RÉGIE de L'ENERGIE
GAZ MÉTRO LIMITED PARTNERSHIP
NO. R-3732-2010
WRITTEN EVIDENCE OF
ASSOCIATION PÈTOLIÈRE ET GAZIÈRE DU QUÉBEC ("APGQ")
(QUEBEC OIL AND GAS ASSOCIATION ("QOGA"))
SEPTEMBER 30, 2010
TABLE OF CONTENTS
Page
I. INTRODUCTION OF APGQ/QOGA ....................................................................................... 1
II. NATURAL GAS RESOURCE DEVELOPMENT IN QUEBEC ............................................ 4
III. GENERAL SUPPORT FOR GAZ MÉTRO TOLLING MODEL ........................................ 12
IV. CATEGORY B RATE .......................................................................................................... 15
V. CATEGORY C RATE ............................................................................................................ 16
VI. AMENDMENTS TO CONDITIONS OF NATURAL GAS SERVICE AND TARIFF ...... 17
APGQ/QOGA Evidence
September 30, 2010
Page 1 of 23
WRITTEN EVIDENCE OF
ASSOCIATION PÈTOLIÈRE ET GAZIÈRE DU QUÉBEC ("APGQ")
(QUEBEC OIL AND GAS ASSOCIATION ("QOGA"))
1
I.
INTRODUCTION OF APGQ/QOGA
2
Q.1
Who is APGQ/QOGA?
3
A.1
"APGQ" is the acronym for the Association pétrolière et gazière du Québec (Quebec Oil
4
and Gas Association or "QOGA" in English) which was created in April 2009.
5
Q.2
What is the mission of QOGA?
6
A.2
QOGA's mission is to represent the Quebec oil and natural gas industry and promote its
7
interests. The association acts as the industry's spokesperson in dialogue with
8
governments, the public and various interest groups. It has strength in numbers and a
9
credible voice to advance the common interests of Quebec producers in an attempt to
10
ensure the full development of Quebec's oil and natural gas resources. QOGA's members
11
are attempting to realize the value of these resources, thus contributing to the province's
12
economic development and energy diversification.
13
Q.3
Who belongs to QOGA and what is required for membership?
14
A.3
Membership in QOGA is open to any company which conducts business related to the oil
15
and natural gas industry in the province of Quebec. This may include producing and non-
16
producing oil and natural gas companies with land interests in Quebec and companies
17
whose primary function is to provide services for oil and natural gas related activities.
APGQ/QOGA Evidence
September 30, 2010
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1
Prospective members are required to apply for membership and to share in the annual
2
costs incurred by the association.
3
companies from Quebec, the rest of Canada, Europe and other regions around the world.
4
Members include public and private companies of various sizes who invest tens of
5
millions of dollars each year in Quebec. A list of the current membership is as follows:
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6
7
8
9
10
11
12
13
14
15
QOGA currently has ten full members including
Altai Resources Inc.;
Canbriam Energy Inc.;
Canadian Forest Oil Ltd.;
Gastem Inc.;
Intragaz Inc.;
Junex Inc.;
Molopo Canada Inc.;
Petrolympic Ltd.;
Questerre Energy Corp.; and
Talisman Energy Inc.
16
Q.4
How does QOGA operate?
17
A.4
QOGA is a voluntary organization representing industry interests. As such, it speaks to
18
the consensus interests of its members but does not purport to bind any of its members to
19
any specific position. All members are free to express and advocate a different position
20
on a specific issue. QOGA has three officers and is governed by a Board of Directors.
21
There is also an Executive Committee which approves committee recommendations
22
made to it. The current members of each are as follows:
23
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24
25
26
27
28
29
30
31
32
Officers:

André Caillé, President;
Pierre Boivin, Vice-president; and
Dave Pépin, Secretary.
Board of Directors:
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
André Caillé (Junex);
Raymond Savoie (Gastem);
Rock Marois (Intragaz);
Réjean Paul (Altai);
John Zetzman (Molopo);
APGQ/QOGA Evidence
September 30, 2010
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1
2
3
4
5
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6
Executive Committee:
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7
8
9
10
11
12
13
14
15
David M. Anderson (Forest Oil);
Paul Myers (Canbriam);
Mendel Ekstein (Petrolympic);
Scott Sobie (Talisman); and
Pierre Boivin (Questerre).
