2. NATURAL GAS
1. Background

Prior to the recent development of Sable Island gas fields off the Nova Scotia coast, there were no widespread natural gas distribution facilities in New Brunswick. The Maritimes & Northeast Pipeline ("M&NP") transmission mainline transports Sable gas across Nova Scotia and New Brunswick to markets in the Northeast U.S. With completion of the Saint John lateral and connections to the mainline, New Brunswick markets received gas in December 2000. It is anticipated that the introduction of natural gas will provide opportunities for increased inter-fuel competition and significant environmental benefits.

The M&NP mainline and laterals are inter-provincial and, consequently, federally regulated by the National Energy Board. A lateral policy approved by the National Energy Board offers an opportunity to expand pipeline coverage by providing a single natural gas transportation tariff (postage stamp toll) throughout the province. The postage stamp transportation toll applies to the mainline and M&NP laterals that meet a threshold toll test, signifying they are economically justified. The level of the threshold will not change until the mainline undergoes expansion.

While the M&NP mainline and laterals are federally regulated, natural gas distribution and marketing are both under provincial jurisdiction. The process for formulating provincial natural gas development guidelines was initiated in July 1998 with circulation of an Expression of Interest document to potential gas distributors asking for their input in development of government policies. In August and September 1998, the 53rd Legislative Assembly created an all parties Select Committee on Energy, whose mandate included examination of the future of natural gas in New Brunswick. The Select Committee held a series of public hearings, with the purpose of providing potential natural gas distribution companies and other interested parties the opportunity to present their position on natural gas distribution issues. The Select Committee report, Natural Gas for New Brunswick, was released in November 1998. Government decisions were based on recommendations by the Select Committee, and formed the foundation for a framework on natural gas development in the province.

Legislation was created to reflect the path New Brunswick had initiated with respect to development of a natural gas infrastructure. The Gas Distribution Act, 1999, which received royal assent in March 1999, served to update, expand and consolidate the province’s laws on gas distribution and regulation previously found in the Gas Distribution Act (1981), Pipe Line Act, Public Utilities Act, Underground Storage Act and Municipalities Act.

Selection of a natural gas distributor was through a Request for Proposals process. The 20-year general franchise was awarded to Enbridge Gas New Brunswick, Inc. ("EGNB") on August 31, 1999. In keeping with recommendations by the Select Committee, the franchise was granted on a province-wide basis to increase the likelihood that the objective of uniform distribution rates and penetration of natural gas throughout the province would be met.

While there is a strong preference for fostering development of a market that reflects customer choice, it is unlikely that everyone will have equal access to natural gas. Although the Province favours encouraging natural gas availability to all regions, the market will develop more easily in those areas where large industry is located, the population is more concentrated and which are closer to the M&NP pipeline.

The Province will encourage rapid economic development of the natural gas infrastructure, making gas as widely available as is economically justified and in a manner that maximizes benefits to the citizens of New Brunswick. The framework established to achieve this objective includes a competitive natural gas market from the outset, thereby allowing natural gas marketers to compete for customers while the distributor, which is a gas transportation monopoly, remains under the authority of the provincial regulator ("Board").

To promote the realization of the objectives of this policy, initiatives on natural gas will focus on the following:

• Development of an indigenous natural gas industry;
• Development of a viable, natural gas delivery system, including continued support for the federal lateral policy; and
• Promotion of market-based fuel selection and consumption decisions.

2. Development of a Viable Natural Gas Delivery System
1. Extension of Natural Gas Laterals and Distribution System

The Province has been an effective participant in National Energy Board Hearings involving development of Sable gas and the M&NP pipeline project. The National Energy Board approved a lateral policy to M&NP whereby the cost of constructing laterals off of the main pipeline will be "rolled-in" to the overall cost of service provided that the average rates do not increase above revenue realized from the addition of the lateral. Accordingly, if potential loads provide enough revenue to support an investment in a new lateral, then the lateral will be built. The $0.60 per MMBtu toll test will remain in place until there is a mainline expansion, at which time the appropriateness of the toll test may be reconsidered. The current plan provides for a postage stamp rate throughout the province, where the cost for delivering gas to the end of any lateral will be no different than along the mainline.

This offers a unique opportunity to make gas available to many areas in New Brunswick without creating intra-provincial transportation cost discrepancies. Energy is regulated by a both federal and provincial legislation. To protect New Brunswick interests, the Province will continue to actively participate at future regulatory board energy hearings.

The Province recognizes the importance of promoting natural gas availability to all regions of New Brunswick. This may prove to be a challenge for regions farthest from the mainline, which may have insufficient natural gas demand (anchor loads) relative to the length of lateral required to transport gas from the mainline. It is the Province’s objective to ensure that pipeline lateral development is economically justified. The intent is to avoid building costly laterals that are not economically sustainable. Such laterals would require significant subsidies that could, if charged on the backs of all consumers, price natural gas out of the reach of potential users. For this reason, broad-based provincial government subsidies for the construction of laterals will not be supported. However, under special circumstances, an aid-to-construct may be considered as a last resort.

