.
In some cases, a certain level of expertise that may have to be obtained from outside of the Strait Area, the province or even the country. Along with these jobs will come the employment that can be sourced on location and within the area. An example being the laying of pipe, which does require expertise but at the same time requires manpower that can be sourced from the Strait Region. Strait Area Gas fully supports the training of a local workforce that would lead to employment of local workers wherever possible, while keeping in mind the practice of “Buy Local, Hire Local”. In summary the development phase of this project would provide shorter-term jobs such as construction and pipefitting. These shorter-term jobs would commence upon completion of the infrastructure.
Some of the jobs and benefits that would come about due to the construction and development phase are; local material handling, trucking, lodging, food, backhoe operators, independent truckers, concrete and gravel sales, gasoline, paving, heavy equipment, heavy equipment operators, community college cooperation regarding the training and operation of specific specialized equipment and techniques, plastic fusion, welding, fabrication, construction workers, traffic control personnel, and occupational health and safety officers on each job site.
Strait Area Gas intends to contract out the initial construction to experienced contractors. There are Nova Scotian contractors who have the experience in gas line construction with inspection being done by Strait Area staff or consultants.
The distribution phase of the Strait Area Gas project would see the long term employment of one general manager, 3 field workers, one clerical worker, jobs as a result of shared services with the towns, as well as legal and audit services, periodic system maintenance, and marketing positions. The aforementioned jobs will become available once the distributions phase is up and running. These jobs will be required for the life of the distribution phase, some at a constant level like the field workers, and clerical workers, while some will be needed on a periodic basis, such as system and line maintenance positions.
Local resources will supplement staff when required. During the first few years external assistance will be used where necessary to ensure all responsibilities are more that [sic] adequately covered. Wages and local purchasing will be returned to the community during the first 25 years of the franchise.
(Exhibit N-7, pp. 16-18)
[80] Strait indicated that a local office would be established and would serve not only as a base for the General Manager but also would be “...useful for community consultation and communication.”22 Strait’s benefits plan also stated that goods and services would be procured through a competitive tender process, with first consideration given to local suppliers.
22Exhibit N-7, p. 21
Document : 82360 67
12.2 Submissions - Intervenors
[81] Through cross-examination of Strait witnesses, Heritage questioned the assessment of benefits under Strait’s plan. This is illustrated in the following exchange between Counsel for Heritage and Strait witnesses:
Q. Thanks. One of the themes, I would say, of the socioeconomic report is obviously maximizing benefits and it mentions such things as keeping profits in the local area, and we've already been through the BOOT fee and that type of thing and I don't intend to -- you'll probably be pleased to hear, don't intend to re-explore that ground. But I take it that you would accept that in addition to the chance of profit that the municipalities might take on there's also, in theory, the risk of loss if things don't go well?
A. (Murray) That's correct.
Q. And that would also be borne by the municipalities?
A. (Murray) That would be guaranteed by the BOOT operator.
Q. Okay. So, you see there's no possible way in which the municipalities could lose money?
A. (Murray) As far as we see in our business plan, no, there's not.
Q. Okay. And I understand it's a commodity based pricing that you're looking to move forward with, that is that -- and please tell me if my understanding is incorrect -- that the rate would be guaranteed at a particular level below the cost of an equivalent fuel source such as fuel oil, say 15 percent or som e percentage. Is that right?
A. (Keeling) No, that's not correct. W e discussed that, I believe, yesterday with possibly Mr. Gogan. It's a market based rate and we didn't guarantee that it was going to be say 15 percent below a com modity, another commodity.
Q. Okay. Well, perhaps you can briefly explain for me what the market based rate is, because as I was -- and Mr. Outhouse has been through the various components of your proposed price, and as I would see it, it's really only the delivery charge where you have much flexibility in terms of adjusting the price and obviously you're relying fairly heavily on a favourable price variance between oil and natural gas in favour of natural gas, but that from time to time does not occur. I'm just curious as to how that's going to be handled.
A. (Keeling) I think very much like your own submission. The commodity portion is more or less a flow-through to the customer but handled through marketers, so Strait Area Gas will be going before the Board for a rate hearing to determine our rates but there will be no cap, for instance, like there was on the first go-round that it's automatically five percent below the price of oil or that type of approach.
Q. So, because the commodity price is in the hands of the marketers, you'll have no control over it whether it be high or low and all you'll be asking -- I presum e what you'll be asking the Board to approve is a rate that has a distribution charge and whatever the commodity happens to be from time to time?
Document : 82360 68
A. (Keeling) You're quite right, but again we go back to the low risk option, and that's the risk that the BOOT operator is taking on essentially. If no customers sign up, then he's taking that risk as opposed to the municipality.
Q. But it is, in fact, Strait Area Gas that would come before this Board to get a rate approved?
A. (Keeling) To get the distribution rate approved, yes.
Q. Okay. And presumably then you would have to go out to customers and say, "Here's what it's going to cost you to hook up." Right?
A. (Keeling) True.
Q. But you wouldn't be able to say to them what the total is, because you wouldn't know what the cost of the commodity was?
A. (Keeling) We would be providing them information on that, which is no different than when you fill up your oil tank now. When you fill it up today and you fill it up next month, there's no guarantee that the price then is going to be the same as what it is today.
Q. All right. Now, in response to a department of energy request -- and it was No. 41 but I'm not sure -- turn it up if you'd like -- you said: "All procurement decisions will ultimately reside with the municipalities as owners of the franchise and as purchasers of the BOOT system." And I guess my first question would be, have you had any discussions with the potential BOOT operator about this?
A. (Murray) I believe Mr. Teague stated late Wednesday before he left that he will work closely with Strait Area Gas and he did state that the ultimate decision on BOOT development moving forward would rely -- would be the decision of Strait Area Gas Corporation.
Q. Yeah. I guess the difficulty I'm having conceptually with this -- and perhaps the panel can help me -- is that the municipalities appear to take some comfort that the risk falls with the BOOT operator and I know it's difficult because there's no agreement yet negotiated and that some num ber of benefits lie with the municipalities, which is obviously in the municipalities' best interests, but that the BOOT operator would be prepared to take on those risks without control over things like where the system rolls out or what's procured or what the costs are but the BOOT operator may ultimately bear that econom ic burden. I don't -- can you perhaps explain to me how you conceive it working in a way that benefits both the municipality and the BOOT operator.
A. (Murray) As the BOOT operator or proposed BOOT operator stated in his testimony late W ednesday, he's willing to take on that risk to enter the Nova Scotia market or the Canadian market and he's taking on a little more risk than he usually would take on but he's willing to do that to enter the market.
Q. Sort of as a loss leader type thing?
A. (Keeling) I would disagree there a little bit. The BOOT operator has looked at our submission and the discussions have certainly gone beyond a preliminary stage and I think when he was here he expressed a willingness to work with Strait Area Gas based on the information contained in the business plan. So, I think he's comfortable in the risk that's there, in the customer sign-ups that are shown and so on.
Document : 82360 69
Q. Okay. If we can just look at the socioeconomic report for a moment, at the Executive Summary, perhaps. And there's a number of items listed there and I won't go through them all but one of them is "long term jobs created". And what is the understanding of Strait Area Gas concerning the long term jobs that will be created and when those will occur?
A. (Murray) What we are referring to there would be in the initial period you would have your general manager, in Year 15 you would bring on your support staff, your field staff, your clerical, et cetera.
(Transcript, October 18, 2002, pp. 1671-1677)
12.3 Findings
[82] The Board considers that the benefits plan (Exhibit N-7) filed by Strait meets the requirements of the GIC Regulations, as such. However, the Board is unable to satisfy itself that Strait will be in a position to implement all of the proposals outlined in the benefits plan since there is no definitive BOOT agreement in place.
[83] The Board’s difficulty in this regard is highlighted in the following exchange between Board Counsel and Mr. Murray:
Q. Fine. Just to change subjects to the socioeconomic benefit plan for a second, in paragraph -- sorry, section 6 on page 22, and you've been referred to this section before, I think, talks about procurement, and the opening sentence is: "Strait Area Gas will procure goods and services through a competitive tender system." And again in the initial phases it's my understanding that procurement will be by the BOOT operator, correct?
A. (Murray) Procurement will be under the direction and control of the Strait Area Gas Corporation, and through an open tendering.
Q. Are you saying that you will be doing the procurement function, not the BOOT operator?
A. (Murray) We will be working with the BOOT operator on that process.
Q. Again, it will be the BOOT operator's money.
A. (Murray) Yes, it will.
(Transcript, October 18, 2002, pp. 1742-1743)
[84] At this point, the Board has no assurance that the ultimate BOOT agreement will
Document : 82360 70 reflect the intentions of Strait as set out in its socio-economic impact statement and benefits plan. The Board recognizes that the Strait area will benefit by having access to an alternate fuel source and, certainly, there will be benefits from the construction of the distribution system. However, there are fundamental questions concerning procurement and staffing that remain unanswered. In the absence of this information, the Board is unable to fully evaluate the benefits plan proposed by Strait until such time as the Board has had an opportunity to review the completed BOOT agreement, and it is tested during the second phase of the hearing, as set out in paragraph 137, above. Consequently, during the proceeding to review the executed BOOT agreement, the Board will require Strait to identify which, if any, components of the proposed benefits plan will be modified as a result of the completed BOOT agreement.