André Caillé (Junex);
Pierre Boivin (Questerre);
Scott Sobie (Talisman);
Paul Myers (Canbriam);
David M. Anderson (Forest Oil);
Michael Binnion (Questerre);
Jean-Yves Lavoie (Junex); and
Raymond Savoie (Gastem).
16
In addition, committees of QOGA members are formed, from time to time, to address
17
various matters. QOGA has formed a Pipeline Committee whose responsibilities include
18
transportation matters on Gaz Métro's system.
19
Q.5
Why has QOGA intervened in this proceeding?
20
A.5
QOGA represents the interests of the natural gas producers in the Province of Quebec. In
21
order to develop natural gas and transport it to markets, a significant investment in
22
pipeline infrastructure will be required.
23
producers included in their portfolio of customers both to facilitate local supply as well as
24
to expand Gaz Métro's pipeline system. The terms under which Gaz Métro proposes to
25
provide these services and the rates to recover their costs are important to the economic
26
returns of the Producers and the continued sustainability of natural gas development in
27
the basin.
Gaz Métro has indicated a desire to have
APGQ/QOGA Evidence
September 30, 2010
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1
II.
NATURAL GAS RESOURCE DEVELOPMENT IN QUEBEC
2
Q.6
How does the current land tenure system work in Quebec?
3
A.6
The oil and gas mineral rights in Quebec are obtained from the Government of Quebec
4
and fall under the rules within the Mining Act (R.S.Q. c. M-13.1). Companies request
5
land rights for which they are granted exploration permits for a period of five years with
6
an option to extend for annual periods not to exceed five years in total upon certain work
7
commitments being met and the payment of annual fees. After that time, the mineral
8
interests under the exploration permits can be converted into production leases as a result
9
of drilling wells that are capable of producing on an economic basis. Current production
10
leases range in size from 200 hectares to 2000 hectares. If exploration permits are not
11
converted into production leases, the lands will revert back to the Government of Quebec.
12
Q.7
13
14
How does the Quebec mineral land tenure system impact the development of
pipeline infrastructure in Quebec?
A.7
The nature of the Quebec mineral land tenure system is that the St. Lawrence lowlands
15
area is composed of relatively large contiguous exploration permits each with a relatively
16
small number of working interest owners. An interactive map showing the land holdings
17
in the St. Lawrence lowlands can be found on the Quebec Ministère des Ressources
18
naturelles et de la Faune website
19
(http://www.mrnf.gouv.qc.ca/publications/energie/exploration/Permis_basses-
20
terres_2010.pdf). Unlike other jurisdictions, these large blocks of mineral interests will
21
result in a more orderly and systematic development of both the natural gas reserves and
22
the associated pipeline infrastructure. As a result, a pipeline serving a 30 km2 or 40 km2
23
area in Quebec may only have two or three customers instead of 20 to 30 customers
24
which would be more common in most other jurisdictions. As the pipeline capacity
25
required for any single project will be required by all working interest owners and as each
26
project will be developed by a small group, this means that the interests of each of these
27
working interest owners will be aligned. This leads to a model where each project is
APGQ/QOGA Evidence
September 30, 2010
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1
specific to a relatively small number of known customers who will use the entire capacity
2
of the pipeline.
3
Q.8
What is a "reservoir"?
4
A.8
A reservoir is the rock that contains natural gas or other hydrocarbons.
5
Q.9
What is "porosity"?
6
A.9
Porosity is the microscopic free and open space within a rock that can store natural gas.
7
Q.10 What is "permeability"?
8
A.10
9
Permeability is the ability of the rock to pass fluids or a gas through it. The higher the
permeability, the greater the amount of fluid or gas that can flow through the rock over a
10
fixed period of time.
11
Q.11 What is a "resource"?
12
A.11
13
A resource is the total amount of natural gas that is thought to exist within a reservoir, but
does not represent how much natural gas is actually recoverable.
14
Q.12 What are "gas reserves"?
15
A.12
Gas reserves are the amount of natural gas that is estimated, with a high degree of
16
confidence, to be economically recoverable from a reservoir. Reserves are considered to
17
be company assets and are determined by professionals using industry standards and best
18
practices.
19
Q.13 What is "source rock"?
20
A.13
Source rock is a rock which contains very small amounts of organic material from which
21
natural gas has been formed. The organic material has been converted to hydrocarbons
22
through geologic time as it was exposed to high temperatures and pressures.
