Enbridge Submission for the Proposed Natural Gas Expansion Support Program:
Enbridge welcomes the opportunity to help inform the proposed Natural Gas Expansion Support Program. This submission builds on our October 31 presentation on Bill 32, Access to Natural Gas Act, 2018, to the Standing Committee on General Government as well as our written submission to that Committee on November 16, 2018.
We strongly support the Government of Ontario’s intent to enable the timely and cost effective expansion of natural gas service to rural, First Nations and northern communities across the province. Access to reliable and affordable natural gas will lower energy bills for families in these communities and help Ontario businesses become more competitive, leading to economic growth and the creation of jobs.
This submission provides a list of guiding principles to help inform program design and outlines a competitive framework for future community expansion projects in new natural gas franchise areas that would:
• Leverage Enbridge’s strong safety record, expertise in project planning and construction, and economies of scale in order to deliver the most timely and cost-competitive projects in rural, First Nations and northern communities;
• Enable the most cost effective and timely projects;
• Enable the natural gas distributor to achieve full cost recovery of infrastructure projects over their economic lives; and
• Limit ratepayer subsidies to no more than $1 per customer per month over the life of the program and restrict the recovery of subsidies from only those located in rate areas where, or adjacent to areas in which natural gas infrastructure investments (“qualifying investments”) occur.
Enbridge safely delivers reliable, affordable natural gas to more than 3.7 million customers in Ontario
Enbridge’s perspective is built on our role as North America’s premier energy infrastructure company, with strategic interests across a range of energy solutions. We safely deliver an average of 2.9 million barrels of crude oil each day and we move roughly 22% of all natural gas consumed in the U.S.
Our regulated utilities – including Enbridge Gas Distribution and Union Gas in Ontario – in total serve approximately 3.7 million customers in Ontario, Quebec, and New Brunswick. Our customers are also able to benefit from Enbridge’s gas storage assets. Between the Union Gas Dawn Hub, which is located near Sarina, and other Enbridge Gas locations, including Lambton County, we have roughly 279 Bcf of storage capacity in Ontario (the equivalent of 80 TWh of seasonal energy storage). This capacity enhances our cost effectiveness and allows us to provide direct access to North America's major supply basins, including abundant and affordable natural gas. We are also involved in electricity infrastructure including an expanding offshore wind portfolio in Europe.
At Enbridge, we are proud to have been delivering safe, reliable affordable energy to Canadians for over 165 years. In Ontario, Enbridge employs over 4,500 employees and is a significant economic driver in the province. In 2017, Enbridge invested over $1.04 billion in capital expenditures in Ontario (e.g. items such as pipe steel, system integrity-related investments, and capital leases) and over $1.03 billion in respect of operating and administrative expenditures (e.g. maintenance costs, equipment leases, power consumption and personnel salaries and wages).
We are also active in the local communities in which we operate. In 2017, Enbridge invested over $6.5 million in community-strengthening initiatives across Ontario—and supported numerous not-for-profit agencies in the province—aligned to our three focus areas of health and safety, environment, and community.
Enbridge Natural Gas Community Expansion in Ontario
Enbridge strongly supports the Government of Ontario’s aim to deliver natural gas to new communities in a timely and cost effective manner.
Our company has the proven expertise, construction experience, and economies of scale to deliver on these commitments in the most timely and cost effective manner. We also have strong support from many municipalities including those for which natural gas grant applications were submitted by the Company, which also made commitments to assist in the timely delivery of local projects.
Enbridge’s proposal would result in up to $650 million in capital investment over a ten year period, while delivering:
• Annual savings of $800 to $1,400 to new residential customers;
• No “ask” for new government funding; community expansion investment would escalate slowly over a number of years (much less than $1 per month in the early years of the program), with a typical residential customer experiencing a rate impact on average of no more than $1 per month; and
• Access to reliable, affordable natural gas to up to 78 communities and 33,000 customers, over a 10-year timeframe.
Enbridge is best-positioned to help the Government deliver on these important objectives, with no new government grants or subsidies and on the most efficient timelines. In fact, work is already underway. Since receiving approvals to move forward on our Fenelon Falls and Moraviantown projects in April 2018, Enbridge has already brought access to natural gas to Moraviantown and we expect the first 120 customers in Fenelon Falls to receive service later this year. This proven record of safe, cost-competitive, and timely project delivery will be critical in delivering new projects across the province.
Guiding Principles for Program Design
Maximize affordability for communities and families
Communities and businesses across Ontario want access to reliable, affordable natural gas that will result in lower energy bills for families, a competitive advantage for businesses, and greater development opportunities in local communities. Enbridge’s proposed program would deliver the greatest benefits for communities, families and businesses. The economies of scale with our existing base of 3.7 million customers in Ontario and our proven experience in construction and project delivery enables us to deliver projects with no need for new government funding while limiting costs to no more than $1 per month for our existing customers.
Enable the timeliest delivery of projects for communities, First Nations, and businesses across the province
Enbridge has support from all municipalities that provided natural gas grant applications, including commitments to assist in the timely delivery of local projects. Enbridge also has a proven record in safe construction and delivery of large scale energy infrastructure projects. In fact, work is already underway. As noted, since receiving approvals to move forward on our Fenelon Falls and Moraviantown projects in April 2018, Enbridge has already brought natural gas access to Moraviantown and we expect the first customers in Fenelon Falls will be connected by the end of this year.