13.0 CONCLUSIONS - STRAIT
[85] Following careful review of the application for franchise by Strait, the Board is not yet satisfied, based on the evidence currently available, that Strait has met the franchise requirements set out in the Act and GIC Regulations. However, the Board is cognizant of the time and effort spent by Strait in making the application and is generally aware of the potential benefit to the area of the timely construction of a gas distribution system. Accordingly, the
Board has determined that it is appropriate to approve the grant of a franchise to Strait, in principle, subject to the approval of the Governor in Council and subject to the directives and conditions outlined in this decision. The directives include Strait filing documentation, to be reviewed in a second phase of the hearing into Strait’s franchise application, which satisfies
Document : 82360 71 the Board that Strait meets the statutory and regulatory requirements for a franchise.
[86] Strait’s franchise area, approved in principle, consists of areas in Antigonish,
Inverness, and Richmond Counties and Guysborough County (excluding Goldboro), as described in its application.
Document : 82360 72
PART FOUR
OTHER ISSUES
14.0 BUNDLED GAS SALES AND CODE OF CONDUCT
[87] As noted earlier in this decision, one of the changes to the former regulatory regime for gas distribution was the elimination of the prohibition on a natural gas distributor also being a gas marketer. Section 5(e)(i)-(iii) of the GIC Regulations now reads as follows:
Franchise evaluation 5 Subject to Section 6, the Board shall not grant a franchise over an area unless
(e) the applicant has provided commitments satisfactory to the Board to encourage competition among agents, gas marketers and brokers in the sale of gas within the proposed franchise area by specifying,
(i) in a code of conduct filed with the Board, the steps the applicant proposes to take to eliminate any undue competitive advantage as a result of its being a bundled service provider, (ii) the availability to all gas marketers of detailed market information including names, addresses and telephone numbers of customers and potential customers in the proposed franchise area, and (iii) information relating to the existing distribution system and such other information, including anticipated construction and build-out plans, as may be determined by the Board;
[88] Heritage, in its application, seeks a gas marketer’s licence to sell natural gas.
The Board believes that, in a greenfield environment, it is reasonable to allow this type of bundled service to ensure that once pipe is in the ground, potential customers are assured of at least one gas marketer - that being the distributor. The Board is aware, however, that other potential gas marketers have concerns that allowing the distributor to sell gas will place them at a competitive disadvantage.
Document : 82360 73
[89] The Board believes that it is reasonable to approve Heritage’s request for a gas marketer’s licence in this decision. However, to facilitate a level playing field for all potential gas marketers, the Board is prepared to consider gas marketer’s licence applications from all interested marketers with a view to issuing licences to qualified applicants, including Heritage, within the same time-frame.
[90] Ideally, the Board would have the benefit of the views of industry participants, as part of a newly formed working group, prior to establishing Codes of Conduct, licence application forms and regulations governing marketers and distributors. However, it is likely that licence applications will be forthcoming prior to a new working group reaching consensus on these points. The Board has already established certain parameters concerning gas sales licences in its decision dated September 15, 2000. It intends to adopt these, with any necessary modifications, as an interim measure to govern the application process, licence issuance, and Code of Conduct for marketers. This interim approach has the advantage of utilizing, to the extent practical, the previous efforts of the former working group and subsequent Technical Conference (in which some current Intervenors were participants).
Accordingly, the Board will, in the near future, issue interim gas marketer regulations and use interim application forms and interim licence forms pursuant thereto until the working group process outlined in this decision has concluded.
[91] The Board believes it is necessary for a further Code of Conduct to be developed to govern dealings between distributors and marketers under the revised regulatory regime.
The Board notes that Heritage filed a draft Distributors’ Code of Conduct which states, in the preamble, that:
Document : 82360 74
Heritage Gas Limited is committed to encouraging a competitive gas market among agents, gas marketers and brokers in the sale of natural gas to customers within its franchise area. It is the purpose of this Code to set out the broad principles that Heritage Gas adopt in the effort to eliminate any undue competitive advantage that may exist as a result of it being a bundled commodity and distribution service provider. (Exhibit N-13, p.1)
[92] Further, Article 10 of the draft code states that:
Heritage Gas will establish a working group with gas marketers and other key stakeholders to develop and modify procedures to enable the efficient exchange of information between Heritage Gas and gas marketers active in the Nova Scotia market. All participants in the working group will be responsible for their own costs. (Exhibit N-13, p.3)
[93] The Board encourages the formation of a working group and believes that a final version of the Distributors’ Code of Conduct and a final version of a code governing the conduct of marketers, should be produced by this group. The Board expects that the working group will develop one Distributors’ Code of Conduct and one Marketers’ Code of Conduct which will apply to all holders of gas distribution franchises and marketers in the Province and which will be provided to the Board for approval. In the interim, the Board approves the draft
Distributors’ Code of Conduct filed by Heritage.
[94] Heritage, in its application, has proposed to use a gas cost variance account
(“GCVA”) as a mechanism to ensure that the distributor is compensated for actual gas costs and the customer is charged for actual gas costs. Since customers’ bills will be based on estimated gas costs there can be a variance between the two.
[95] Heritage, through its witnesses, pointed out that GCVA s are common in the gas industry23 and also indicated that:
23Transcript, October, 10, 2002, pp. 746-748
Document : 82360 75
There are numerous options available in regard to the specifics of the operations of such an account. If granted the franchise, Heritage will, as part of its rate application, put forward a proposal to the Board in respect of the actual operation of this account.
(Heritage, Post Hearing Written Submission, p. 60)
[96] While the Board has no difficulty, conceptually, with the idea of a GCVA, it notes that Irving expressed concern in its final submission with respect to the proposed GCVA and the Province had suggestions as to how the account should operate. The specifics of the
GCVA will be deferred to the Heritage Tolls and Tariffs proceeding where the details of the operation of the GCVA can be fully reviewed.
[97] In the present case, Intervenors also expressed concern that since Heritage plans to treat the cost of gas as a “pass through” to customers with no mark up, it would be difficult for gas marketers to compete on the basis of price.
[98] The Board notes that it is common in other jurisdictions for distributors to treat the gas commodity as a “pass through” cost to customers and, where such arrangements exist, the development of a competitive gas market does not appear to have been impeded.
Further, Heritage proposes to allocate a share of its indirect costs to the gas sales function.
The Board considers such an allocation to be appropriate and, by increasing the commodity cost to Heritage, will assist gas marketers to compete.
15.0 REGULATORY OVERSIGHT
[99] Heritage makes the point in its evidence that it wishes to “...minimize the cost of regulation,”24 and asserts that “Regulatory oversight must be light handed.”25
24Exhibit N-3, S.6, p.21
25Exhibit N-3, S.6, p.22
Document : 82360 76
[100] In terms of pipeline construction and operation oversight, Heritage states that:
The distributor has the primary responsibility for building a safe and reliable gas distribution system. With this premise in mind, Heritage Gas proposes that all materials and construction be subject to a quality assurance program similar to that currently in place in Saskatchewan. This program would see Heritage Gas providing quality assurance testing of m aterials and inspection of installation at its own expense with all records being available to the regulatory agencies. The regulatory agencies would be welcome to audit the records and the ongoing works at any time.
Should the NSUARB or Government impose additional interventions that attract costs, these costs should be borne by the respective agency and not passed on to the customer via increased distribution rates.
(Exhibit N-3, S.6, p. 22-23)
[101] Strait, in its evidence, has estimated $5,000 for Legal and Audit costs in years
1-15, while engineering and permitting costs are estimated at $50,000 for year 1. It is unclear as to the BOOT operator’s contribution to regulatory costs as is illustrated in the following exchange with Board Counsel.
Q. So who would be interfacing with the regulator -- let's talk about at the permitting stage when you're looking for your license to construct under the Pipelines Act and then subsequently license to operate, who's going to be applying for those licenses?
A. (Teague) Well, basically, ARB is going to have to apply for those licenses.
Q. But you will not be ---
A. (Teague) Now, it's on behalf of Strait Area Gas, is the way it comes.
(Transcript, October 16, 2002, p. 1375)
[102] In response to questions from Board Counsel, Mr. Clark, President of
SaskEnergy stated that:
Q. Okay. But recognizing that there are going to be regulatory costs, the question, I guess, is who pays them. You've already said it wouldn't be obviously fair or appropriate for NSPI to pay them. I guess the other option, if Heritage Gas doesn't pay them, is that they be absorbed by this board or by the government. How would you foresee that happening?