APGQ/QOGA Evidence
September 30, 2010
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1
Q.14 What is a "shale"?
2
A.14
Shale is a sedimentary rock formed by the consolidation of very fine grained mud and silt
3
materials, which has been solidified into rock as shale. Some shales contain very small
4
amounts of organic matter and can form source rocks.
5
Q.15 What is the difference between an unconventional shale gas reservoir and a
6
7
conventional natural gas reservoir?
A.15
In conventional reservoirs, natural gas is contained within the relatively high permeability
8
and porosity pores spaces found within the rock. Natural gas is generated within a source
9
rock which then migrates to a reservoir where it is trapped by a sealing cap rock. In
10
unconventional shale gas reservoirs, natural gas is generated and trapped in the very low
11
permeability and porosity shales. Unlike conventional reservoirs, the target of shale gas
12
reservoirs is the source rock itself which contains a significant accumulation of natural
13
gas that has never migrated away.
14
Q.16 How is the natural gas produced from an unconventional shale gas reservoir?
15
A.16
In order to produce natural gas, unconventional shale gas reservoirs require a mechanism
16
to enhance the very low porosity and permeability of the source rock through the
17
utilization of advanced stimulation or "completion" technologies. In order to produce
18
natural gas from shale, a fracture network must be created by means of stimulating the
19
source rock through a technique known as "hydraulic fracturing".
20
involves pumping fluid, mostly water and sand, at high rates and at a high pressure to
21
physically create a micro-fracture network which provides a conduit for the natural gas to
22
flow to the wellbore.
23
Q.17 Will all the areas in the St Lawrence lowlands have natural gas that is commercially
24
25
26
This technique
exploitable?
A.17
It is unlikely. The St Lawrence lowlands are a complex geological area that have several
regional geological settings. While not all geological settings have been tested as yet, it
APGQ/QOGA Evidence
September 30, 2010
Page 7 of 23
1
is unlikely that all of the areas will have the combination of source rock quality, reservoir
2
pressures and gas maturity to make a successful commercial play.
3
Q.18 What is a "resource play"?
4
A.18
Unconventional natural gas plays are often referred to as "resource plays". Due to the
5
high cost of extracting natural gas from an unconventional reservoir, resource play types
6
of exploration and development projects are usually successful as a result of lower cost
7
operational efficiencies and economy of scale type operations. The consistent nature of
8
the natural gas reservoir shifts the risk from those related to geology to engineering and
9
operational related risks. In resource plays, there is also a recognition that there will be
10
both high volume and low volume producing wells. As a result, a Producer will rely on a
11
statistical average to achieve an economic return on its project investment costs. The
12
success of a resource play hinges upon the ability of the developing Producer to optimize
13
productivity while lowering its full cycle development costs through economy of scale
14
and synergies. The natural gas market is very competitive and each shale gas project has
15
to be commercially competitive on a North American basis.
16
Q.19 How does the development of a resource play differ from that of a conventional
17
18
play?
A.19
Compared to a conventional play, development costs for a resource play are high due to
19
the requirement for extensive horizontal drilling and multi-stage hydraulic fracturing
20
operations to access the natural gas. Each resource play is unique, requiring capital
21
intensive exploration and experimentation to determine the geographical areas with the
22
highest productive capacity and to optimize drilling and completion techniques. Once
23
successful drilling and stimulation methods have been established, the remaining wells in
24
the development area will be similar in design. To minimize surface impact numerous
25
wells will be drilled from the same well pad covering a small surface area. Development
26
will typically advance in a methodical manner from the existing wells and related
27
infrastructure.
APGQ/QOGA Evidence
September 30, 2010
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1
Conventional plays revolve around attempting to find a reservoir trap that contains
2
sufficient quantities of natural gas to generate a return on the investment. As compared
3
with resource plays, conventional reserves are confined to smaller accumulations which
4
usually restricts development to a very specific area. Unlike resource plays, conventional
5
reserves have higher permeability, which allow the natural gas to flow much more readily
6
to the wellbore thus requiring fewer wells to capture all of the natural gas in the targeted
7
trap. Conventional natural gas accumulations generally will produce all the accumulated
8
natural gas reserves over a relatively short period of time, whereas, unconventional
9
natural gas reserves typically will produce natural gas for decades.
10
Q.20 Does this mean that the risk is less for a resource play?
