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Natural gas project business case report released

Kincardine/Huron-Kinloss

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The business case report, regarding a proposed natural gas pipeline to Kincardine, Huron-Kinloss and Arran-Elderslie, has been released.

Presented by J. Mark Rodger of Borden Ladner Gervais LLP, the report is a collaborative approach taken amongst the three municipalities and the consultant team, comprising of Borden Ladner Gervais LLP, Henley International Inc., Innovative Research Inc., Elenchus Inc. and DR Quinn and Associates Ltd.

The report concludes that the failure to provide natural gas service to the southern Bruce County region remains a deficiency in theoverall provision of energy services in Ontario. 

"Two options have recently been proposed to remedy this problem," states the report. "The first, provided by UNION (Union Gas), envisages an extension of its existing system via two transmission lines, one from Dornoch and the other from Wingham that would meet the needs of the municipalities of the southern Bruce region. 

"The positive feature of this proposal is that natural gas would be provided to customers at the same rate as in other southwestern Ontario municipalities implying substantial savings to customers. The very serious drawback of the proposal is that the substantial incremental capital and other costs would have to be borne by themunicipalities in the form of a contribution in aid of construction amounting to some $85.7-million."

The report says while there appear to be savings to natural gas consumers, the incremental costs are simply shifted to the municipalities in another form. This amount is beyond the financial capacity of the
municipalities.

"An independent review of the UNION proposal concluded that it was technically feasible and that the estimated costs for the system, that was proposed, were not unreasonable. However, it also concluded that such an expensive system was impractical. 

"It proposed that the transmission component of the UNION proposal be replaced with delivery of gas to the distribution facilities via compressed natural gas, which it judged entail far lower capital expenditures, although it had not worked out the details of this proposed alternative."

The report states that the second option, proposed by NORTHERN, consisted of a three-phased system which would start by an expansion of its existing Huron County facilities to connect the Township of Huron-Kinloss, including industrial customers in the area, to the UNION system at Wingham. 

The second phase would connect the Municipality of Arran-Elderslie and area industrials to the UNION system at Dornoch. 

The third phase would connect the first two phases and communities in between the two, such as Tiverton, Kincardine and Point Clark. The total capital cost is some
$27-million less than the UNION proposal. The phased approach is intended to provide the flexibility to connect industrial and selected commercial loads at an early stage of project development. 

"A preliminary independent technical review  of the NORTHERN proposal, prepared by DR Quinn and Associates, concluded that it did not have adequate information to reach conclusions on essential features of the NORTHERN system, including design, safety considerations and cost," states the report. "This remains a major outstanding issue."

With respect to the financial aspects of the NORTHERN proposal, the company providing the service would be a stand-alone entity and the cost of providing the service would be passed on to consumers in their rates, the report says.

"Initial estimates indicate that these rates would be substantially higher than those charged by UNION in the surrounding area but could still provide savings to
customers under certain assumptions.

"These assumptions are that the predicted conversions to natural gas are actually realized, that the distribution company is prepared to receive lower than 64 normal returns on capital for up to 10 years and that capital expenditures are as forecast. 

"This implies considerable risk to the distribution company that can be reduced by a lowering of capital expenditures. This could be accomplished through access to sources of funds from other levels of government.

 

"In summary, the contributions in aid of construction required by UNION are beyond the capacity of the municipalities making this option impractical. 

"The NORTHERN option requires further independent analysis to ensure its technical feasibility. On the basis of existing information it would appear to involve considerable risk to the municipalities. These risks could be mitigated by the participation of other levels of government."

The report recommends the following:

  • The municipalities should meet with senior provincial and federal government officials to determine what scope of assistance may be available and on what terms. Issues to be discussed include both financial assistance and changes to existing regulatory requirements
  • With respect to the Province of Ontario specifically, the municipalities should meet with the premierís office and ministry of energy to determine the applicability of recently-articulated government policy around extending natural gas services to southern Bruce County
  • The municipalities should begin discussions with the Ontario Energy Board and TSSA officials to brief them on this report and to review and discuss the required regulatory approvals needed to implement the options under consideration.
  • The municipalities should continue their stakeholdering activities with the general public, including all key customer groups and affected First Nations and Metis communities
  • UNION should be requested to update the cost estimates associated with its proposal. UNION should also be requested to re-evaluate its 2012 proposal in the context of current Ontario policy concerning extending natural gas services
  • NORTHERN should be requested to provide additional detailed cost and technical information so that the municipalities can conduct further due  diligence on the NORTHERN proposal. This may require that the municipalities finalize and enter into the cost-sharing agreement with NORTHERN based upon the draft agreement circulated by Borden Ladner Gervais in April, 2014
  • As part of the municipalities' ongoing due diligence review, consideration should be given to exploring potential public-private partnerships and/or contracting with third-party service providers who would be capable of operating a natural gas distribution utility should the stand-alone option be selected as the preferred option
To read the entire report, click here.


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