via email william j. andrews, barrister & solicitor 1958 ... · believes it would be beneficial...

Nicholas M. Gretener Partner Direct Line: 403.298.3405 e-mail: [email protected]

December 23, 2011

VIA EMAIL William J. Andrews, Barrister & Solicitor 1958 Parkside Lane North Vancouver, BC V7G 1X5 Dear Mr. Andrews: Re: An Inquiry into FortisBC Energy Inc. regarding the Offering of Products &

Services in Alternative Energy Solutions & Other New Initiatives (the "Inquiry") Project No. 3698635

Ferus Inc., LNG Division – Response to BCSEA and Sierra Club IR No. 1 Attached, please find a copy of the response of Ferus LNG to Information Request No. 1 of the BC Sustainable Energy Association and the Sierra Club of British Columbia. Yours truly, Original Signed by Nicholas Gretener

c: Ms. Alanna Gillis – BCUC, Acting Commission Secretary

Ms. B. Lancaster – Ferus Inc., LNG Registered Parties

C8-9

markhuds

FORTISBC ENERGY – AES OFFERING

FortisBC - Inquiry into Alternative Energy Solutions and New Initiatives Page 1 of 13 Ferus LNG Response to IR No. 1 of BCSEA and Sierra Club December 23, 2011

FERUS INC., LNG DIVISION

RESPONSE TO INFORMATION REQUEST NO. 1 OF BC SUSTAINABLE ENERGY ASSOCIATION

AND SIERRA CLUB OF BRITISH COLUMBIA

BRITISH COLUMBIA UTILITIES COMMISSION

FortisBC Energy Utilities An Inquiry into FortisBC Energy Inc.

Regarding the Offering of Products and Services in Alternative Energy Solutions and Other New Initiatives

BCSEA/SC – FERUS LNG – 1

Request

1.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, p.1

“Ferus is very active in British Columbia ("BC"), and in June, 2011 was certified a BC-Based Business by Energy Services BC.” [underline added]

Energy Services BC’s website states:

“Energy Services BC (ESBC) is the voice of the British Columbia oil and gas service sector and has been serving the industry for over 30 years. We are a member-based non-profit organization representing a wide variety of safe, efficient and productive BC based service and supply companies.”

1.1 Please confirm the description of Energy Services BC.

Response

1.1 Confirmed.


Request

2.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, p.1

“Following on the successful model underlying its N2 and CO2 operations, Ferus LNG's business plan includes the construction and/or operation of LNG production plants and LNG logistics equipment across North America. Beginning in 2012, Ferus LNG intends to invest significant capital into the robust energy industry in northeastern BC.”


2.1 Please confirm that Ferus LNG intends to invest significant capital in the construction and/or operation of LNG production plants and LNG logistics equipment in northeastern BC.

2.2 Does Ferus LNG see these activities as being in a market affected by FEI’s LNG or CNG activities?

Response

2.1 Confirmed.

2.2 Yes.


Request

3.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, p. 2, 5

“Ferus LNG’s participation in this Inquiry is not intended to thwart any LNG related initiatives, be they carried out by FortisBC or other parties, but rather to ensure that such initiatives do not create an unlevel playing field that in itself may stifle the development of a freely operating, competitive market in LNG services. Ferus LNG considers the development of such a market is critical to the ultimate success of the NGV/LNG industry and, Ferus LNG submits, would be in the public interest of all British Columbians.”

After reviewing Commission decisions regarding LNG/CNG, Ferus LNG states:

“It is Ferus LNG's position that the Commission's findings in the CNG-LNG Decision and the EEC-NGV Decision referred to above are directionally consistent with the expectations of investors looking for open functioning markets for NGV/LNG service offerings on a competitive basis.” [p. 5]

3.1 What then is Ferus LNG’s disagreement with the Commission’s decisions regarding CNG/LNG and EEC-NGV incentives?

Response

3.1 Ferus LNG has no particular disagreement with the Commission's CNG-LNG Decision or its EEC-NGV Decision. As noted in its evidence, Ferus LNG sees these decisions as directionally consistent with the development of open functioning markets.