11
A.20
While the risk of a resource play is typically interpreted as being less than that of a
12
conventional play, it should be more accurately classified as a different type of risk rather
13
than less risky. In conventional plays, much of the risk is geologic in nature which is
14
characterized by the ability to physically locate natural gas reservoirs of an economic
15
size. In resource plays, the risk is characterized by the ability to produce economic
16
volumes of natural gas from regionally pervasive accumulations of natural gas where the
17
risk of finding a reservoir with a large amount of hydrocarbons in place is low. Resource
18
play risks involve the timing of development, mechanical issues that impact completion
19
efficiencies and the ability to implement cost saving strategies.
20
Q.21 Describe the stages of exploration and development of a resource play.
21
A.21
22
23
24
25
26
27
There are typically six stages involved in the development of a resource play:
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identification of the resource;
exploration and early evaluation drilling;
pilot project drilling;
pilot production testing;
commercial development; and
project reclamation.
APGQ/QOGA Evidence
September 30, 2010
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1
Q.22 Describe where the industry is at today in Quebec and what is required to get to the
2
3
next step.
A.22
Industry is currently in the exploration and early evaluation drilling stage of
4
development.
Work performed to-date has focused on: defining the source rock
5
properties of the shale to determine how much natural gas may be present, defining
6
reservoir properties to guide in the development of the fracture stimulation program and
7
performing initial stimulation testing to quantify productivity and anticipated ultimate
8
recoverable reserves expected per well .
9
reservoir testing to determine decline rates and potential recoverable reserves. Industry
10
will eventually move to the pilot project drilling and pilot production testing phases in
11
certain areas of the basin by drilling multiple wells to determine reproducibility of results
12
and to attempt to achieve reductions in cost.
Industry is starting to conduct extended
13
Q.23 How many wells have been drilled in Quebec over the last few years?
14
A.23
Year
2008
2009
2010
Vertical Wells
4
8
1
15
Q.24 What will be the timing of the pilot project drilling stage?
16
A.24
Horizontal Wells
2
1
6
The pace of development and capital expenditure is largely dependent on technical
17
success, availability of oil field services, availability of risk capital and natural gas
18
market conditions, of which each Producer may have a different view. Each Producer
19
will tend to allocate capital to the highest return project in their individual portfolio to
20
generate the return on capital demanded by shareholders.
21
Q.25 What is the typical production profile for a shale gas well?
22
A.25
23
Shale gas well production performance is characterized by steep initial decline rates and a
long period of transient flow. Due to the extremely low permeability and the creation of
APGQ/QOGA Evidence
September 30, 2010
Page 10 of 23
1
an extensive near wellbore fracture network, shale gas wells exhibit a unique production
2
profile.
3
characteristically high which is followed by a long term transient flow period. A shale
4
gas well can theoretically produce for 20 to 40 years.
5
development, QOGA members do not have enough information to determine exactly
6
what initial production and decline rates the Utica shale in Quebec will exhibit, but there
7
is enough analogous data from other shale basins in North America to know what the
8
expected range could be. Below is a typical shale gas well production decline curve:
When a shale gas well commences production, initial gas rates are
At the current stage of
9
10
11
12
13
14
15
16
17
18
19
Q.26 Given this production profile, what it the expected life of a shale gas play?
20
A.26
As production from wells declines, new wells will be drilled and brought on-stream to
21
fully utilize the facility and pipeline capacities. Depending on the pace of drilling, the
22
size of the prospective acreage and the stabilized production rates achieved, it is expected
23
that the life of a project could be in excess of 50 years.
APGQ/QOGA Evidence
September 30, 2010
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1
Q.27 What types of facilities would a Producer typically install in order to produce shale
2
3
gas?
A.27
The Producer facilities consist primarily of two components, production and processing.
4
The function of the production component is to measure and collect the raw natural gas
5
produced from the wells. The production component includes the wells, field separation
6
and measurement, gathering pipelines and potentially field compression. The function of
7
the processing component is to condition the raw natural gas into sales gas quality
8
specification and deliver it to a downstream pipeline.
9
depending on the raw natural gas composition, but typically, the processing component
10
includes a central compression and dehydration facility.
11
A schematic of possible Producer facilities is shown below:
12
13
14
Exact equipment may vary
APGQ/QOGA Evidence
September 30, 2010
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1
III.
2
Q.28 Does QOGA support the overall model which Gaz Métro has developed for the
3
4
GENERAL SUPPORT FOR GAZ MÉTRO TOLLING MODEL
receipt rate?