A. (Clark) No, Mr. Outhouse, we're not asking specifically electrical customers to subsidize the hearing costs. The burden, if that's the word -- we'll have to -- our custom ers will have to obviously absorb those costs. I really want to spend a bit more tim e on this because ---
Document : 82360 77
Q. Go ahead.
A. (Clark) --- as I said yesterday, there's not a suggestion here that we should diminish our interaction with the Board in any way. You are rightfully pointing out that our OM&A budget would be minuscule compared to Nova Scotia Power. So will our customer base and so will our net income and so will our revenue stream.
Q. Yes.
A. (Clark) And we're only trying to find that effective public policy balance that would appropriately keep our feet to the fire, if I can use that phrase, on safety issues or rates or areas of deep conflict that might fall out of the Code of Conduct. It's been discussed earlier today and yesterday. And we understand that.
Q. And you would expect to bear the costs associated with that.
A. (Clark) We would have to. I mean, it's clear. All we're -- all we're -- all in terms of what we're advocating obviously from our perspective is let us be as effective, efficient as we possibly can, effective in a public policy and regulatory sense so that the public interest is served and we can use most of our resources at least trying to attract customers and expand the system.
Q. With respect to construction of the system, as I understand your evidence, you are suggesting that Heritage Gas should be responsible for its own quality control. Is that correct? Subject to audit, I think.
A. (Ritcey) That's correct.
Q. It's not a quite "trust us, be happy" approach, but it borders on that? Do you agree with me, Mr. Ritcey? And I appreciate that your shareholders have a lot of experience building natural gas distribution systems.
A. (Ritcey) I think, Mr. Outhouse, what we're talking about trying to do here is we're bringing a new industry into the province and there's a lot of existing regulatory processes that are in place.
Q. Yes.
A. (Ritcey) And what's happening is we're trying to layer on this new industry with those existing processes. And what we're talking about here is really an opportunity to try to find a better way to fit this new industry, recognizing those other processes are already in place. And we think an approach utilizing discussion and conversation, dialogue with the regulator, we should be able to find better ways to enable the introduction of natural gas into the market and again control the costs associated with the introduction into the market. We're not talking about -- it's more of a philosophy and it's an opportunity for us to have those discussions, and obviously we're going to have to earn trust along the way.
Q. I guess that's a valid point, Mr. Ritcey. With any new business, it would have to earn that trust along the way.
A. (Ritcey) That's correct.
Q. You're aware of the provisions in the Act and the Regulations, regulations dealing with the certifying authority? Correct?
Document : 82360 78
A. (Ritcey) Yes, I am.
Q. And would you not expect that in the early days, as it were, in initial construction, that you would expect to see an audit authority or a certifying authority more frequently than you might expect to see them later on if things go well initially?
A. (Ritcey) That's correct. I mean, Mr. Outhouse, what we're talking about here again with respect to the certifying authority, there are a number of other levels of inspection that are also involved.
Q. Yes.
A. (Ritcey) And we think as we go forward, there may be an opportunity for us to find way [sic] to limit that amount of review and do it in a cost-effective way, not compromising safety or reliability of the system.
(Transcript, October 8, 2002, pp. 245-249)
[103] The issue of regulatory costs was also canvassed with Strait witnesses. The following exchanges between the Board and Mr. Teague, the prospective BOOT operator, are instructive:
Q. In terms of the interaction with the regulator in the construction phase as Mr. Outhouse mentioned, what's your expectation in terms of -- for example, you build a pipeline. This Board uses a certifying authority and inspects it at, perhaps, all stages of construction and certainly verifies or a certifying authority would verify that it was safe to operate and the Board would issue a permit to operate it. Is it your expectation that ARB pays all those costs?
A. Yes.
Q. So that's included in the B.O.O.T. fee, is it?
A. W ell, yeah. And if it turns out I've missed something dramatic and it turns out the fees are 20 million dollars a year, I'll kind of go, "Ooh, I've got a problem here." But ---
Q. And —
A. But, you know, we're very -- the other systems we operate, Mammoth Lakes, you know, I've got to pay fees to the state of California to come out and do an inspection and I've got to pay fees to the weights and measures group to double check the meters and make sure the meters are all put in properly and those kind of arrangements.
Q. Now, you mentioned that you had some experience with the Sempra application. And the Board, I guess, had some experience, too, in terms of the small bit of construction that was done. And one of the issues that came up was in Nova Scotia pipelines have to be constructed to Canadian standards.
A. Correct.
Document : 82360 79
Q. As an American company, that involved some translation, some time delays and probably some additional costs. And are you prepared for that type of thing that, in fact, American standards are not going to be applicable here, regardless as to their integrity?
A. And that's the reason the engineers here are the ones who -- like I said, I provided certain cost estimates. I don't know exactly the weighting that they put into their cost estimates to come up with these financial projections, but yes, indeed, they were putting those costs into these cost of building the pipelines.
Q. But you understand and acknowledge as a person who may be constructing a system if this franchise was granted that the standards to be met are Canadian standards and not American ones.
A. I understand that fully.
(Transcript, October 16, 2002, pp. 1385-1387)
[104] Strait witnesses also responded that:
Q. Are you aware of the role of the Board in these proceedings in the design, construction and operation of pipelines?
A. (MacDonald) Yes.
Q. And that the Board engages a certifying authority to review the actual work and the rollout and the design? And the Board is at times -- some may think the Board is a little over cautious in terms of the -- particularly in the initial rollout of a system in terms of we engage a certifying authority -- and these costs, by the way, are ongoing costs that have to be paid by the utility. Now, it may be that in your case, it would be worked out with the B.O.O.T. operator, but the question is always, well, how much observation should the certifying authority observe. Should he be there -- should the certifying authority be there for the whole of the construction or part of the construction? And the view of the Board is that in initial rollouts, until the Board and the Board's certifying authority has a level of comfort with the quality of the work -- because as you said earlier, safety is paramount here —
A. (MacDonald) Yes.
Q. --- then the Board will initially wish to assure itself that the quality is there. And as the Board -- as time moves on and if there are no problems, then the Board obviously at some point would feel that the quality is there, the construction is being carried out properly in accordance with all the related standards, and it will not be necessary for the Board to be there 100 percent of the time. But initially the Board will wish to be there just to satisfy itself that all the standards are being complied with. And unfortunately for the utility initially, that means costs. And I just wonder if you have any comment on that.
A. (Murray) I'll make the comment, Mr. Chairman. Strait Area Gas Corporation anticipate becoming and have been officially accepted into the Federation of Alberta Gas Co-ops, and as well as other Canadian municipalities, what they have done -- examples, I've been in discussions with the Town of Devon, the County of Vermilion River -- they have adopted the Federation's Operations and Maintenance guideline, and essentially you'll see some costs, I think it's under Staff Training, other things to that effect. I think the Board will have a level of confidence with our abilities and with the construction of it once we adopt these guidelines. And essentially we will be looking for guidance and
Document : 82360 80
assistance from the Federation, as well, in terms of what we're doing and the competency with which the pipeline is installed.
A. (Murray) And, Mr. Chairman, we do realize that we are under the direction of the Board and will have to comply with the regulations, and realize that you are very diligent in your efforts and there is a contingent fee for those services in our start-up.
Q. W ell, we wouldn't want you to think, Mayor MacDonald, that after the initial -- assuming you were to get the franchise, that after the initial awarding of the franchise and the hearing on the rates, that you won't be hearing from us any more. We're going to be around.
A. (MacDonald) We do not expect that at all. We look forward to the relationship, Mr. Chairman.
Q. And initially there will be costs, there'll certainly be costs. And, in fact, as a matter of fact, I might add, they will be ---
A. (MacDonald) It's ongoing. Yes.
Q. --- ongoing costs because we have staff dedicated in our office to these functions, and so there will be ongoing costs.
A. (MacDonald) W e are fully aware of that.
(Transcript, October 17, 2002, pp. 1456-1459)
[105] The Board wishes to make it clear to both applicants that it fully appreciates the requirement for fairness and reasonableness in incurring and assessing regulatory costs.
However, it should be understood by all parties that the Board intends to discharge its responsibilities with respect to safe pipeline construction and operation by having its certifying authority verify that the pipelines have been constructed in accordance with all required standards and are safe to operate. There will be costs associated with these functions and there will be costs associated with hearings and other activities required to be performed by the Board. Franchise holders will be required to pay these costs.
16.0 MUNICIPAL FEES AND MUNICIPAL TAXATION
Document : 82360 81
[106] GIC Regulation 13(4) sets out the Board’s role with respect to municipal fees:
13(4) If, pursuant to Section 78 of the Public Utilities Act, a municipality does not consent to the construction requested or gives consent that is unacceptable to the franchise holder, the matter shall be referred by the franchise holder to the Board.