Ferus LNG is concerned that FortisBC has disagreements with these decisions and may challenge some of the principles arising from these decisions. For example, FortisBC states:

The FEU‘s evidence in the 2012 and 2013 RRA is that from a revenue generation and station capital perspective, FEI


believes that the additional terms and conditions imposed on FEI with respect to developing fueling station agreements will make it significantly more challenging to conclude agreements with customers. Although the NGV Decision may pose additional challenges, FEI believes that it can overcome these challenges and that the growth in the market can be achieved. However, should that prove to be incorrect, the benefits to existing natural gas customers of the additional requirements imposed by the Commission may be counterproductive. The proposed guidelines in Section 5.5 and Section 8 invite the FEU to seek changes in the approved rate design should new evidence come to light on the extent to which potential customers are being lost.1 (emphasis added)

. . .

FEI notes that the Commission‘s NGV-EEC Decision69 determined that the FEU did not have approval to use EEC monies to provide incentives for NGVs, which the FEU believe is key in the early days of "kick-starting" demand for CNG/LNG Service. The Commission is also of the view that the potential benefits to existing customers in the FEU‘s the long-term forecast of NGV load additions have not been established. These issues will have to be addressed in due course (there is a further process dealing with incentives for NGV as outlined in the NGV-EEC Decision), but cannot be resolved in this Inquiry.2 (emphasis added)

. . .

As a result of the uncertainty cast on the FEU's ability to recover the costs of incentives by Commission Order No. G-6-11 and the subsequent determination by the Commission in Order No. G-145-11 that these incentives are not a demand-side measure under the Act, the FEU have put the NGV EEC incentive program on hold until these issues can be resolved. Since rapid market transformation requires the presence of a strong incentive program, and since large scale adoption of NGVs is in the best interests of all of our customers, the FEU are actively working to find an agreeable way to reinstate the NGV incentive program. 3 (emphasis added)

FortisBC has also signaled through its proposed guidelines that it may wish to revisit certain principles established in the CNG-LNG Decision in the future. Its proposed Guideline 7 for NGV reads:

1 FortisBC Evidence: Section 5.3.5, page 96.

2 FortisBC Evidence: Section 5.5, pages 98-99.

3 FortisBC Response to BCSEA/Sierra Club IR No. 1.4.1.


7. The Commission recognized in the NGV Decision that its directed modifications to the proposed CNG/LNG Service rate design could affect the rate of take-up of the service, and was satisfied with that trade-off to reduce risk to other natural gas customers. Nevertheless, the FEU are encouraged to apply for modifications to the approved CNG/LNG Service rate design based on new evidence that the approved rate design is presenting a significant impediment to the adoption of CNG/LNG Service, such that the interests of ratepayers in reduced risk is outweighed by lost opportunities to build load.4 (emphasis added)

FortisBC has also indicated its intention to pursue an NGV incentive program through regulation under Section 18 of the Clean Energy Act.5 This approach could be particularly problematic for both other market entrants and ratepayers since it would potentially remove FortisBC's LNG services from regulation and oversight by the BCUC while preserving the competitive advantages of a regulated utility (economic leverage).

Finally, FortisBC apparently sees the guidelines to be developed in this proceeding to be specific to services currently provided by FortisBC and to have no further significance. FortisBC's proposed Guideline 8 for NGV reads:

8. The Commission‘s NGV Decision addressed rate design in the context of CNG/LNG Service, which is focused on recovery of costs associated with the fueling station. The FEU‘s investment in new or expanded upstream facilities, such as LNG production and storage, may give rise to different rate design considerations that would have to be addressed by the FEU. (emphasis added)

Ferus LNG is participating in the Inquiry in part to support and preserve the principles of Stand Alone Regulation (no cross-subsidization of costs or risks) for LNG related initiatives and for any new Natural Unregulated Services (i.e. services that do no display natural monopoly characteristics).