Restrict cross-company subsidization for new community expansion projects
Any mechanism that would allow consumers from one utility to subsidize customers of another utility represents a strong departure from the long established North American regulatory principles of cost causality, violating a key tenant of cost of service rate regulation. Such an approach would introduce inequities across both utility’s ratepayers.
In the context of community expansion projects and most regular customer attachments, these principles mean that when a subsidy is contained within a single utility, the customers that subsidize the early year revenue shortfalls associated with customer additions eventually will have the subsidy returned to them in later years in the form of lower rates. The return in future years results from two factors: (1) reduced asset values as the new system assets age (are depreciated); and (2) incremental growth on the new parts of the system over the longer term (beyond the term for forecast customer attachments in the Ontario Energy Board’s feasibility guidelines for gas distribution system expansion). With cross company subsidies, the customers that originally provided the subsidy would never see the benefits in terms of future lower costs. A cross-utility subsidy would simply amount to a tax—a tax paid by the customers of the incumbent utility to the benefit of those of another utility.
Avoid administrative complexities that would add further costs and delay important community expansion projects
Cross-company subsidization would also create significant administrative complexities, added costs and delays for project delivery. Significant design elements remain unclear, for example:
• Who would administer the fund? How much would administration cost?
• How would the value of the subsidy get adjusted each year as assets depreciate, when the rate is billed by one utility and the depreciation and expenses are recorded by another?
• Would the existing customers that are subsidizing another company’s projects be required to pay the full $12.00 per year beginning in the first year and in every year of the program?
• Would non-rate-regulated gas distributors be also required to financially support expansions by rate-regulated distributors?
Enable True Competition for New Gas Distribution Franchise Areas
In terms of timing, the OEB’s EB-2016-0004 generic community expansion proceeding required approximately nine months to complete, followed by the South Bruce franchise application process which added roughly another fifteen months, for a total process of twenty-four months. Beyond this, typical OEB Leave to Construct (“LTC”) applications require six to eight months to prepare and a significant portion of the underlying work cannot be completed in winter (environmental studies, etc.). It would be imprudent for a utility to invest the time, effort and funds required to prepare an LTC application prior to securing the franchise to serve the project area. Once submitted to the Board a typical OEB Leave to Construct Application requires six to eight months to be approved.
Enbridge agrees in principle with the fundamental tenets of competition as a potential means of arriving at cost effective solutions for the provision of natural gas service to new franchise areas, as was the intention with South Bruce. However, the competition established for South Bruce did not recognize these principles. If this type of competition is to continue in Ontario it needs to be undertaken in the manner of a truly competitive environment that recognizes each proponents’ true strengths (e.g. existing economies of scale, proven track record on safe and timely construction for project delivery in Ontario).
Moving Forward with the Proposed Natural Gas Expansion Support Program
Existing projects that have already undertaken a review process under the previous Natural Gas Grant Program (NGGP) and are already in flight should be upheld and allowed to proceed without having to go through a second review process. This would allow for proponents to begin the timely delivery of natural gas community expansion projects as per their original applications (including cost projections, timelines). Otherwise, construction could not begin on new projects if subjected to the OEB’s competitive process for eighteen to twenty-four months from the time the competing proposals are resubmitted to the Board.
Funding for projects for the original NGGP projects must be strictly limited to the original grant amounts. This would ensure that customers would not be held responsible for poor financial projections, cost overruns, and other changes incurred by the intended grant recipients. The scope and intended market to be served by projects that have been awarded NGGP grants also should be considered in the determination as to whether these projects go forward, particularly in instances where the grant funding on its own would not provide for investments that actually would deliver natural gas to a community and where subsidies beyond that provided by the NGGP grant awarded would be required in order to do so.
Any competitive process for new gas distribution franchises must be conducted in a transparent fashion with key evaluation criteria that is well-defined and understood in advance. This would allow proponents to prepare and bring forward the best project proposals with the most accurate costing projections and timelines for delivery, and to take steps to gain support from local communities and other partners throughout the process. Evaluation criteria must also carefully weigh the proven strengths of each proponent, including existing economies of scale that would ensure projects pass along the greatest savings for consumers and a proponent’s proven record of safe construction in Ontario in order to ensure that projects will be delivered to families, businesses, and communities on time and on budget.
Further to the aforementioned principles, the following framework should be considered in designing a competitive process for natural gas community expansion projects in new franchise areas:
• Potential community expansion projects should be identified and brought forward for consideration by project proponents;
• Each competing proponent should be enabled to leverage their unique skills, capabilities, scale and scope to every extent possible, and one competitor should not be expected or required to support the other competitor’s business operations;
• Proponents should not be permitted to assume to be able to leverage a competitor’s capability to purchase the gas commodity, upstream transportation or gas storage services;
• Competition should be based on the actual expected total incremental cost of service as opposed to fully allocated costs (to do otherwise would have new customers subsidizing existing ratepayers);
• The process should minimize duplication of costs and extended project development periods that might otherwise result from competition; and
• All costs incurred should be recoverable by the successful project proponent (including development costs).
Enbridge appreciates the opportunity to provide input as the Government of Ontario prepares next steps on the Natural Gas Expansion Support Program.
We look forward to continue working with decision-makers and our partners in local communities and industry, to help inform next steps including to help establish an efficient process and delivery mechanism for new projects, and to deliver natural gas to more communities, businesses and families across the province.
Submitted November 30, 2018 6:25 PM