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CONCLUSIONS AND RECOMMENDATIONS

Summary of Key Issues

Lateral Policy and Pipeline Access

The committee recommends that all consumption of natural gas in the province be included under a broad definition of gas distribution in order to bring these activities under provincial jurisdiction. It further recommends that prospective anchor load customers be granted a single end-user franchise for a term of 20 years, or the term of their firm service agreement with the pipeline, whichever is less. The single end-user franchises would be required to pay an annual, fixed franchise fee, which will, among other uses, help cover the increased costs of regulatory activities by the PUB.

The committee emphasizes the importance of timing in maximizing benefits to New Brunswickers under the NEB-approved M&NE lateral policy. Hearings before the NEB on the Saint John lateral will take place before the provincial government has the opportunity to award distribution franchises. The issue of whether anchor customers will have to pay additional distribution charges to an LDC will arise within the context of the lateral hearings.

The committee recognizes the significance of the role that the anchor loads play in the construction of the original pipeline laterals. Without the anchor loads, the laterals will not be constructed. Without the laterals, it is very unlikely that distribution companies will be established unless they are very close to the main line.

Even with the use of the M&NE lateral policy, there may still be a shortfall in natural gas market loads to meet the economic threshold toll test for parts of the province such as the Northeast and Northwest. In this event, governments should provide a contribution in aid of construction to ensure that the laterals are constructed.

The result is that anchor load customers will be able to preserve the "economics" of direct access, but will be subject to provincial regulation.

By creating the single end-user franchise, it becomes possible for the pipeline to proceed with the construction of laterals. Commitments to construct laterals must be made before the development of general distribution franchises can be considered.

The committee strongly supports maximizing economic benefits to New Brunswickers from the opportunities created by the Sable Gas Project. The committee suggests that the Stage II process evaluate all bidders' approaches to maximizing the environmental and economic benefits to the people of New Brunswick.

Future Laterals and Lateral Expansions

The development of future laterals and expansion of existing laterals will necessarily take place within the context of NEB policy applicable at the time the lateral project is proposed. The current lateral policy provides benefits to the province that the provincial government will continue to support. The province should also recognize that a contribution in aid to construct may be required to meet the economic threshold toll test for some laterals. The PUB will be responsible for making regulatory decisions regarding future LDC laterals and lateral expansions.

Regulation

Cost of Service and Incentive Regulation

The committee recommends that the PUB be given flexibility in the methods it can use in determining the distribution company's charges to consumers. The PUB should be given discretion to use either traditional cost of service or incentive regulation methods. This discretion should preserve the goals of fairness to consumers and fair compensation to the distributor.

Bundled and Unbundled Services

>The committee recommends that the Stage II Request for Proposals state a preference for an unbundled system, where the sale of the gas commodity is separated from the distribution service throughout the province. Distributors should be permitted to have affiliates that can make the commodity sales throughout the province. All bidders for distribution franchises should be required to propose standards of conduct, the goal of which will be non-discriminatory access and service to all users of the distribution system.

The committee also acknowledges that there may be valid reasons to allow a bundled service in the early years of development. Bidders may propose bundled service offerings for a limited number of years (e.g., 3-4 years). Bidders doing so must specify how long the bundled service will be offered and the benefits of this approach. There will be a strong presumption against the recovery of any "stranded" costs related to the bundled service when the service is eventually unbundled.

Market Power

The government and the committee want to ensure the expeditious development of a competitive market for natural gas and other sources of energy in New Brunswick. The committee is aware of the potential for the abuse of market power if the holder of a distribution franchise is also engaged in another line of the energy business.

The committee recommends that standards of conduct be established by the regulatory authority to address any market power issues. At a minimum, these standards of conduct should include non-discriminatory access to distribution services, forbid the sharing of customer information between the LDC and its affiliates, require that all utility information be accessible to all interested parties through the regulatory process, prohibit sharing of employees between the affiliate and the distribution utility, and require maintenance of separate offices and systems.

If questions remain about the effects of inter-affiliate dealings on the level of competition in the energy market, a market power test should be instituted when considering whether a distribution franchise should be awarded to a party engaged in the oil, coal, electric or natural gas production or transmission business.

Other Regulatory Issues

The committee has recommended an appropriate expansion of the PUB's responsibilities. These new responsibilities will require an expanded workforce and entail increased costs. The committee recommends that the PUB's revenues required to cover the expenses related to the regulation of natural gas be collected from the distribution franchises. General and producer franchises should be assessed a fee based on a percentage of revenues. Single end-user franchises should be assessed a fixed annual fee.

The committee recommends that other issues relating to revenue cycle services, supplier of last resort, load balancing and incentives are matters best left to the expertise of the PUB. Bidders should address these issues as appropriate in the Stage II Request for Proposals process.



Franchises

The committee has concluded that three classes of franchises should be established: single end-user, local producer, and general franchise. A single end-user franchise should be required for any end-user that takes direct service from the pipeline. The committee has concluded that the number of general franchises will be determined in the Stage II competitive bidding process.

Local Gas Production

The committee is very encouraged by the potential for indigenous gas to play an important role in New Brunswick's energy future. It is important that a system be created to promote its development. Furthermore, the committee supports the indigenous gas producers' non-discriminatory access to the distribution system and the M&NE Pipeline. It is recognized that the producer is responsible for meeting pipeline and distribution quality specifications. All bidders in Stage II will be required to demonstrate how they would provide open access transportation service for local gas producers.

Municipal Involvement in Gas Development

The committee recommends that existing legislation be amended to protect municipal interests. To the extent that distribution companies impose additional costs on municipalities, the municipalities should be allowed to recover their additional costs. The committee expects that LDCs will work closely with municipalities to minimize local disruption and maximize access to distribution service. Municipalities may also be in a position to offer cost-effective services to the LDCs.

Impact of Gas Industry Development on Electric Restructuring

The committee recognizes that, in an ideal world, it would be desirable for the development of the gas industry to take place in conjunction with the restructuring of the electric industry in New Brunswick. But certain important factors involving the gas industry are on schedules that are independent of electric industry restructuring. These factors include:

     

  • •The effective period of the favorable terms of the lateral policy;


  • •Competition from electric generation developers in New England who are proposing to serve the growing New England market, which will not wait for New Brunswick policy; and the fact that industrial customers have signed precedents with M&NE that would be lost without timely decisions.

Therefore, the committee has chosen to proceed initially with its review of natural gas market policies, but has started to address the electric restructuring issue in New Brunswick with an initial planning session. The committee expects to address the issues outlined in "Electricity in New Brunswick Beyond 2000," a discussion paper dated February, 1998, and the Hay-Savoie Report over the next several months.




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