Request

4.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, p. 8

After reviewing the LNG/CNG activities and plans of FEI and other companies, Ferus LNG states:

4 FortisBC Evidence: Section 5.5, page 100.

5 FortisBC Response to Ferus LNG IR No. 1.3.4; FortisBC Response to BCSEA IR No. 1.4.3.


“It is worth noting that in other jurisdictions industry support has been made available on a "level-playing field" basis (i.e. tax incentives generally made available to the entire marketplace which do not, as such, stifle competition).”

4.1 Is Ferus LNG saying that support for NGVs in B.C. is not available on a “level playing field” basis? If so, please provide details.

Response

4.1 Support for NGVs in B.C. through EEC funding in the past has not been made available on a "level playing field" basis. Such funding has been provided to NGV customers that entered into long-term fuel supply contracts with FortisBC.6 As such, FortisBC was able to use its economic leverage as a monopoly service provider to cross-subsidize the NGV service using funds from its traditional natural gas utility customers. With the EEC-NGV Decision, the Commission has ruled that no such further EEC funding is to be allowed. Note, though, FortisBC's advice that it may wish to revisit that finding in the future (see BCSEA/SC – FERUS LNG – 1.3.1).

In the context of TES service, FortisBC notes that: "The incentives are provided independently of the customer's choice of TES provider. As such the incentives do not provide a competitive market advantage in any sense." 7 In the case of past EEC funding or commitments for NGV initiatives, the funding was tied to the choice of fuel provider, thus providing FortisBC with a competitive market advantage.

Support for NGVs can be made available on a "level playing field" basis. Indeed, Ferus LNG is not opposed to such non-discriminatory support and believes it would be beneficial to the development of the NGV/LNG industry in BC. As noted in the evidence of Ferus LNG,8 an example of such support is the tax relief provided by the Province of Quebec to LNG vehicle owners. These vehicle owners remain free to choose their LNG service provider and, as such, the support does not have an anti-competitive effect.

Presumably, EEC funding could also be provided on a "level playing field" basis if it is not tied to the NGV owner's choice of fuel provider (i.e. the customer does not have to purchase its fuel from FortisBC).

NGV vehicles have the ability to migrate to different fueling stations. If all market participants in British Columbia have access to EEC funding for BC purchased and registered NGV’s regardless of the fueling source/supplier, and if the Commission finds that ratepayers do indeed benefit from the potential resulting increased throughput, then Ferus LNG would support the use of EEC program funds for NGV incentives.

6 FortisBC Evidence: Section 5.1, page 86.

7 FortisBC Response to Corix IR No. 1.2.3.

8 Ferus LNG Evidence: Section C.3(e), page 8, lines 4-15.



Request


“Ferus LNG would contend that based on the evidence of significant interest from well established (and financed) industry players, the failure of NGV/LNG programs to develop traction in the past should not lead to the conclusion today that the industry is not viable without artificial aid in the nature of cross-subsidization. The emergence of plans from non-regulated industry players to develop the market is, in fact, strong evidence that the opposite is true.”

5.1 Is Ferus LNG saying that development of the NGV/LNG industry in B.C. does not require aid involving cross-subsidization, or that it does not require aid at all?

Response

5.1 Ferus LNG is saying that the development of the NGV/LNG industry in B.C. does not require aid involving cross-subsidization and that such aid will ultimately be more detrimental than beneficial to the development of that industry. The benefits of assisting utility market penetration by tilting the playing field to the benefit of a single participant are more than outweighed by the harm that such a tilted playing field will create by acting as a barrier or disincentive to other potential new market entrants. Ferus LNG believes that the industry may well require some form of non-discriminatory aid if it is to flourish. Please also refer to BCSEA/SC – FERUS LNG – 1.4.1.


Request

6.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, pp. 9-10

“The guidelines resulting from this Inquiry should set forth basic principles that will in the future continue to prevent public utilities from competing in markets that have no natural monopoly characteristics with the advantage of subsidization (cost or risk) from other ratepayers. The CNG-LNG Decision and the EEC-NGV Decision go some way toward establishing such principles. However, although these principles have been previously enunciated, Ferus LNG believes such principles are sufficiently important to the successful outcome of the Inquiry that they should be incorporated by the BCUC in any guidelines developed in this proceeding.”