[107] In its 1999 decision on natural gas franchise applications, the Board made the following comment on the issue of municipal taxation:
It is important that parties recognize that, for the development of a successful greenfield natural gas market in Nova Scotia, costs must be minimized. The Board expects municipalities to negotiate with Sempra Atlantic in good faith so that the municipal fees will be reasonable in light of the objective of the Province to have a viable natural gas delivery system for the benefit of Nova Scotia. The Board does not believe it is in the best interests of Nova Scotia to burden either Sempra Atlantic or its customers with excessive municipal fees or taxes.
(Board decision - November 16, 1999-NG-98 p.77)
[108] Heritage, in its application, states that:
Heritage Gas acknowledges the distribution system should be subject to a fair and equitable municipal tax system. The pipeline system will be located in municipal property and the distributor will require access to municipal rights-of-way and road infrastructures.
Heritage Gas is also concerned with the potential cost of municipal taxes. In a greenfield marketplace, where municipal taxes levied on infrastructure alone can impede cash flow during the establishment of the customer base, alternative methods of taxation must be considered.
To assist in the successful development of the distribution utility, Heritage Gas will be proposing a province wide municipal taxation system which will be based on annual delivered volumes and/or revenues within each municipality. These arrangements will be subject to further discussions with the municipalities and the Province of Nova Scotia.
A province wide taxation agreement is a fundamental means to ensure fairness throughout Nova Scotia and is consistent with the taxation approach applied in respect of other Nova Scotia utilities. (Exhibit N-3, Section 6, pp. 20-21)
[109] Under cross-examination by Counsel for the Province, Heritage expanded on the issue as follows:
Q. Your inability to come to an agreem ent with municipalities, can you tell me whether or not that will affect, in any way, the roll-out or the commencement of service as set out in your application?
Document : 82360 82
A. (Ritcey) Well, clearly it would affect the timing in roll-out because we don't believe we could build a system and roll it out without those agreem ents in place. I mean, it's our view that we really need those agreements in place prior to putting pipe in the ground and beginning to operate. So I guess, yes, it would affect the timing if we weren't able to put those agreem ents in place. But it would be our full intention to make sure we have those in place such that we could have gas flowing in 2003.
Q. Yes. Mr. Malin, were you going to elaborate?
A. (Malin) I was just going to say that municipal taxes traditionally typically is a flow-through to customers as part of our rate structure, and certainly from our perspective and absolutely why our application proposes the type of municipal tax treatment as we have in our application is because we're going to build up customers from zero to whatever the number is over time, and we think it particularly unfair for those initial customers to pay the load on a facility that's being constructed. And so it makes full sense to m e, anyway, that you'd try to look at that on some type of a revenue basis.
Q. You're aware that the proposed revenue-based taxation system is inconsistent with current legislation in the province.
A. (Ritcey) Yes, we are.
Q. So I take it, is it your intention, if you proceed in that direction, to seek legislative change from the province?
A. (Ritcey) We would have to.
Q. I just want to be clear on this. You are proceeding down the path of a revenue-based taxation system in your discussions with the municipalities, that's correct?
A. (Ritcey) That is correct.
Q. And you are aware that that is inconsistent and therefore it will require a change, that's correct?
A. (Ritcey) That is correct.
Q. And if an agreement is reached that the municipalities and Heritage is satisfied with, you intend to seek that change through the Province of Nova Scotia.
A. (Ritcey) That is correct. (Transcript, October 7, 2002, pp. 145-147)
[110] Under questioning by Strait, Mr. Reeve explained the rationale for a revenue- based taxation model:
Q. One final question with the municipal tax issue. What is the gain from Heritage Gas pursuing the revenue-based tax regime?
Document : 82360 83
A. (Reeve) Well, Mr. Murray, it's essentially -- I wouldn't -- again, I wouldn't argue it's so much a gain for Heritage Gas as it's got an impact on our customers. Really, it's a recognition that says, in the early years as you build infrastructure, you may have very few customers and not that much revenue to try to deal with, and so you've got a property tax base that essentially has to be spread around few customers. So customers have to bear that cost. Really, the revenue-based model is a recognition that as you grow revenue and customer numbers, that essentially allows you to pay a greater amount of tax.
(Transcript, October 11, 2002, p.777)
[111] For its part, Strait indicated to Board Counsel that:
Q. Mr. Read, I'm not certain how municipal taxes are being handled in the business model. Can you tell us? Or what assumptions there are about taxes in the business model.
A. (Murray) Our assumptions in the model -- we have none included in the model. Municipal taxes would be exem pt.
Q. I'm sorry, would be? Exempt? Oh.
A. (MacDonald) If I may, Mr. Outhouse, it hasn't been included now. There is some dispute about what regime is going to be in place for municipal taxes, and they haven't been included. They would have to -- that would change the model.
Q. Okay. So as far as the model goes, they are, in quotation marks, "exempt," but you have not made any final decision what those taxes would be.
A. (MacDonald) No, they wouldn't be exempt.
Q. No.
A. (MacDonald) I think Mr. Murray was referring to other properties owned by the municipality.
Q. Okay.
A. (MacDonald) This would not be owned by the municipality. It would be owned by the franchise.
Q. All right.
A. (MacDonald) And our understanding is, in the discussions we have, that we would look at taking less of a return in the municipal end as opposed to on the taxes, so that it shouldn't affect the bottom line.
Q. It should not affect the bottom line?
A. (MacDonald) No, it shouldn't. It would on the profit end, but there would be nothing in the model that would change other than the net profit would be reduced.
Q. The net profit would be reduced.
A. (MacDonald) Yes.
Document : 82360 84
(Transcript, October 17, 2002, pp. 1423-1424)
[112] The Board continues to be of the view that excessive municipal taxation or fees will detract from the ability of a franchise holder to build out a distribution system, thereby delaying the distribution of natural gas in the Province. The Board awaits, with interest, the outcome of negotiations in this matter.
17.0 LATERAL POLICY
[113] In the Board’s 1999 decision, the following overview of the lateral policy was provided:
Essentially, according to the limited evidence before the Board, the policy was developed by M&NP and endorsed by the NEB. Theoretically, the lateral policy provides for the addition of pipeline facilities (i.e. branch lines off the main pipeline) to markets within the Maritime Provinces to be built by M&NP, with the cost of such extensions to be paid for by all customers on the mainline, including shippers to the United States. This policy was developed in conjunction with the decision to establish a postage stamp toll methodology for the M&NP pipeline. The NEB agreed with M&NP that the Maritime Provinces should be considered as one market region and that the introduction of the lateral policy, coupled with the postage stamp toll, would assist the development of natural gas markets in the Maritimes. Provided certain economic tests are met, (and the application of these tests appears to be evolving in view of the evidence before the NEB in the Halifax lateral hearing), the cost of constructing laterals would be offset by the revenue generated from the additional volumes of gas flowing through the system. The cost of these lateral facilities would be “rolled in” to the existing M&NP tariff.
The NEB is the body which approves any such lateral extension through the use of the M&NP lateral policy, and the Maritime Provinces would essentially be considered as one indivisible region for purposes of assessment by the NEB. It also appears that there are various interpretations of the economic tests being advanced by parties before the NEB and that the NEB has decided to review the applicability of the lateral policy on a case by case basis rather than deal with its application on a generic basis.
(Board decision, November 16, 1999, NG-98, pp. 37-38)
[114] In its application, Heritage commented on the lateral policy as follows:
Heritage Gas will take all reasonable steps to ensure that it minimizes its capital and operating costs. An area that could lead to specific cost savings is in the area of additional laterals, spurs and taps off the M&NP system and custody transfer stations.
M&NP has a Tariff provision that allows for a pipeline extension of its existing transportation
Document : 82360 85
facilities. If a test toll of 60 cents/MMBTU ($.5687/GJ) is met (“Lateral Test”), M&NP will build the facilities without any contribution based on a specified contract demand.
Heritage Gas expects that the Lateral Test may provide distinct benefits to the development of its distribution system and the customers of Nova Scotia. If the situation arises wherein these expected benefits are not realized, then the distributor will work with all stakeholders in developing alternate mechanisms to reduce cost and risk.
(Exhibit N-3, Section 6, p.16)
[115] On cross-examination by Board Counsel, Heritage witnesses stated that:
Q. Thank you, Mr. Clark. Just turn to the next page of your application dealing with the M&NP Lateral Policy. From Heritage Gas' perspective, where within the franchise area does it see the Lateral Policy as having any potential application? The proposed franchise area, I should say. Where within that proposed franchise area would you see that Lateral Policy having application?
A. (Reeve) Well, you know, certainly there is -- if you speak to an area like the Trenton/New Glasgow area that we talked about, it will require a gas transmission pipeline to get into that area to serve, and so that would be possibly one area where you could see the Laterals Policy applied.
Q. I gather you've had no specific discussions, though, with M&NP about that.
A. (Reeve) We had very general discussions. We did not talk about details of where the Lateral Policy may or may not be applied.