A.28
Yes, QOGA believes that the overall toll model proposed by Gaz Métro reflects an
5
appropriate balance between the toll design principles of cost causation, avoidance of
6
cross subsidization, toll stability and simplicity.
7
Q.29 Does QOGA's support of the overall model mean that QOGA supports all elements
8
9
of the receipt rate?
A.29
No. QOGA does not believe that there is enough information available at this time to
10
confirm that the proposed Category B rate of .7¢/m3 ($.20/mcf) is appropriate nor to
11
confirm that a Category C rate determined on the basis of a uniform 4% of the Category
12
A investment cost is appropriate for all projects. Given the current development status of
13
the industry in Quebec there is, however, no better information currently available to
14
establish these rates. Accordingly, QOGA would be prepared to have the initial receipt
15
rates established utilizing the amounts proposed by Gaz Métro for these costs on the
16
condition that they could be reviewed at a future rate case once practical operating
17
experience in Quebec has been obtained.
18
Q.30 Please describe why QOGA believes the determination of the Category A costs on a
19
project specific basis is more appropriate than a postage stamp form of rate
20
applicable to all Producers?
21
A.30
As previously discussed in Section II of this Direct Evidence, the development of the
22
shale gas industry in Quebec is quite unique and is very different from conventional
23
natural gas development in other Canadian jurisdictions.
24
development involves large resource plays. The ownership of the natural gas rights in
25
each play tends to be held by a small number of Producers. Both the distances between
26
each project and the nearest Gaz Métro facilities and the respective sizes of the required
27
pipeline infrastructure required for each project may also vary significantly. In the usual
The Quebec shale gas
APGQ/QOGA Evidence
September 30, 2010
Page 13 of 23
1
situation connection lines will be constructed by Gaz Métro to serve the specific needs of
2
an individual Producer or a small group of Producers in the same geographical area. It is
3
entirely fair that those particular Producers which require a connection line should pay
4
for the specific costs associated with that particular connection line. This reflects the toll
5
principles of cost causation and avoidance of cross-subsidization. A Producer which
6
requires a $50 million connection line should not pay the same Category A rate as a
7
Producer which only requires a much shorter $10 million connection line. To charge a
8
uniform or postage stamp rate for the cost of connection lines would be unfair to the
9
second Producer in this example and would provide a windfall to the first Producer. The
10
economics of the first Producer for developing its shale gas project should not be
11
subsidized by the second Producer.
12
economically justified on its own merits.
13
Q.31 Are there other problems which would be created if the Category A costs were
14
15
Each project should be developed and be
established on a postage stamp basis?
A.31
Yes. A decision to take a shale gas project to a commercial scale involves a significant
16
commitment of capital. The transportation costs to move a Producer's gas to markets also
17
factor into the project development decision. A Producer wants to establish, as precisely
18
as possible, what its future gas transportation costs will be. Determining Category A
19
costs on a project specific basis provides a greater level of certainty to each Producer as
20
to what these costs will be. As the Producer class of customers is likely to be small, a
21
postage stamp rate model could lead to wide fluctuations in a postage stamp Category A
22
rate which would introduce unnecessary uncertainty into the Producers' development
23
decisions. An example illustrates this issue. Producer A is the first Producer to request
24
receipt service and requires a $10 million connection line for a volume of 10 MMcfd.
25
Producer A determines what its Category A rate would be and makes its project
26
development decision on that basis. Two years later Producer B comes along and
27
requests receipt service requiring a $50 million connection line for a volume of 20
28
MMcfd. With a postage stamp tolling methodology Producer A's Category A rate would
29
likely double. If Producer A had known this at the time of its project development
APGQ/QOGA Evidence
September 30, 2010
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1
decision, it may not have chosen to proceed. Given that the number of Producers in the
2
early years is likely to be small and the magnitude of the Gaz Métro facilities required for
3
each Producer is likely to be very different, a postage stamp toll would result in toll that
4
would not be stable for any of the Producers. A project specific toll provides each
5
Producer with a more stable and predictable toll.
6
Q.32 Are there any other elements of Gaz Métro's proposed Category A rate which
7
8
QOGA wishes to comment on?
A.32
9
Yes, there are two, the first is Gaz Métro's proposal that the determination of the
Category A rate will be based on an amortization period of 20 years and the second is the
10
levelization of the toll over a 20 year period.