The Government will continue to explore and evaluate every reasonable opportunity for the expansion of the natural gas infrastructure, where economically justified. To this end, the Province will encourage discussions among potential natural gas customers, industry participants and other agencies which could result in sufficient load to anchor a lateral. Moreover, the Province will look for opportunities to form partnerships with the private sector and the federal government to secure funding that will provide leverage for natural gas infrastructure development and system expansions.

To this end, the Government has signed a Memorandum of Understanding ("MOU") with the Province of Quebec to work toward building a natural gas pipeline that would connect Quebec and New Brunswick gas transmission networks. This MOU outlines the commitment of the two governments to create a favourable environment for the development of a lateral from M&NP through the province’s Northwest and then linking with the TransQuebec and Maritime pipeline. The MOU also outlines a commitment to work together to develop a second interconnection near Belledune to serve Northeastern New Brunswick that would constitute a second alternative for serving Eastern Quebec.

The province’s policies with respect to the awarding of natural gas distribution franchises are also intended to promote the development of gas distribution infrastructure in New Brunswick. Three types of distribution franchise were created: single end use, local producer and general, all of which are under provincial jurisdiction.

A single end use franchise was made available for facility-specific industrial end users. The objective is to encourage large industrial customers to act as anchor loads in securing laterals and serves to satisfy the Province’s desire to use the Maritimes and Northeast Pipeline lateral policy for as long as it is in effect. The single end use franchise fee was set at $50,000 annually, indexed to the consumer price index. This amount was determined as sufficiently large to ensure that small and medium-sized consumers would find value in being served by the distribution company while not being so high as to negatively impact the likelihood that large customers would become anchor loads to the laterals. In support of developing a safe and effective natural gas industry in New Brunswick, the Province will direct all franchise fees to help defray expenses of the Board, particularly for costs associated with pipeline safety.

To accommodate local production of natural gas, a provision was made whereby indigenous gas producers could apply for a local producer franchise over a specific area. The objective was to encourage continued exploration for natural gas in New Brunswick, which could prove significant to the province’s economy and job creation.

In New Brunswick, a challenge exists for development of natural gas infrastructure in that potential loads required to economically justify pipeline construction are concentrated in only a few locations. The population in the province is relatively low (756,600), with 52% living in rural areas. Approximately 1/3 of the population live in close proximity to the mainline and Saint John lateral. To discourage "cherry picking" by distributors interested in serving only high volume areas, the general distribution franchise was defined on a province-wide basis. It was determined that a single, province-wide general franchise was more likely to meet the objective of uniform distribution rates and penetration of natural gas throughout the province than would awarding one or more general franchises for a smaller area.

In its proposal, EGNB committed to serve 70,000 customers in 23 communities within 20 years. The Board will monitor Enbridge’s progress in satisfying its commitments and will issue a formal report within seven years while the Province will provide ongoing assessment of Enbridge Gas New Brunswick’s progress and compliance with their proposal.

An important part of encouraging the use of natural gas was the development of clear and user-friendly terms and conditions for the monopoly distribution service. Terms and conditions of service will, at a minimum, be fair and equitable to suppliers and customers, ensure the safe and reliable operation of the distribution system, not create unnecessary entry or transaction barriers, and protect each customer’s privacy. The distribution system is required to link individual customers with suppliers operating in a North American gas market. The terms and conditions of the distribution tariff will not limit how buyers and sellers structure their transactions. In other words, the operating requirements will not, unless necessary for safe and reliable system operation, define or limit the transactions between buyers and sellers.

2. Development of a Competitive Retail Market

Natural gas customers are interested in the opportunity to easily tailor the process and services to their unique demands. Customization can occur at a number of levels, ranging from the terms surrounding the delivery of the services, to the billing and payment process, to the bundling of services sold and delivered. Terms of service can vary from customer to customer. Some customers will seek fixed price contracts while others may prefer prices that vary monthly. Methods to customize the billing and payment process include the customer determining the method of payment or providing the capability to normalize payments throughout the year to provide stability and certainty. Customers who value convenience may seek the opportunity to bundle their energy purchases (gas, electricity, and oil) together with other services, such as telecommunications. While providing customization on a large scale may seem to be a daunting task, advances in information technology and the lack of historical systems should enable energy service providers to deliver services in a cost efficient manner.

Experience has also shown that customers seek to minimize their interaction around the "product" in three areas: product cost, transactional cost, and their involvement arising from discrepancies in information and billing. If the cost of gas is too high compared to its substitutes, consumers will not switch to natural gas, hampering the development of the gas industry. The transaction costs to be minimized are defined as costs associated with the selection of the desired services (that may extend beyond the provision of natural gas), negotiating the services agreement, and the contracting and payment process. Customers desire an arrangement that is transparent and easy to implement. Once the service contract is in place, customers expect to minimize their involvement. The involuntarily involvement in the distribution company or gas marketers’ business process has often been a source of complaints for customers in other jurisdictions.