(Transcript, October 8, 2002, pp. 240-241)
[116] The Province, in its closing submission, comments that:
The Province recognizes and accepts the difficulty which may be associated with utilizing the Laterals Policy during distribution system development. However, recognizing that the Laterals Policy exists, and may in fact result in significant savings to ratepayers if employed, the Province believes that all reasonable efforts must be taken to utilize it to the fullest extent. Based upon the application and oral evidence of Heritage Gas, it would appear that Heritage Gas also accepts that accessing the laterals policy could yield significant benefit to distribution customers. Accordingly, the Province requests that the Board require Heritage Gas to utilize the Laterals Policy where its use would result in significant overall benefits to distribution customers.
(The Province, Closing Submissions, p. 26)
[117] The Board directs that franchise holders should make all reasonable efforts to utilize the lateral policy if its use would be of benefit to customers.
Document : 82360 86
18.0 ROAD SHOULDERS/ROAD RIGHTS-OF-WAY
[118] One of the factors noted by Sempra Atlantic as an impediment to the build out of its proposed gas distribution system was the policy of the Province which restricted access to road shoulders and road rights-of-way for natural gas distribution pipelines. The restriction on access, which was documented in a letter dated February 8, 1999 from the Department of
Transportation and Public Works to Sempra Atlantic, was the subject of a revised departmental policy, approved in September of 2002 and filed with the Board in the current proceeding as Exhibit N-12.
[119] The Province addressed the issue of use of rights-of-way for pipeline construction in its cross-examination of both Applicants. Heritage, in its post hearing written submission, makes the following comment on the use of road shoulders:
Heritage has been consistent throughout that it does not intend to utilize road shoulders in the Initial Development phase of its system . An econom ically sustainable system can and will be built without resort to shoulder of the road construction.
As noted on several occasions in this written submission, development beyond the Initial Development phase will be market driven. The specifics of that market development cannot be known until the market itself has been established. Therefore it is not possible to be as unequivocal in respect of the use of road shoulders in the expansion of the system beyond the Initial Development phase. However, as a general approach, Heritage will use alternative methods of routing which do not use road shoulders to expand its distribution system. Road shoulders would only be utilized as a last resort. If access to road shoulders is required, it will be necessary to reach an understanding with the Department of Transportation and Public Works to determine whether utilization of a road shoulder is possible.
(Heritage, Post Hearing Written Submission, p. 36)
[120] In response to a question from Heritage’s Counsel concerning the use of road shoulders, Strait indicated:
A. (Keeling) The simple answer is no. The only portion of the rollout area -- there are two kilometres of roadway that fall under provincial jurisdiction. It's not a provincial highway, it's the road leading out of Mulgrave on the -- what would that be? -- the south side, I guess, not going down to Auld's Cove, the other section. Through that section, at this point, it looks like the pipe won't be on the road shoulder, but the vast majority of the pipe
Document : 82360 87
will be in the municipal right-of-way.
(Transcript, October 17, 2002, p. 1510)
[121] The Board believes that the Province’s present position which restricts the use of road shoulders and road rights-of-way for pipeline construction is abundantly clear to all parties.
19.0 FUTURE PROCEEDINGS
[122] As noted earlier in this decision, Heritage’s proposed deferral account, gas cost variance account, and the question of exit fees for customers leaving the gas distribution system, will be reviewed in its Tolls and Tariffs hearing. The Board would also expect the proposed Distributors’ and Marketers’ Codes of Conduct, as revised by the newly formed working group, to be presented for approval at that time. The Board understands that Heritage will apply initially for an interim rate and, subsequently, will file for approval of long term rates.
It is this second filing which will be the subject of the future proceeding.
[123] Also, as noted earlier, the requirement for Strait to file an executed BOOT agreement, together with additional information which has been outlined, will require a further proceeding. In the Board’s opinion, in view of the deficiencies in Strait’s application, Strait will be required to produce additional evidence and to permit cross-examination of that evidence, especially with respect to the BOOT agreement. The Board will notify the parties when the documentation is filed by Strait and will provide Directions with respect to the process to be followed in reviewing Strait’s submission.
Document : 82360 88
20.0 SUMMARY OF FINDINGS
HERITAGE
20.1 Grant of Franchise
[124] The Board has determined that, subject to the conditions noted, it is appropriate to grant to Heritage a full regulation class franchise for a period of 25 years, subject to the approval of the Governor in Council. The franchise area will consist of five of the eight areas applied for by Heritage and is more specifically described as Cumberland, Colchester, Pictou and Halifax Counties, the Municipality of the District of East Hants and the Goldboro area of
Guysbourough County.
[125] For reasons which are noted in Part Three of the decision, the Board has approved, in principle, the grant of a franchise to Strait and the Board has included Inverness,
Richmond and Guysborough Counties (excluding Goldboro) in Strait’s franchise area rather than Heritage’s franchise area.
20.2 Existence of Markets
[126] The Board is satisfied that Heritage’s assessment of the actual or potential market for natural gas, and its methodology and resulting estimates, are reasonable.
20.3 Availability of Adequate Supply
[127] The Board has concluded that Heritage will have access to an adequate natural gas supply to meet both the immediate and long term needs of Nova Scotia natural gas customers. Prior to the commencement of service, the Board will require confirmation from
Document : 82360 89 franchise holder that gas supply and ancillary services, supplier of last resort and backstopping arrangements are in place.
20.4 Feasibility Test - Application
[128] While the Board understands the logic of focusing on large “anchor load” customers, it remains concerned that Heritage has projected a disappointingly low number of approximately 4,000 residential customers by the end of the 10 year development period. In view of the cautious approach suggested by Heritage, the Board believes that the strict nature of the feasibility test should be modified somewhat to encourage system expansion.
Accordingly, the Board directs that the period over which the total cost to total revenue component of the feasibility test is applied be extended to seven years from five years.
20.5 Feasibility Test - Ongoing Review
[129] The Board believes that since Heritage makes no specific commitment to build all or part of its proposed distribution system, ongoing review by the Board is warranted.
20.6 Customer Commitment
[130] The Board understands from the evidence that Heritage defines customer commitment as a signed agreement to take service prior to conducting the feasibility test. The
Board understands the concerns of the Province and marketers with respect to the requirement for a signed contract as an indication of customer commitment to take gas for the purposes of the feasibility test. The Board also recognizes the legitimate need on the part of
Document : 82360 90
Heritage to obtain a meaningful and binding commitment from customers to take gas prior to putting pipe in the ground, and the Board finds that a contract signed by residential customers is a reasonable requirement under these circumstances. For purposes of the feasibility test, however, it is the Board’s view that something less than a signed contract should be acceptable for prospective residential customers.
20.7 Tolls and Tariffs Proceeding/Extension of Services
[131] The Board directs that, as part of Heritage’s Tolls and Tariffs proceeding,
Heritage is to provide a detailed description of the feasibility test and specific examples of its application to be available for discussion and comment by all parties at that time. Should
Heritage decide not to extend service to areas within its franchise where the feasibility test otherwise appears to be met, the Board reserves the right to review the decision of Heritage not to build and may order Heritage to extend service if it finds that it is justifiable to do so.
20.8 Financial Capability and Related Experience
[132] The Board finds that Heritage has met the regulatory requirement relating to financial capability and related experience.
20.9 Capital Structure and Cost of Debt
[133] The Board finds that the proposed debt equity ratio of 55:45, and the proposed
8.75% for the cost of debt, are reasonable and approves them as proposed.
Document : 82360 91
20.10 Deferral Account
[134] The Board is not opposed, in principle, to the establishment of a deferral account. However, it does believe that this issue would be more appropriately dealt with at the Tolls and Tariffs hearing at which time Heritage would be expected to provide a detailed explanation of those costs proposed for inclusion; the manner in which the account would operate; the term of the deferral account; and other issues relating to the account.
20.11 Return on Equity
[135] After careful review of the proposed 14% ROE, the Board finds that, on balance, the proposed rate is too high and, accordingly, reduces the ROE to 13%.
20.12 Socio-Economic Impact Statement and Benefits Plan
[136] The Board is satisfied that the socio-economic impact statement and benefits plan presented by Heritage satisfies the requirements of the GIC Regulations. The Board agrees with the points raised by the Province with respect to compliance reporting to improve accountability and transparency. Accordingly, as part of the reporting required by s.9 of the
GIC Regulations, Heritage shall:
(a) provide details of local procurement of goods and services during the initial years of system development; and
(b) set out the specific measures taken to encourage supplier development in Nova Scotia.
Document : 82360 92
STRAIT
20.13 Approval of Grant of Franchise “in principle”
[137] The Board is not yet satisfied, based on the evidence currently available, that
Strait has met the franchise requirements set out in the Act and GIC Regulations. However, the Board is cognizant of the time and effort spent by Strait in making the application and is generally aware of the potential benefit to the area of the timely construction of a gas distribution system. Accordingly, the Board has determined that it is appropriate to approve the grant of a franchise to Strait, in principle, subject to the approval of the Governor in Council and subject to the directives and conditions outlined in this decision. The directives include
Strait filing documentation, to be reviewed in a second phase of the hearing into Strait’s franchise application, which satisfies the Board that Strait meets the statutory and regulatory requirements for a franchise.