11
Q.33 Does QOGA believe that an amortization period of 20 years is appropriate?
12
A.33
QOGA believes that a 20 year amortization period, which reflects the estimated service
13
life of a connection line of 20 years, is very conservative for a pipeline which will be
14
transporting shale gas. As discussed in Section II of this Direct Evidence, shale gas
15
development is very different from conventional natural gas production.
16
characterized by development over a large area with a relatively consistent level of
17
production from the resource area.
18
maintained through the drilling of additional development wells. Shale gas wells are
19
expected to produce for 20 to 40 years and with additional drilling the life of a particular
20
project could be in excess of 50 years.
21
Production from the project area can be easily
Q.34 Is QOGA proposing that a different amortization period be established in this
22
23
It is
proceeding?
A.34
No. Once again QOGA appreciates that the industry is still in the early stages of shale
24
gas development in Quebec.
QOGA agrees with Gaz Métro's position that the
25
appropriate amortization period can be re-examined at a future investment request
26
proceeding or at a future rate proceeding (Régie-Gaz Métro IR 6.2 (Gaz Métro-1,
27
Document 1.6)). QOGA is prepared to accept a conservative 20 year amortization period
APGQ/QOGA Evidence
September 30, 2010
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1
but fully expects that a longer period will be shown to be more reflective of the useful life
2
of the connection lines. Once more project specific details are known and operational
3
performance has been demonstrated QOGA fully expects that an appropriate amortization
4
period will exceed 20 years.
5
Q.35 Does QOGA support Gaz Métro's proposal to levelize the Category A rate over a 20
6
7
year period?
A.35
Yes, a levelized toll creates toll stability which is important to Producers. A toll which
8
was not levelized would necessarily be higher in the early years and lower in the later
9
years. Having a levelized toll means that a Producer's transportation costs will be lower
10
in the early years of a project, a time when the capital costs associated with a project
11
would tend to be higher.
12
Q.36 Is a Producer ultimately responsible for the costs of Gaz Métro providing a levelized
13
14
toll?
A.36
Yes, the indemnity or "exit fee" required by Gaz Métro reflects the cost of any benefit
15
received by a Producer in the years prior to the crossover point being reached including
16
the time value of money determined on the basis of Gaz Métro's overall rate of return
17
(QOGA- Gaz Métro IR 41.4 (Gaz Métro -1, Document 1.23)).
18
IV.
19
Q.37 Gaz Métro has proposed that a Category B rate be charged to those Producers who
20
wish to have their gas transported to an interconnection point with TCPL/TQM for
21
ultimate delivery outside of Gaz Métro's territory.
22
Category B rate of .7¢/m3 ($.20/mcf) to be applied to those volumes of gas which a
23
Producer is delivering outside of Gaz Métro's territory. Does QOGA believe that
24
the proposed Category B rate is appropriate?
25
26
A.37
CATEGORY B RATE
Gaz Métro is proposing a
QOGA believes that it is appropriate for those Producers who will utilize the
transmission portion of Gaz Métro's gas system to transport gas for delivery outside of
APGQ/QOGA Evidence
September 30, 2010
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1
Gaz Métro's territory, to pay for such service. QOGA also understands the difficulty at
2
this time of determining the appropriate amount of Gaz Métro's total transmission costs
3
which should be allocated to the Producers and why Gaz Métro has chosen to rely on a
4
proxy amount being the amount of transmission costs which would be allocated to the
5
Rate D4 Consumer Customers (excluding the 4.10 level) expressed on a ¢/m 3 basis.
6
However, QOGA remains uncertain whether or not this proxy amount is appropriate on a
7
longer term basis. QOGA would be prepared to have the initial receipt rates established
8
on the basis proposed by Gaz Métro on the condition that the Category B rate could be
9
reviewed at a future rate case once practical operating experience in Quebec has been
10
obtained.
11
V.
12
Q.38 Gaz Métro has proposed that a Category C rate be charged to all Producers and is
13
proposing a Category C rate which will be equal to 4% of the original Category A
14
investment costs (QOGA- Gaz Métro-1 IR 35.12 (Gaz Métro-1, Document 2.35)).
15
The 4% percentage will apply to all receipt points. Does QOGA believe that the
16
proposed Category C rate is appropriate?