Building on the customer attributes described above, policies to foster competition at the retail level should address quality of service issues. While the regulator is not interested in dictating how an energy service provider operates at a micro-level, it is necessary that natural gas marketers entering the New Brunswick market meet certain standards. In order to address these concerns, the Board invited potential natural gas marketers to participate in a consensus committee and on-going working group to consider natural gas marketing and operational issues. This committee proposed a code of conduct, which has subsequently been adopted as part of the gas marketer licensing requirements.

Given the important role that natural gas marketers play in increasing the penetration rate for natural gas, it is critical that the Government create an environment that encourages their participation in the New Brunswick market. Towards this end, the Province will reassess the Gas Distribution Act, 1999 to identify any areas where it might be amended to improve the effectiveness of the competitive natural gas retail market.

3. Reliability of Supply

As natural gas consumption in the province grows, the most cost-effective way of meeting the increased gas requirements ensuring reliability of supply might include, among other things, the development of underground storage, gas liquefaction and vaporization (LNG plant), or the ability to switch between fuels. The Province believes that it is for the market to decide which, if any, of these alternatives are preferred. However, given the economic benefits that would accrue from the development of high deliverability storage facilities in the province, the Province will continue to explore opportunities for the development of natural gas storage facilities by the gas industry.

4. Training and Development

The extension of natural gas systems, conversion of electrically heated buildings to oil or gas, oil heated buildings to gas, installation of equipment and appliances in the residential, commercial, institutional and industrial sectors, and the ongoing maintenance of gas and oil-fired systems requires a labour pool sufficiently skilled to perform these tasks. An increasing problem across North America is the availability of skilled technicians and trades people. Any labour shortage would hinder expansion of the gas distribution system as well as the deployment of more innovative end-use technologies. The Province will continue to offer and actively support training programs in community colleges to ensure that the infrastructure to assist the installation and maintenance of systems that burn gaseous and liquid fuels is in place. The Province will work cooperatively with its colleges and universities to look for opportunities to promote research and development that will foster the penetration of natural gas in New Brunswick.

3. Development of an Indigenous Natural Gas Industry

New Brunswick is a natural gas-producing province. Historic peak production saw pipeline delivery of natural gas to 3,000 customers, although local production was suspended in 1991. The construction of the M&NP pipeline has renewed interest in exploration for hydrocarbons in the province and there are currently 600,000 hectares held under license to search.

The M&NP and EGNB natural gas transportation infrastructure provides New Brunswick with the opportunity to develop natural gas resources which would likely otherwise be uneconomical. In an effort to promote the development of an indigenous natural gas industry, the Province will further develop the New Brunswick hydrocarbon geoscience database. As part of this effort the Province will make information available regarding the attractiveness of New Brunswick as a location for natural gas exploration. In addition, the Province will provide a regulatory regime that minimizes barriers to exploration and development, and fosters the development of these indigenous resources. This will include working with the natural gas industry to update oil and gas legislation, as required. Finally, the Province will have a competitive royalty regime in the event that there are economic discoveries of indigenous hydrocarbons.

4. Market-Based Fuel Selection

For a competitive market to be efficient, all buyers and sellers must be free to make rational economic decisions. This, in turn, depends on equal access to accurate, comparable and timely information that is relevant to the purchasing decision.

To determine the feasibility of converting to natural gas, potential customers will consider costs associated with the initial conversion of a heating system, water heaters or appliances, and the ongoing operating costs. The conversion costs will be comprised of capital costs and related financing costs. Operational costs will include fuel costs, periodic maintenance costs, warranty and extended warranty costs. Total estimated costs should be compared to ongoing costs that would be incurred if the potential customers were to continue with its current fuel sources. On-going costs would include fuel costs, maintenance costs and potentially, costs to comply with environmental requirements.

To facilitate market-based decision making, this information needs to be timely and readily accessible. Market participants must also have confidence in the accuracy of available information. If the scarcity of information and/or the uncertainty of the information hamper potential consumers’ efforts, the decision-making process will be discounted and lower the likelihood those customers will make appropriate decisions. This will inhibit conversions from one fuel to another and the penetration of new technology into the market place.

Due to the unfamiliarity with natural gas and the potential for conflicting information, there is a need for independent unbiased source for information regarding fuel conversion costs. Therefore, the Province will serve as a reliable source of unbiased information that will enable New Brunswickers to make appropriate fuel choice and energy conversion decisions. The information provided would be tailored to the market segment (particularly residential and commercial/institutional) to address differences in their respective decision making processes, initial knowledge and awareness of natural gas, and likely consumption behaviour. Developing segment specific education plans will also minimize confusion and distortion, and facilitate rational economic decisions.