[138] Strait’s franchise approved, in principle, consists of areas in Antigonish,
Inverness, and Richmond Counties and Guysborough County (excluding Goldboro), as described in its application.
20.14 Existence of Markets
[139] The Board is not satisfied that Strait has met the statutory test with respect to the actual or potential market for natural gas in its proposed franchise area. However, the
Board is mindful of the effort which has been made by Strait and is generally cognizant of the potential for a natural gas market in the Strait area. The prospective BOOT operator has indicated a willingness to continue to negotiate in the absence of the combined cycle
Document : 82360 93 generation facility and the Board finds that it is reasonable to allow an opportunity for such a process to occur.
20.15 Availability of Adequate Supply
[140] The Board finds that it is more likely than not that Strait will have access to adequate gas supply as a franchise holder. As a condition of franchise approval, Strait will be required to demonstrate to the Board that it, or its gas marketer, has access to sufficient gas supply to provide service under its franchise, and that supplier of last resort, ancillary services and backstopping arrangements are in place.
20.16 Economic Feasibility - BOOT Agreement
[141] The Board is unable, based on the information before it, to find that Strait has met the test of economic feasibility. Similarly, its plans for service are uncertain as they will ultimately be determined by the final BOOT agreement which does not yet exist. The Board believes that, in this case, it is reasonable to allow Strait an opportunity, using a revised financial model, to negotiate a BOOT agreement which would meet with the approval of the
Board. While it is concerned that Strait’s application has a number of deficiencies, on balance, the Board believes it is reasonable and in the public interest to give Strait an opportunity to succeed.
20.17 Filing Requirements - BOOT Agreement - Phase II
[142] The Board finds it is reasonable to approve the granting of a franchise to Strait
Document : 82360 94 on an “in principle” basis. The conditions applicable to such approval, as it relates to the
BOOT agreement, are as follows:
1. Strait shall provide to the Board, within six months from the date of acceptance of the
Board’s recommendation by the Governor in Council, an executed and legally binding
copy of a BOOT agreement. The Board will review the agreement, and supporting
documentation, to determine whether the agreement is reasonable, adequate, and in
compliance with the requirements of the Act and GIC Regulations. In particular, the
Board will look for clarification and specifics concerning:
(a) the BOOT fee/schedule of payments (b) bridge financing (c) operating costs (d) regulatory costs (e) decision making - in particular with respect to system build-out (f) staffing (g) maintenance of the system (h) public safety (i) insurance (j) responsibility for financial losses (k) contractor selection/NS content (l) bidding process (m) transfer of assets to Strait
The above is not intended to be an all-inclusive list.
2. As part of the information required in its BOOT agreement filing, Strait shall file a copy
of a shareholders’ agreement and the operating agreement governing the relationship
between the Towns and Strait and the BOOT operator.
Document : 82360 95
20.18 Phase II/Costs
[143] The Board will be conducting a second phase of the hearing into Strait’s application at which time Strait’s evidence will be the subject of review and comment by
Intervenors. Strait should be aware that, as the applicant for a franchise, it will be expected to cover the Board’s regulatory costs as a result of this proceeding.
20.19 Financial Capability and Related Experience
[144] Strait’s application is deficient with respect to financial capability, and as noted earlier, without a completed BOOT agreement, fundamental information is unavailable to the
Board. Consequently, the Board cannot form an opinion as to whether the application is economically viable. Despite its reservations, the Board has decided to approve the grant of franchise to Strait on an “in principle” basis. Accordingly, Strait will be required to file detailed information with respect to the experience and financial capability of the BOOT operator ultimately selected by Strait. This information should be filed at the same time as the executed
BOOT agreement is filed and will also be subject to review and comment by Intervenors at the second phase of the hearing into Strait’s application.
20.20 Socio-Economic Impact Statement and Benefits Plan
[145] The Board considers that the benefits plan filed by Strait meets the requirements of the GIC Regulations, as such. However, the Board is unable to satisfy itself that Strait will be in a position to implement all of the proposals outlined in the benefits plan since there is no definitive BOOT agreement in place. Consequently, during the proceeding to review the
Document : 82360 96 executed BOOT agreement, the Board will require Strait to identify which, if any, components of the proposed benefits plan will be modified as a result of the completed BOOT agreement.
OTHER
20.21 Gas Sales
[146] The Board believes that it is reasonable to approve Heritage’s request for a gas marketer’s licence in this decision. However, to facilitate a level playing field for all potential gas marketers, the Board is prepared to consider gas marketer’s licence applications from all interested marketers with a view to issuing licences to qualified applicants, including Heritage, within the same time frame.
20.22 Licencing Process
[147] For an interim period, applications for gas sales licences will be processed and issued on the basis established in the Board’s gas sales licence decision dated September
15, 2000. This interim approach has the advantage of utilizing, to the extent practical, the previous efforts of the former working group and subsequent Technical Conference (in which some current Intervenors were participants). Accordingly, the Board will, in the near future, issue interim gas marketer regulations and use interim application forms and interim licence forms pursuant thereto until the working group process outlined in this decision has concluded.
Document : 82360 97
20.23 Codes of Conduct - Working Group
[148] The Board believes it is necessary for a further Code of Conduct to be developed to govern dealings between distributors and marketers under the revised regulatory regime.
The Board encourages the formation of a working group and believes that a final version of the Distributors’ Code of Conduct and a final version of a code governing the conduct of marketers, should be produced by this group. The Board expects that the working group will develop one Distributors’ Code of Conduct and one Marketers’ Code of Conduct which will apply to all holders of gas distribution franchises and marketers in the Province and which will be provided to the Board for approval. In the interim, the Board approves the draft
Distributors’ Code of Conduct filed by Heritage.
20.24 Gas Cost Variance Account
[149] Heritage, in its application, has proposed to use a gas cost variance account
(“GCVA”) as a mechanism to ensure that the distributor is compensated for actual gas costs and the customer is charged for actual gas costs. The Board has no difficulty, conceptually, with the idea of a GCVA. The specifics of the GCVA will be deferred to the Heritage Tolls and
Tariffs proceeding where the details of the operation of the GCVA can be fully reviewed.
20.25 Regulatory Oversight
[150] The Board wishes to make it clear that it fully appreciates the requirement for fairness and reasonableness in incurring and assessing regulatory costs. However, it should be understood by all parties that the Board intends to discharge its responsibilities with respect
Document : 82360 98 to safe pipeline construction and operation by having its certifying authority verify that the pipelines have been constructed in accordance with all required standards and are safe to operate. There will be costs associated with these functions and there will be costs associated with hearings and other activities required to be performed by the Board. Franchise holders will be required to pay these costs.
20.26 Municipal Fees and Municipal Taxation
[151] The Board continues to be of the view that excessive municipal taxation or fees will detract from the ability of a franchise holder to build out a distribution system, thereby delaying the distribution of natural gas in the Province.
20.27 Lateral Policy
[152] The Board directs that franchise holders should make all reasonable efforts to utilize the lateral policy if its use would be of benefit to customers.
20.28 Road Shoulders/Road Rights-of-Way
[153] The Board believes that the Province’s present position, which restricts the use of road shoulders and road rights-of-way for pipeline construction, is abundantly clear to all parties.
20.29 Future Proceedings - Strait
[154] In view of the deficiencies in Strait’s application Strait will be required to produce
Document : 82360 99 additional evidence and to permit cross-examination of that evidence, especially with respect to the BOOT agreement. The Board will notify the parties when the documentation is filed by
Strait and will provide Directions with respect to the process to be followed in reviewing Strait’s submission.
Document : 82360 100
An Order will issue accordingly.
DATED at Halifax, Nova Scotia, this 7th day of February, 2003.
______John A. Morash, Chair
______Margaret A.M. Shears, Vice-chair
______John L. Harris, Member
______Kulvinder S. Dhillon, Member
Document : 82360 APPENDIX A
HERITAGE GAS LIMITED
TERMS AND CONDITIONS OF FRANCHISE
The Board imposes the following terms and conditions on the grant of franchise to Heritage.
1. The terms and conditions set out below are in addition to the terms and conditions contained in the Act and GIC Regulations.
2. Unless the Board otherwise directs, the full regulation class franchise granted by the Board, subject to Governor in Council approval, shall be held and operated by Heritage Gas Limited for a term of 25 years.
3. Heritage Gas Limited shall implement or cause to be implemented, as modified by this decision or by future Orders of the Board, its gas delivery plan and financial plan as set out in its application for the construction of a natural gas delivery system in all or parts of Cumberland, Colchester, Pictou, Halifax, the District of East Hants, and in the Goldboro area of Guysborough County, in accordance with all federal, provincial, and municipal legislation.