17
A.38
CATEGORY C RATE
As with the proposed level of the Category B rate, QOGA is not in a position at this time
18
to determine whether or not the 4% percentage is appropriate. QOGA notes that the 4%
19
amount was selected based on three different theoretical scenarios for a project's
20
estimated capital costs and estimated volumes. Gaz Métro has indicated that there is
21
uncertainty as to whether these scenarios will be representative of actual investment costs
22
or volumes (Régie-Gaz Métro IR 9.3 and 9.5 (Gaz Métro-1, Document 1.9)). Whether or
23
not these scenarios reflect actual capital investment costs and actual volumes remains to
24
be seen. While a different and specific percentage might be developed for each project,
25
QOGA does see some merit in selecting a uniform percentage for all projects. What may
26
be lost in a precise cost allocation exercise is gained in toll stability and simplicity of
27
application. It must be remembered that Gaz Métro's proposed Category C rate will
28
comprise only a small portion of the overall receipt charge and there is a project specific
APGQ/QOGA Evidence
September 30, 2010
Page 17 of 23
1
element in that the 4% is applied against the Category A costs so the larger the project the
2
larger the Category C rate will be. At the same time QOGA believes that a fixed
3
percentage of total investment may not be appropriate. Perhaps both a volume factor and
4
a capital investment factor may be more appropriate than simply a capital investment
5
factor alone. Perhaps a sliding scale percentage where the percentage would decrease as
6
capital costs increase may be more appropriate, e.g. 4% of the first $5 million, 3% of the
7
next $5 million and 2% of all amounts in excess of $10 million. Accordingly, as with the
8
Category B rate, it is uncertain whether or not Gaz Métro's proposed 4% will be
9
appropriate on a longer term basis. QOGA would, however, again be prepared to have
10
the initial receipt rates for Category C costs established on the basis proposed by Gaz
11
Métro on the condition that the Category C rate could be reviewed at a future rate case
12
once practical operating experience in Quebec has been obtained. As with the Category
13
B rate, at this later time there should be more data available which could be used to assess
14
the suitability of the continued use of setting this rate based on a fixed 4% applied against
15
the capital investment.
16
VI.
AMENDMENTS TO CONDITIONS OF NATURAL GAS SERVICE
AND TARIFF
17
18
Q.39 Gaz Métro has proposed numerous changes to its Conditions of Natural Gas Service
19
and Tariff (Ex B-7 - Gaz Métro 2 - document 2 revised) ("Service Conditions") for
20
which Gaz Métro is seeking approval of in this proceeding. Does QOGA believe
21
that all of these requested changes should be approved at this time?
22
A.39
No, while QOGA appreciates that certain amendments to the Service Conditions are
23
required now in order to establish the receipt service in the Service Conditions there is a
24
category of changes which will only be required to be approved prior to the
25
commencement of receipt rate service.
26
consideration of matters in this category be deferred until the next Gaz Métro rate case.
QOGA recommends that the Régie's
APGQ/QOGA Evidence
September 30, 2010
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1
Q.40 Please describe the types of matters which QOGA is suggesting should be deferred
2
3
to a future proceeding.
A.40
These matters can best be categorized as the operational aspects of the relationship
4
between a Producer and Gaz Métro which primarily dealt with the delivery of natural gas
5
by a Producer to Gaz Métro. They include matters such as:
6

pressure requirement (Section 16.6.4);
7

quality specifications (Section 16.6.4);
8

measurement (Section 5);
9

allocation procedure for overrun volumes among Producers (Section 16.6.6);
10

balancing penalties (Section 16.6.7); and
11

revision of Maximum Contractual Capacity (Section 16.6.5).
12
There are also a number of operational matters which Gaz Métro has not addressed in its
13
Service Conditions including:
14

nomination process including intra-day nominations;
15

temporary assignments of capacity; and
16

supply of linepack.
17
Q.41 Does QOGA disagree with the content of all of the changes requested by Gaz Métro
18
19
in respect of these matters?
A.41
No. In many cases Gaz Métro has clarified its business understanding of a matter in
20
response to various information requests. However, even in these situations QOGA
21
believes that Gaz Métro's proposed wording could often be revised to better reflect the
22
business understanding.
APGQ/QOGA Evidence
September 30, 2010
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1
Q.42 Why is QOGA not bringing forward, in this proceeding, the specific wording which
2
3
it would propose for each of these matters?
