Sable Island Gas: New Brunswick’s Historic Energy Reform Opportunity

Tom Adams
Energy Analects
June 9, 1998

New Brunswick has a brief but unprecedented opportunity to redirect its energy industry on a path away from monopolies and damaging megaprojects toward competition and environmental responsibility.

Developments on the business and political fronts make change in a previously frozen energy policy status quo possible. Two hungry, competing gas pipeline consortia-one featuring Westcoast allied with the Irving group and the other led by IPL through Consumers Gas allied with the McCains and other local investors-are vying for franchises.

The McKenna political era, which oversaw a doubling of NB Power’s debt, is over. An independent enquiry, expected to report this month or next, is charged with undertaking a sweeping review of competitive electricity alternatives, including privatization. Quebec and neighbouring New England juridictions are pushing ahead with competitive electricity reforms.

The interest of New Brunswick consumers in the outcome of these developments could not be clearer. Consumers need free trade in energy commodities across the province’s borders, rapidly expanding, low cost gas distribution networks, competition within energy commodity sectors, and revitalized regulation of electricity and gas energy distribution monopolies.

Despite an auspicious alignment of opportunities, competition advocates should be alert to powerful forces supporting the status quo. In a province where the vast majority of the home heating market is tied up by a duopoly of a single electricity interest and a dominant fuel oil interest, both of whom are politically savy, the risk of roadblocks being thrown in the path of widespread gas availability is substantial.

NB Power’s most recent business plan states that “Over the next five years, NB Power intends to maintain its position as the prime supplier of electricity to businesses and residents of New Brunswick.” The plan further states that it is NB Power’s intention to “maintain and improve market share.” This statement clearly implies that the utility’s management is not considering customers gaining the right to select alternative suppliers at any time before the year 2002.

One interpretation of the statement in the business plan that NB Power intends to “maintain and improve market share” is that NB Power is intending to extend its influence beyond the electricity market to the gas business and thereby expand its share of the provincial energy market. A year ago, NB Power’s president James Hankinson told a provincial legislative committee “We may even get into marketing gas.” The utility has already booked a substantial amount of Sable gas.

The arrival of natural gas in New Brunswick, particularly if a competitive electricity market is in place to facilitate the development of gas-fired power options, represents an excellent near term opportunity to reduce the province’s reliance on high emission and high cost coal, oil, and bitumen-fired power but the monopolist NB Power is a poor candidate to drive this transition.

New Brunswick, which because of its resource oriented economy, should have extensive cogeneration, is a virtual cogeneration desert. A small cogeneration facility is in place at a forest products facility in northern New Brunswick near the border with Quebec and NB Power sells a small amount of heat from some of its facilities. A New Brunswick law, with a feudal redolence about it, requires all cogenerators over 500 horsepower to apply for special government permission to operate. Energy conservation would make great progress if cogeneration, for which gas is ideally suited, expands significantly. Deregulation of cogeneration should be a priority.

The arrival of Sable gas should lead to closure of NB Power’s coal subsidiary, whose strip mines produce among of the highest sulphur content coal produced anywhere in the world, at a gaping financial loss, and with major environmental destruction.

Over the medium term, natural gas can significantly ease the transition to a non-nuclear future for the province. The province’s sole nuclear reactor is now being crippled by age.

There are substantial dangers to the public should NB Power be permitted to influence the development of natural gas in New Brunswick. The electricity and natural gas industries are natural competitors, often seeking sales in the same end-use markets. In New Brunswick, gas should have a big price advantage over electricity and certainly has a major environmental advantage. An electric utility’s natural inclination is to fight to protect market share in lucrative markets like water heating. On the other hand, the success of gas in New Brunswick will be enhanced if this fuel takes a large portion of the heating markets.

In Ontario, falling natural gas prices to consumers during the 1990s, due to natural gas deregulation, was one of the main factors driving Ontario Hydro to freeze its rates starting in 1994.

If the development of the natural gas system in New Brunswick is curtailed for the benefit of NB Power, consumers and the environment will suffer.

NB Power’s demonstrated inability to invest and operate efficiently does not augur well for any foray it might make into the natural gas field. Removing accounting changes, NB Power has been loss making since fiscal 1994. (Although its year-end was at the end of March, the utility has yet to report its fiscal 1998 results.) NB Power would be bankrupt if it were not for the protection afforded by its monopoly status and the provincial loan guarantees. It would not be prudent for the province to allow NB Power to expand into a new business with which the utility has no experience.

The New Brunswick fuel oil industry, despite its competitive distaste for NB Power, probably shares its rival’s perspective on the arrival of gas-good gas is gas that can help reduce its operating costs such as in refining and bad gas is gas that cuts into fuel oil’s market share.

There are several proposals for lateral pipelines off the main trunk line carrying Sable gas through the province from Nova Scotia to New England markets. One proposal would take gas north to feed an export-oriented gas-fired power station on site of NB Power’s Belledune station. The power station would be owned by the Belgian energy giant Tractabel. This proposal carries the political attraction of bringing gas to the economically depressed Bay of Chaleur area and using excess NB Power facilities at Belledune. Other proposals would take gas south to add capacity or dual fuel capability at existing NB Power oil-fired units, or supply a large cogeneration station at the Irving refinery in Saint John.

Politics and the rate treatment used for access to the power system are likely to determine which of these proposals goes forward. The efficient location for new power generation capacity in New Brunswick is near to where the power is used in the populated south and close to the U.S. border. Postage stamp rates for power transmission would subsidize remote northern development. On the other hand, nodal transmission pricing would signal efficient sighting but could be politically unattractive because it would discourage development in areas with excess capacity, particularly the north.

The rate treatment for the laterals themselves is likely to determine the future of gas distribution development in the province. If gas distribution systems are not able to share costs for lateral capacity with the gas-fired power stations, then the development of the gas distribution industry will be very slow. Competition will be impaired and energy users injured if laterals to gas-fired power stations do not rapidly blossom into distribution networks as well.

To maximize the benefits of gas development in New Brunswick to consumers, proponents of proposed laterals should be required to publish firm commitments that can be compared with competing proposals. These commitments should specify the terms of service that will be offered including rates and measures of the quality of that service. The commitments should also provide an expansion schedule for the lateral system that includes the communities to be piped, the number of customers to be attached, and the timing of this program. These commitments could form the initial basis for regulation of the eventual franchisees.

It may also be beneficial for the government to provide different distribution franchises to more than one company. Some competitive pressures may be achieved by comparing the results of one distributor with those of other distributors.

Regulation is an unavoidable necessity to protect customers using natural monopoly services such as gas and electricity distribution systems. However, regulation pales in comparison to competition as a means of controlling energy costs over the long term and making producers accountable to their customers.

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