6.1 Are Ferus LNG’s recommendations for guidelines to be adopted by the Commission in this proceeding limited to restatement of principles previously endorsed by the Commission? If not, please identify the


recommendations for guidelines that Ferus LNG proposes that are not principles already endorsed by the Commission.

Response

6.1 Ferus LNG's recommendations for guidelines to be adopted by the Commission in this proceeding are not limited to a restatement of principles previously endorsed by the Commission. While Ferus LNG believes it is important to incorporate such principles in the guidelines for the future reference of all industry participants, Ferus LNG's proposed guidelines go further in that they:

(i) Apply the base principle of Stand Alone Regulation generically to all new initiatives (not just NGV/LNG initiatives) that involve Natural Unregulated Services;

(ii) Propose that rates under Stand Alone Regulation be based on a separate determination of rate of return for each Natural Unregulated Service, depending on the risks and other circumstances of that service; and

(iii) Call for the Commission to explore the use of separate classes of service for new initiatives (including NGV/LNG initiatives) that involve Natural Unregulated Services.

In terms of the guidelines incorporating (or restating) past principles, Ferus LNG notes that while FortisBC is not supportive of restating NGV related principles, it is supportive of incorporating the CPCN threshold in the guidelines for purposes of "…ensuring that participants unfamiliar with the CPCN construct are made aware of it in the guidelines" and to "…ensure that the FEU's intentions and expectations are clearly communicated, such that they can be open to meaningful discussion in this process."9 It is for similar reasons that Ferus LNG believes it is important for the guidelines to incorporate past principles applicable to NGV/LNG services.

Please also refer to BCUC – Ferus LNG – 1.4.1.


Request


“FortisBC has argued that it has the prerogative, in its sole discretion, as to whether to conduct new initiatives that have no natural monopoly characteristics on a regulated or non-regulated basis.23 As part of its evidence in this proceeding, Ferus LNG notes that this choice is simply not available to private

9 FortisBC Response to CEC IR No. 1.7.1.


sector, non-regulated service providers. Ferus LNG believes that this too creates an inherent tilting of the playing field in favour of FortisBC.” [underline added]

7.1 Assuming FEI provides LNG/CNG services in compliance with the Commission’s NGV decision requiring full cost recovery of NGV costs from NGV customers, is the difference in the competitive positions of FEI and non-regulated LNG/CNG service providers limited to the fact that FEI’s LNG/CNG services are priced on a cost-of-service basis whereas the non-regulated LNG/CNG service providers provide service on a market basis?

Response

7.1 No. The CNG-LNG Decision does not provide the further assurance against cross-subsidization which can be achieved by treating NGV/LNG services as separate classes of service. This level of separation has been implemented for the TES service. While Ferus LNG is not expert in ratemaking, it considers a separate class of service would provide further separation of costs and risks from what is currently the case where the CNG/LNG services form part of the natural gas service class. A principle from the CNG-LNG Decision is that "…there should be as little potential for cross-subsidization as it is possible to achieve."10 Ferus LNG notes that separate classes of service would entail separate rate bases and separate rates of return.



Request


“If the Commission intends to ensure that the development of the NGV marketplace takes place in an environment of effective competition, then the option FortisBC reserves to itself of deciding which "end of the field" to operate on, i.e. as either a regulated or unregulated undertaking, requires extra vigilance by the BCUC. The Commission must ensure that in making such a choice, FortisBC does not do so with the knowledge that the regulated "end of the field" has already been unfairly tilted to the advantage of the public utility, which will inhibit the development of a robust, well functioning market in a sector that, as the Commission has already ruled (a ruling that Ferus LNG would suggest the evidence strongly supports), exhibits no natural monopoly characteristics.”

8.1 Does this position collapse down to the proposition that the Commission should not allow FortisBC to provide regulated LNG/CNG services except as required by the Commission’s NGV decision?

10

CNG-LNG Decision, page 24.