4. Heritage Gas Limited shall take all reasonable measures to implement or cause to be implemented all of the commitments, policies and practices set out in its application.
5. Heritage Gas Limited shall take all reasonable measures to implement or cause to be implemented all of the commitments, policies and practices set out in its socio- economic impact statement and benefits plan included in or referred to in its application, and as adduced in evidence before the Board in this proceeding.
Document : 82360 2
6. Heritage Gas Limited shall file with the Board, in a timely manner, all required applications pursuant to the Pipeline Act and regulations, and any other applicable enactments, with respect to the construction, operation, maintenance and inspection of its gas delivery system.
7. The total cost to total revenue component of the feasibility test is to be applied over seven years.
8. Where the feasibility test otherwise appears to be met, the Board reserves the right to review the decision of Heritage Gas Limited not to build out in certain areas and may order Heritage to extend service if it finds that it is justifiable to do so.
9. The allowed Return on Equity (ROE) is 13%.
10. Unless the Board otherwise directs, Heritage Gas Limited shall follow the following Regulatory Calendar:
Filing Requirement Filing Date
1. Financial Reports (audited) March 31 (for prior year)
2. Detailed report on all activities in the March 31 (for prior year) Gas Cost Variance Account
3. Detailed report on all activities in the March 31 (for prior year) Deferral Account
4. Detailed report on the application of the Quarterly Feasibility Test
5. Socio-Economic and Pipeline Semi-annually Benefit Plan reports which also detail local procurement of goods and services during system development. These reports must include specific measures taken to encourage supplier development in Nova Scotia.
Document : 82360 3
6. Other reports which the Board may As required determine are necessary.
11. Prior to the commencement of service, Heritage shall file confirmation that gas supply and ancillary services, supplier of last resort and backstopping arrangements are in place.
Document : 82360 APPENDIX B
STRAIT AREA GAS CORPORATION
DIRECTIVES CONCERNING APPROVAL, IN PRINCIPLE, OF GRANT OF FRANCHISE
The Board imposes the following directives on the approval to grant, in principle, a franchise to Strait Area Gas Corporation.
1. The directives set out below are in addition to the terms and conditions contained in the Act and GIC Regulations.
2. Unless the Board otherwise directs, the full regulation class franchise granted in principle by the Board, subject to Governor in Council approval, shall be held and operated by Strait Area Gas Corporation for a term of 25 years.
3. Strait Area Gas Corporation shall provide to the Board, within six months of approval of the Board’s recommendation by the Governor in Council, an executed copy of a BOOT agreement. The Board will review the agreement, and supporting documentation to determine whether the agreement is reasonable, adequate, and in compliance with the requirements of the Act and Regulations. In particular, the Board will look for clarification and specifics concerning: a) the BOOT fee/schedule of payments b) bridge financing c) operating costs d) regulatory costs e) decision making - in particular with respect to system build-out f) staffing g) maintenance of the system h) public safety i) insurance j) responsibility for financial losses k) contractor selection/NS content
Document : 82360 l) bidding process m) transfer of assets to Strait
2
n) any additional information as may be required by the Board.
4. Strait Area Gas Corporation shall file with the Board detailed information with respect to the experience and financial capability of the BOOT operator ultimately selected by Strait Area Gas Corporation.
5. Strait Area Gas Corporation shall identify what, if any, components of the proposed benefits plan will be modified by the executed BOOT agreement.
6. As part of the information required in its BOOT filing Strait Area Gas Corporation shall provide confirmation that gas supply and ancillary services, supplier of last resort and backstopping arrangements are in place.
7. As part of the information required in its BOOT agreement filing, Strait shall file a copy of a shareholders’ agreement and the operating agreement governing the relationship between the Towns and Strait and the BOOT operator.
8. Strait’s BOOT agreement filing, together with the information noted above will be the subject of Phase II of the hearing into Strait’s franchise application.
Document : 82360 APPENDIX C LIST OF FORMAL INTERVENORS
Town of Amherst Landis Mining Corporation Roger MacIsaac, Director, Economic Development and David Birkett Tourism President Brian S. Creighton
Antigonish Regional Development Authority Maritimes NRG (Nova Scotia) Limited John Parker Christopher Stewart Debby Jackson
Town of Berwick New Democratic Party Caucus (NDP) c/o Mr. Don Regan Shawn Fuller Superintendent, Berwick Electric Commission Manager of Research
Canadian Association of Petroleum Producers Nova Scotia Power Inc. Brian Troicuk James L. Connors, Q.C. Manager, Natural Gas Vice President, Regulatory Affairs, Emera Inc. Melvin Whalen Manager, Regulatory Affairs and Rates, NSPI
Canadian Oil Heat Association - NS Chapter Province of Nova Scotia - Department of Energy David A. Hovell James R. Gogan Executive Director Allan Crandlemire Manager, Gas Marketing and Distribution
Competition Bureau Province of Prince Edward Island Richard Robicheau Wayne MacQuarrie, P.Eng. Commerce Officer, Civil Matters Branch Chief Executive Officer Prince Edward Island Energy Corporation
Emera Energy Inc. Municipality of the Co. of Richmond James L. Connors, Q.C. Louis Digout, C.A.O. Vice President, Regulatory Affairs Wayne Rousch Senior Vice President
GasWorks Energy Corporation Sempra Atlantic Gas John H. Reynolds, P. Eng. Hal Snyder Dwight E. Jeans Director of Operations Dale Kelly-Cochrane
Geostorage Associates Stora Enso Port Hawkesbury Limited Alan Ruffman, P.Geo. George T. H. Cooper, Q.C. Partner David MacDougall Fred Hussey Vice President, Engineering & Special Projects
Halifax Regional Municipality The Sydney & Area Chamber of Commerce Mary Ellen Donovan Anne Marie Singler Senior Solicitor John MacIsaac
Imperial Oil Resources Union of Nova Scotia Municipalities R. R. Moore Jamie S. Campbell, Q.C. Manager, Regulatory Affairs Ken Simpson Gas and NGL Marketing Executive Director, UNSM
Irving Energy Services Limited Wilson Fuel Co. Limited Christopher Stewart c/o Ian Wilson, President Mark Brown Director of Natural Gas Marketing
WPS Energy Services, Inc. Jon F. Sorenson Ed Howard
Document : 82360 APPENDIX D
NOVA SCOTIA UTILITY AND REVIEW BOARD
NATURAL GAS DISTRIBUTION
DIRECTIONS ON PROCEDURE
June 24, 2002
Franchise Hearing
I. INTRODUCTION
1. The Nova Scotia Gas Distribution Act (the "Act"), the Gas Distribution Regulations (Nova Scotia) and the Board Gas Distribution Regulations (Nova Scotia) (collectively the "Regulations") regulate the delivery and sale of natural gas within the Province. The purposes of the Act are to: (a) provide a framework for the orderly development and operation of a gas delivery system in the Province; and (b) allow for fair competition in the sale of gas for consumption in the Province.
2. Pursuant to Section 8 of the Act, the Nova Scotia Utility and Review Board (the “Board”) may grant a franchise to distribute natural gas, subject to approval of the Governor in Council.
II. GENERAL
3. By these Directions on Procedure, the Board is inviting applications for a full-regulation class franchise to construct and operate a gas delivery system covering multiple areas of the Province. To qualify for consideration, applications must provide for gas distribution service to at least four counties over the initial ten years of the proposed franchise operation. The Board intends to convene a subsequent proceeding which will deal with applications for full regulation class franchises covering less than four counties.
4. The Board proposes to conduct a single, integrated process for filing and hearing all multiple- area franchise applications.
Document : 82360 2
III. PROCEDURE
5. The procedures and timelines for the conduct of the proceeding are summarized in Attachment 1 and more fully described below.
Notice of Intention to Apply
6. Prospective applicants are required to file a formal Notice of Intention to Apply by July 8, 2002. The Notice of Intention to Apply shall include summary information on each of the following matters:
(a) the proposed geographic boundaries of the franchise area (including a preliminary map); and
(b) a general description (of three to five pages in length) of the main features of the proposed application for a franchise.
7. The Notice of Intention to Apply must be accompanied by a non-refundable fee of $25,000.
8. By July 10, 2002, the Board will publish a List of Intended Applicants setting out the names and particulars of applicants filing a Notice of Intention to Apply.
Interventions
9. By July 22, 2002, those wishing to intervene in this proceeding with respect to one or more franchise applications must file a written intervention with the Board and serve a copy on each applicant at the address set out in the List of Intended Applicants.
10. Interventions shall specify the name and contact particulars (including phone and, if applicable, facsimile number) of the party and shall state the nature of the party’s interest in the proceeding. Intervenors must also specify in their written interventions if they wish to receive copies of the applications and documents filed subsequently, and whether they intend to appear at the hearing. Each Applicant will provide a copy of its application and all subsequent filings to intervenors indicating that they wish to receive same.
