Assembly of New Brunswick
As noted earlier, the Government of New Brunswick has several policy objectives for establishing a gas distribution system in the province. In this section, we discuss these objectives.
Maximum Availability of Natural Gas
Construction of the M&NE Pipeline provides New Brunswick with its first opportunity to introduce natural gas as a major source of energy in the province. The anchor support for the pipeline is the U.S. export market. The NEB's lateral policy provides an opportunity to construct the pipeline facilities under terms that are favourable to the province. These terms will assist in delivering gas to locations not along the main pipeline. This is the first step in providing access to natural gas for a larger segment of the New Brunswick population.
However, it will not be possible to economically justify building pipeline and gas distribution facilities in all areas of the province in the immediate future. One reason is that 60 percent of the residential heating market is currently served by electric baseboard heat. The cost of converting from electric resistance heating to gas heating is very high, making it difficult for homeowners to make the investment. These high conversion costs are likely to delay or preclude natural gas penetration into some areas of the province.
The committee recognizes that facilities will likely be built first to serve large anchor loads. However, main line and lateral facilities built to serve large industrial demands make it more economical subsequently to serve nearby commercial and residential customers. The specific decisions as to whether a particular area will receive gas service will depend on several factors, including economics, location of potential new loads, and lateral costs. The committee urges the New Brunswick Government to promote agreements between anchor customers and M&NE pipeline so that laterals could be built under the pipeline's current lateral policy at the earliest possible date. Construction of these laterals so they can be priced on a "rolled-in" basis, that is, averaged with the cost of main line construction, as explained earlier, is viewed as essential to meeting the goals of achieving maximum availability of gas in the province.
In the event that natural gas markets for Northeastern and Northwestern New Brunswick are inadequate to meet the economic threshold test for lateral construction under the lateral policy, the New Brunswick Government should be prepared to provide a contribution in aid of construction to enable the laterals to be built. In addition, access to natural gas for all of New Brunswick, including the Northeastern and Northwestern parts of the province, should be a key criterion in evaluating proposals for any distribution franchise.
Timely Development of a Natural Gas Infrastructure
It will take time for commercial and residential natural gas markets to develop. Some potential developers, however, appear willing to take steps to speed up the process. The committee is encouraged by remarks at the hearings that indicate broad subsidies will not be necessary. The government's primary interest in this process is the expeditious development of a natural gas industry. The committee does not recommend a broad policy of governmental subsidies or incentives, but recognizes that some subsidies or incentives may be necessary for laterals that would not otherwise be economically justified under the terms of the M&NE lateral policy.
Development of an Effective Regulatory Framework for the Gas Distribution Business
In recent years, it has become understood that not all aspects of the natural gas industry are natural monopolies requiring governmental regulation. In some parts of the industry, the forces of the market can provide sufficient protection for customers. Other areas, such as distribution, require continued governmental regulation as natural monopolies.
Substantial reforms in the area of governmental regulation in many jurisdictions have made the process less cumbersome and more effective. The major reform has been the evolution from traditional cost of service regulation, which is based largely on historical cost information, towards incentive regulation, which is based largely on performance standards. As a "greenfield" market, New Brunswick has the opportunity to choose the gas distribution regulatory process that is most effective for its situation.
Increased Competition in the Energy Market
With the introduction of a new source of energy to the province, inter-fuel competition will increase. This has the potential to provide energy cost savings throughout the New Brunswick. There is however, a need to ensure "arm's-length" separation when companies are in the business of marketing more than one form of energy. This is particularly important in today's market, where there is increased consolidation of energy companies and the development of energy providers marketing not one but all forms of energy. Any issues of market power must be adequately addressed to ensure that the benefits of an additional source of energy are available on competitive terms throughout the province.
Access for Indigenous Natural Gas Supply
The provincial government wishes to encourage the development of commercially viable sources of natural gas in New Brunswick. The committee's recommendations in this report will, if followed, ensure no artificial barriers will deter moving this gas to the competitive market.
Regional Price Equity
The committee is concerned that similar end-users (residential, commercial, industrial) in different areas of the province may face different prices. We are, however, confident that the bidding process will minimize these differences. We want to ensure that any differences in rates reflect true cost differences or are the products of competitive market forces.
Maximizing Economic Benefits in New Brunswick
New Brunswick wishes to maximize economic benefits from development of Sable Island gas and the M&NE Pipeline systems. Pipeline laterals and distribution facilities will not be constructed unless they are economical. Market forces will determine the extent to which natural gas penetrates the New Brunswick market. Carefully developed government programs may be able to create broader access to gas, but these programs have costs that must also be fully considered.