8.2 Or, is Ferus LNG suggesting that the Commission should not allow the FEU to provide LNG/CNG services?

Response

8.1 While Ferus LNG believes that the principles against cross-subsidization espoused in the CNG-LNG Decision are directionally consistent with Stand Alone Regulation, Ferus LNG also believes that under FortisBC's current regulated corporate structure, these principles are best implemented through separate classes of service for Natural Unregulated Services, including NGV/LNG services. Please also refer to BCSEA/SC – FERUS LNG – 1.6.1 and BCSEA/SC – FERUS LNG – 1.7.1.

8.2 Ferus LNG has not taken the position that the Commission should not allow FortisBC to provide LNG/CNG services. As noted in BCUC – Ferus LNG – 1.4.1, the cleanest way to avoid cross-subsidization is through complete separation of the regulated and non-regulated activities. In preparing its evidence, Ferus LNG recognized that this Inquiry has to work within the context of past decisions that have approved certain FortisBC LNG/CNG services. Presuming that complete separation of regulated and non-regulated activities is not possible, Ferus LNG has proposed an approach that preserves the ability of FortisBC to provide such services within the regulated arena, but that also supports the Commission's stated goal of having as little cross-subsidization as it is possible to achieve.



Request

9.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, p. 10-11

“As noted by FortisBC, the "public interest" involves the weighing of competing interests of all the affected members of the public.26 This includes potential competitors. It also includes the interests of all British Columbians, not just the rate payers of one regulated entity, in seeing a competitive marketplace develop for the provision of NGV and LNG related services.”

9.1 Does this proposition require the Commission to revisit the Retail Markets Downstream of the Utility Meter Guidelines? [reference: 5.1.2 Objectives]

Response

9.1 In the captioned excerpt, Ferus LNG was referring to the Commission's consideration, in regulating FortisBC, of not only the narrower FortisBC ratepayer interests but also the broader public interest in NGV/LNG market development. In this regard, please refer to BCUC – Ferus LNG – 1.7.1.


With respect to the RMDM Guidelines, Ferus LNG has informed itself in a general sense with the RMDM Guidelines and has read the testimony of Dr. Mark Jaccard, who chaired the review that lead to the RMDM Guidelines, filed in this proceeding on behalf of Corix.11 Ferus LNG has no reason to disagree with Dr. Jaccard when he states that the RMDM Guidelines still apply today.12 In terms of their interaction with the present Inquiry, Ferus LNG would note that Dr. Jaccard's proposed objectives and principles applicable to different classes of service, presented in Appendix A of his evidence, are based on the RMDM Guidelines and are directionally aligned with Ferus LNG's proposal to regulate Natural Unregulated Services via Stand Alone Regulation. The aim once again being that, as noted in the CNG-LNG Decision, "…there should be as little potential for cross-subsidization as it is possible to achieve."13


Request


“It [the BC government’s objective of reducing provincial GHG emission levels] is advanced, however, by achieving the maximum displacement of more GHG intensive fuels. Ferus LNG submits, and believes this position is supported by the evidence of FortisBC, that the maximum opportunity for a significant reduction in GHGs will be realized if the NGV/LNG marketplace can reach a sustainable size and mass. This, in turn, is most effectively accomplished by ensuring there are no artificial barriers to new entrants.” [underline added]

10.1 Is Ferus LNG suggesting that the Commission’s LNG/CNG decision and EEC-NGV decision leave artificial barriers to the new entrants to the LNG/CNG market? If so, please identify such barriers and the corresponding segments of the LNG/CNG market (refueling stations, gas commodity, LNG liquefaction, LNG transportation, etc).

Response

10.1 Ferus LNG is suggesting that the principle espoused by the CNG-LNG Decision to the effect that "…there should be as little potential for cross-subsidization as it is possible to achieve" 14 is best realized within the current FortisBC regulated corporate structure by adopting Stand Alone Regulation and using separate classes of service. The current mixing of CNG/LNG services into the traditional natural gas service class results in greater risk of cross-subsidization than would be the case with separate classes of service.