11. By July 24, 2002, the Board will distribute a List of Intended Applicants and Intervenors. Each intervenor whose name appears on the list must serve a copy of its intervention, and of any other documents subsequently filed by that Intervenor, on each applicant and other intervenors.
Document : 82360 3
Applications
12. An Application for Franchise, together with all supporting evidence and documents, must be filed by August 16, 2002. The information required to be included in each such application is prescribed by the Regulations.
13. The Application for Franchise must be accompanied by the balance of the non-refundable application fee in the amount of $225,000.
14. Applications must be complete in all material respects at the time of filing. Motions for amendment or the filing of supplementary evidence or documents will only be considered in exceptional circumstances and where it is clearly demonstrated that other applicants or intervenors would not be prejudiced.
15. Applicants will be required to keep available at their offices in Nova Scotia, for public inspection during normal office hours, copies of their applications and all other documents filed in this proceeding.
16. The Board will direct applicants to deposit copies of their applications and all documents filed in this proceeding to be available for public inspection at various other locations in the Province to be determined by the Board.
17. Copies of all documents filed in this proceeding will also be available for viewing at the Board offices during business hours.
18. By August 19, 2002, the Board will publish a List of Applicants.
Information Requests and Intervenor Evidence
19. Information requests, responses and intervenor evidence shall be filed with the Board and served on all applicants and intervenors in accordance with the dates specified in Attachment 1 to these Directions on Procedure.
Public Hearing
20. The hearing to consider all applications will commence at 8:30 a.m. on October 7, 2002, at a location in Halifax to be determined. Subsequent hearing dates and sitting hours will be determined by the Board at the commencement of the hearing.
21. During the public hearing, the Board will conduct informal evening sessions to accommodate members of the public who do not want all the obligations and rights that intervenor status entails, but who wish to make oral submissions to the Board on issues relevant to this proceeding. Dates for the informal sessions will be announced at the opening of the public hearing. Notice of the dates for the informal sessions will also be sent by ordinary mail or by
Document : 82360 facsimile to members of the public who provide their name, address and facsimile number to the Board in writing.
4
22. During the informal sessions, participants may be required to respond to questions about their submissions from other participants or from the Board.
23. Members of the public who wish to make written submissions to the Board on issues relevant to this proceeding, rather than participating in the informal evening sessions, may file a Letter of Comment with the Board by September 30, 2002.
Filing and Service Requirements
24. When filing or serving documents, applicants and intervenors shall provide twenty-five (25) copies to the Board and one copy to each other party. Applicants and intervenors filing documents at the public hearing shall provide twenty-five (25) copies to the Board and shall leave a sufficient number of copies for all other parties participating in the hearing at a designated location in the hearing room.
25. Unless otherwise directed by the Board, documents shall be filed with the Board and served on all other parties by 4:00 pm Atlantic Time on the days specified in the attached timetable.
Revisions to Directions on Procedure
26. These Directions on Procedure may be revised in order to ensure that the Board's process is appropriate having regard to the number and nature of applications that are actually filed.
27. Enquiries should be directed to:
THE CLERK Nova Scotia Utility and Review Board 3rd Floor, 1601 Lower Water Street Box 1692, Unit "M" Halifax, Nova Scotia B3J 3S3
Telephone: (902) 424-4448
Facsimile: (902) 424-3919
E-mail: [email protected]
These Directions on Procedure under s. 4 of the Board Gas Distribution Regulations (Nova Scotia) were issued by the Nova Scotia Utility and Review Board
Document : 82360 by Order dated the 24th day of June, 2002.
______Clerk of the Board
5
Nova Scotia Utility and Review Board Directions on Procedure Attachment 1
T I M E T A B L E
Event Date
Directions on Procedure June 24, 2002 Notice of Proceeding June 24, 2002 Notice of Intention to Apply July 8, 2002 List of Intended Applicants July 10, 2002 Interventions July 22, 2002 List of Intended Applicants and Intervenors July 24, 2002 Franchise Applications August 16, 2002 List of Applicants August 19, 2002 Information Requests to Applicants September 3, 2002 Applicant Responses September 17, 2002 Intervenor Evidence and Letters of Comment September 30, 2002 Hearing Commences October 7, 2002
Document : 82360 NOVA SCOTIA UTILITY AND REVIEW BOARD
BOARD GAS DISTRIBUTION REGULATIONS (NOVA SCOTIA)
REGULATIONS MADE BY THE NOVA SCOTIA UTILITY AND REVIEW BOARD PURSUANT TO S. 41(1) OF CHAPTER 4 OF THE STATUTES OF NOVA SCOTIA, 1997, THE GAS DISTRIBUTION ACT
9. These Regulations may be cited as the Board Gas Distribution Regulations (Nova Scotia).
10. In these regulations, unless the context indicates otherwise, words and expressions have the same meaning as in the Gas Distribution Act and the Gas Distribution Regulations (Nova Scotia) enacted under Section 42(1) of the Act.
3. The previous Board Gas Distribution Regulations (Nova Scotia) dated November 24, 1998 are hereby repealed.
PART I
APPLICATION FOR FRANCHISE
4. The Board may at any time invite applications for a franchise by issuing directions on procedure for the processing of applications for a franchise in accordance with a timetable specified in such directions.
Document : 82360 5. (1) During a period that falls within a timetable specified in directions on procedure issued pursuant to Section 4, an application for a franchise shall be made in accordance with the directions on procedure.
(2) Subject to subsection (1), a company may apply to the Board for a franchise at any time.
2
6. Notwithstanding anything in these regulations or directions on procedure issued by the Board, the Board may at any time request additional information from an applicant for a franchise or any participant in a proceeding to consider an application for a franchise.
7. Unless the Board otherwise directs, an application for a franchise shall include the following:
(a) the name and, if applicable, the place of incorporation of the applicant;
(b) a description of the business of the applicant;
(c) the name and contact particulars of an individual to whom inquiries with respect to the application are to be directed;
(d) the class of franchise being applied for;
(e) the geographic boundaries of the proposed franchise area;
(f) the proposed term of the franchise, which shall be 25 years;
(g) evidence of the existence of markets, actual or potential, throughout the proposed franchise area, with annual consumption forecasts for the following categories of customers:
(i) users of gas in an amount less than 500 gigajoules per year;
(ii) users of gas in an amount equal to or greater than 500 gigajoules per year but less than 10,000 gigajoules per year;
Document : 82360 (iii) users of gas in an amount equal to or greater than 10,000 gigajoules per year but less than 100,000 gigajoules per year;
(iv) users of gas in an amount equal to or greater than 100,000 gigajoules per year;
(h) the availability of adequate gas supply;
(i) the financial capability of the applicant;
(j) related experience of the applicant in the delivery of gas;
3
(k) the plans of the applicant to provide delivery service throughout the franchise area within 10 years from the date of the granting of the franchise, including;
(i) a general description of the facilities for the gas delivery system;
(ii) the anticipated cost of the gas delivery system;
(iii) a proposed timetable for construction, operation and expansion of the gas delivery system;
(l) the Socio-Economic Impact Statement and evidence of commitments to encourage competition among agents, gas marketers, and brokers in the sale of gas within the proposed franchise area required by subsections (c) and (e) of Section 5 of the Gas Distribution Regulations (Nova Scotia);
(m) a description of the public information program conducted or being conducted by the applicant with respect to the franchise application including:
(i) an explanation of the steps taken to notify the public and the consultation conducted;
(ii) a summary of the comments received and concerns raised;
(iii) a discussion of the measures the applicant has taken or proposes to t ake to
Document : 82360 respond to the comments and resolve the concerns;
(n) Pro forma financial statements for the proposed facilities for a period of not less than 10 years from the anticipated date of commencement of delivery service, including:
(i) statement of revenue and expenses and balance sheet;
(ii) annual capital expenditures;
(iii) proposed delivery service rates and estimated utility income at the proposed rates;
(iv) estimated rate base, including an allowance for working capital; and
(v) estimated rate of return.
4
PART II
ASSIGNMENT, TRANSFER OR AMENDMENT
8. The requirements of section 7 apply to an application for an assignment, transfer or amendment of a franchise to the extent to be determined by the Board within 30 days of receipt of the application.
PART III
FEES
9. (1) An application for the granting of a franchise, other than the assignment, transfer or amendment of a franchise, shall be accompanied by a fee in the amount of $250,000. The Board may specify in the directions on procedure that a portion of the foregoing fee shall be paid upon the filing of a Notice of Intent to Apply for a franchise.
(2) Municipalities and co-operatives are exempt from the fee in subsection 1.
Document : 82360 10. An application for authorization of an assignment, transfer or amendment of a franchise shall be accompanied by a fee in the amount of $5,000. The Board may waive all or any part of the prescribed fee if in the opinion of the Board the application for assignment, transfer or amendment is routine in nature.
These Regulations under the Gas Distribution Act were made by the Nova Scotia Utility and Review Board on the 20th day of June, 2002.
Signed
Clerk of the Board
Document : 82360