N.B. to break natural gas agreement with Enbridge

The New Brunswick government is escalating its fight with Enbridge Gas New Brunswick over high natural gas prices by bringing in legislative reforms that are intended toreduce rates.

Energy Minister Craig Leonard said in the legislature on Friday that he will introduce amendments to the Gas Distribution Act that he said will bring in price sustainability for natural gas users.

"At this time of historic low prices, New Brunswickers are paying amongst the highest natural gas distribution rates in North America with no relief in sight," he said.

"This is an example of the problems that have developed in the current model which have put in question the sustainability of the current system."

The legislation was introduced on Friday.

The proposed changes are a result of months of negotiations between the provincial government and Enbridge Gas. The reforms are going forward without the company's consent.

Dave Charleson, the company's general manager in New Brunswick, said the province is breaking its contract with the new rules.

The company has invested a lot in New Brunswick, but its ability to continue operating in the province will depend on the fine points of the new rules, Charleson said.

"We want to see a model that recognizes the investment that's been made and recognizes the interest of the shareholders as well as that of the customers."

Enbridge said another option was including big customers, such as J.D. Irving Ltd. and NB Power, which were exempt from the pricing system, but Leonard said the province isn't considering that.

Leonard said the natural gas distribution system was not built to cope with the changes in the natural gas marketplace.

The energy minister said those changes are limiting customer growth and forcing higher rates.

The distribution system is based on a system that has 30,000 homes and businesses on it. So far, Enbridge has 11,000 customers.

"This simply cannot be allowed to continue," Leonard said.

"Those customers who happily invested in converting to natural gas are on a path to ever higher costs and this during a time when the savings from switching from other fuels, especially oil, should have been quite significant."

The legislation sets out a series of reforms to the rate categories that Enbridge customers are now in. It also outlines several key dates on when the company must have its new rates approved by the Energy and Utilities Board.

Current rates are fixed until Sept. 30. Enbridge must make a new application to the EUB under the new rules by May 31. The rates for residential electricity and residential oil clientsare expected tobe merged on June 1, then the EUB will make an order setting rates and tariffs.

The act also contains a clause that says the provincial government cannot be sued over the changes contained in the proposed law.

The energy minister said he understands that Enbridge may oppose the province's steps to cut natural gas costs in the province.

"Im sure that they are not going to look at it as a positive, that is an asset that they have been making a very generous rate of return on for the last number of years," Leonard said.

"But the fact of the matter is, we simply dont see how the system can continue on with the current structure."

He said he believes there is still room for a sustainable gas model in the system but that changes need to be made.

But Leonard said the reforms will adjust the components of how Enbridge Gas New Brunswick can set its rates. It will make natural gas available throughout New Brunswick and it will set new guidelines on making the gas distribution system sustainable.

The energy minister said natural gas distribution could fall by 10 to 15 per cent for residential consumers when the changes are implemented. And Leonard told reporters that large industrialcustomers could see distribution costs fall by 40 to 50 per cent.

Opposition Leader Victor Boudreau said in the legislature that he has not yet seen the proposed legislative changes. Boudreau said the changes seem "reasonable."

"[It is] an approach that is heading in the right direction," he said.

Months of negotiations

Enbridge Gas New Brunswick and the New Brunswick government entered into talks in May on how to lower the company's rates.

The main issue is Enbridge's use of market-based rates.

Enbridge sets its current rates by discounting the price of natural gas compared to the cost of competing energy sources, such as electricity or oil.

Enbridge and the provincial government wanted to move toward a scheme that would allow the company to charge rates based on its cost of service. This change could allow Enbridge to be more competitive in how it charges its rates.

"Enbridge understands the objectives of the government of New Brunswick and we remain prepared to explore co-operative approaches to restructuring the provinces gas distribution franchise," Guy Jarvis, president of gas distribution for Enbridge stated in a news release.

"We believe that the franchise agreement can be restructured to enhance the benefits of natural gas to New Brunswick while preserving the attractiveness of the province as a place for further investment. We will employ all efforts to work with the government toward that objective," Jarvis said.

Enbridge has a franchise agreement with the provincial government that allows it to be the sole natural gas distributor in New Brunswick until 2020.

There is also a framework in place on how Enbridge must pay back its deferral account.

When Enbridge started creating the province's natural gas pipeline, it put all of the costs associated with the development stage into a deferral account, which has to be repaid.

The deferral account has roughly $170 million in it. Enbridge paid $6 million into the deferral account in the first quarter of 2011, according to Enbridge.

Dan Theriault, a Fredericton lawyer and a former public intervener, said he believes changes had to be made to the natural gas system.

However, he said the proposed changes are quite drastic.

"In fairness, Enbridge entered into the franchise agreement with the government back in 2000 without knowing how the price of natural gas would unfold. They came up with a system and in good faith put some serious dollars down," Theriault said.

"And now basically, having the rug pulled out from under them. What I would have rather seen is direction from the [Energy and Utilities Board] is find a way to make the system work."

The Energy and Utilities Board did make a recommendation in July that called for Enbridge to reform its rate structure. The energy regulator had called for a cost-of-service component to the rates, which is a part of the New Brunswick government's reforms.

New Brunswick infrastructure

The natural gas company is serving customers in Moncton, Riverview, Dieppe, Saint John, Fredericton, Oromocto, St. Stephen, St. George and Sackville.

Mama's Pub in Fredericton became Enbridge Gas New Brunswick's first distribution customer on March 22, 2001.

Enbridgehas laid more than 700 kilometres of pipeline.

Earlier this year, the Alward government received an energycommission report that sketched out a 10-year energy blueprint for the province.

In that report, the authors said, Enbridge's original plan for the distribution system "projected a system that reached 23 communities and attracted 70,000 customers by the time the 20-year agreement expires in 2019."

When Enbridge moved into New Brunswick, it expected the deferral account would not exceed $13 million.

Enbridge has invested about $480 million in the development of the provincial gas distribution, according to the statement by Guy Jarvis. The companyhas "reinvested every dollar it has earned in the province, plus much more," he said.

As it stands, Enbridge earns about $20 million per year in its New Brunswick business, said Jarvis.

"The legislation includes provisions, which could have the effect of substantially reducing those earnings, although the specific effects remain dependent on further discussions between Enbridge and the government of New Brunswick, and the details of the regulations, which will follow," he said.

"Although establishing a gas distribution system in New Brunswick is an expensive proposition, natural gas does offer significant savings compared with more costly sources of energy available within the province, such as fuel oil and electric power."

"Enbridge believes that these savings can be enhanced and extended to additional customers through a co-operative restructuring of the terms of the franchise."

Natural gas in new areas

The New Brunswick government is also opening up the system that will allow natural gas to get into areas of the province that are not connected by Enbridge's pipeline.

The province's energy minister said companies or potential customers that are willing to convert their system to natural gas can arrange to have natural gas shipped to them by truck.

And Leonard said Enbridge will not have the franchise agreement for that service.

He said that change "frees up areas where Enbridge is not serving."