11

Exhibit No. C12-5: Written Direct Evidence of Dr. Mark Jaccard. 12

Exhibit No. C12-5: Written Direct Evidence of Dr. Mark Jaccard, at page 3. 13

CNG-LNG Decision, page 24. 14



Essentially, Ferus LNG is saying that the reasons for establishing the TES service as a separate class of service also apply to CNG/LNG services. Ferus LNG does not believe the distinguishing factor should be whether the new initiatives relate to the same energy form (i.e. natural gas)15 but whether or not the new initiatives involve Natural Unregulated Services. To the extent a utility wishes to pursue a Natural Unregulated Service as a regulated activity, the activity should be regulated on the basis of Stand Alone Regulation under a separate class of service.

By minimizing cross-subsidization in this manner, any barriers to entry resulting from a tilted playing field will be similarly minimized.


Request


“Policies that encourage the development of a competitive LNG industry are in harmony with the goal of maximizing the displacement of more GHG intensive fuels. Policies that inhibit the development of a competitive marketplace are not. Providing incentives to advance a utility's penetration of the marketplace at the expense of wider industry participation, for example, may result in winning the battle and losing the war.” [underline added]

11.1 Is Ferus LNG suggesting that incentives are currently being provided, either “to advance a utility's penetration of the marketplace” or to do so “at the expense of wider industry participation”? If so, please provide the details.

Response

11.1 Yes. Please refer to BCUC – Ferus LNG – 1.3.1.


Request


“Ferus LNG proposes that Natural Unregulated Services, to the extent they are "regulated" by the BCUC by virtue of being provided by entities that are already public utilities, must, in order to be fair to all potentially affected parties, be regulated on a basis that ensures there is no cross-subsidization of costs or risks between the customers of the Natural Unregulated Services and the public utility’s other ratepayers. Such an approach is consistent with the findings of the Commission in the CNG-LNG Decision.” [underline added]

15

See FortisBC Response to BCSEA/Sierra Club IR No. 1.8.1.


12.1 Please clarify whether Ferus LNG takes the position that the Commission’s LNG/CNG decision satisfactorily requires FEI to provide any LNG/CNG services without any cross-subsidization.

12.2 Is it correct that despite Ferus LNG’s endorsement of the Commission’s LNG/CNG decision, Ferus LNG would like to see the Commission prohibit the FEU from participating any LNG/CNG markets on a regulated basis even where cross-subsidization is prohibited?

Response

12.1 Please refer to BCSEA/SC – FERUS LNG – 1.6.1 and BCSEA/SC – FERUS LNG – 1.8.1.

12.2 Please refer to BCSEA/SC – FERUS LNG – 1.8.2.


Request


13.1 What does Ferus LNG mean by the term “Stand Alone Regulation” (as distinct from a stand-alone corporate structure)?

Response

13.1 Ferus LNG defines "Stand Alone Regulation" in its evidence as regulation aimed at insulating traditional natural gas transportation customers from the costs and risks of Natural Unregulated Services (services not displaying natural monopoly characteristics). Stand Alone Regulation is distinct from a stand-alone corporate structure, as it still allows for the provision of distinct services by the same corporate structure, but strives to ensure through regulation that this is accomplished with a minimum amount of cross-subsidization between the services.


Request

14.0 Reference: Exhibit C8-5-1, Ferus LNG Evidence, pp. 13-14

14.1 Please confirm that Ferus LNG is proposing that the Commission should require the FEU to provide any CNG/LNG services as separate class of service separate from their gas distribution class of service.

Response

14.1 Confirmed. While Ferus LNG is not expert in ratemaking, Ferus LNG believes that separate classes of service would provide increased


protection against cross-subsidization. Working within the context of existing decisions that have allowed FortisBC to start providing Natural Unregulated Services under the regulatory umbrella without a separate company or division, Ferus LNG believes that the use of separate classes of service for such services would assist in providing the desired separation of costs and risks (i.e. would be in harmony with the Commission's goal of providing "…as little potential for cross-subsidization as it is possible to achieve."16).

Please also refer to BCUC – FERUS LNG – 1.8.1.

16


via email william j. andrews, barrister & solicitor 1958 ... · believes it would be beneficial...

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