A.42
QOGA does not feel that a formal regulatory proceeding is the best forum for addressing
4
the wording of proposed changes to the Service Conditions especially given that these
5
matters will only have to be in place prior to receipt rate service commencing. QOGA
6
does not expect these matters to be too contentious and suggests that they are ones that
7
could be more appropriately and more efficiently dealt with through discussions between
8
Gaz Métro, QOGA and any other intervenor which had an interest in these matters.
9
QOGA believes that these discussions could commence immediately after the Régie's
10
decision in this proceeding with a goal of having the changes to Service Conditions
11
considered as part of Gaz Métro's 2011 rate case.
12
Q.43 Does QOGA believe that these discussions will result in Service Conditions which
13
14
will be supported by all parties?
A.43
Yes. Gaz Métro and consumer customers such as those represented by IGUA have
15
extensive experience with respect to Gaz Métro's gas system which, to date, has
16
essentially been a gas distribution system. The members of QOGA are Producers who
17
have experience with upstream pipelines which have primarily a receipt or transportation
18
function rather than a distribution function. These include the NOVA Gas Transmission
19
Ltd. ("NOVA)") and ATCO Pipelines systems in Alberta and the Westcoast Energy Inc.
20
("Westcoast") system in British Columbia. A full discussion about the tariffs, policies
21
and procedures utilized by pipelines in these other jurisdictions should lead to the
22
development of Service Conditions for Gaz Métro which are consistent with those of
23
other pipelines while still recognizing any unique aspects of Gaz Métro's gas system.
24
Many of these other pipelines also have tariff provisions or written procedures which are
25
much more detailed than what has been proposed by Gaz Métro in this proceeding.
26
Further discussions with Gaz Métro will determine whether it would be preferable to
27
have additional details for these matters set out in the Service Conditions or whether
28
standardized procedures could be adopted at the administration level. The important
APGQ/QOGA Evidence
September 30, 2010
Page 20 of 23
1
aspect to QOGA is that there are unambiguous and uniform procedures which are
2
consistently applied to all Producers and all receipt rate contracts.
3
procedures are documented is not a major concern to QOGA.
Where those
4
Q.44 Why would QOGA object to the Régie approving all of Gaz Métro's proposed
5
changes given that the Service Conditions can always be revised in a subsequent
6
proceeding?
7
A.44
As previously discussed, QOGA believes that there is no pressing need to have these
8
matters approved at this time. An approval by the Régie of all of Gaz Métro's requested
9
changes to the Service Conditions as a result of this proceeding could be interpreted as
10
placing an onus on a party requesting changes in the future to demonstrate that changes to
11
what was previously approved are warranted. If the Régie feels that all of Gaz Métro's
12
proposed changes must be addressed in this proceeding, QOGA would strongly
13
recommend that any approval by Régie be specifically conditioned to require these
14
matters to be further addressed in the Gaz Métro 2011 rate case and to indicate that the
15
onus would remain on Gaz Métro to demonstrate that any changes to the Service
16
Conditions which were approved in this proceeding continue to be appropriate.
17
Q.45 Are there any of Gaz Métro's proposed changes to the Service Conditions which
18
QOGA feels should not be approved by the Régie in this proceeding, even on a
19
conditional basis?
20
A.45
Yes there are two. The first being the balancing penalties proposed by Gaz Métro in
21
Section 16.6.7 of the Service Conditions and the second relates to the security deposit
22
which may be requested by Gaz Métro from the Producers in Section 8 of the Service
23
Conditions.
24
Q.46 What are the issues with Gaz Métro's proposed imbalance penalties?
25
A.46
In Section 16.6.7 Gaz Métro has proposed to utilize the same balancing procedure which
26
is used by TransCanada PipeLines Ltd. ("TCPL"). Gaz Métro has indicated that the
27
same tolerances and penalties will be used. The monetary amounts of specific daily
APGQ/QOGA Evidence
September 30, 2010
Page 21 of 23
1
imbalance penalties proposed by Gaz Métro are the same as those currently in place on
2
TCPL, but it must be remembered that the TCPL numbers are based on TCPL's "FT
3
Daily Demand Charge" which is the Canadian Firm Service from Empress to the Eastern
4
Zone Toll (currently $1.6381/GJ). The TCPL system is very different from Gaz Métro's
5
system and it is very different from other pipelines which deal with receipts from
6
Producers at the field level. By their very nature deliveries by Producers at a field receipt
7
point can be more variable and are more likely to be subject to an intraday variance than
8
are deliveries onto TCPL system which can be effectively managed through the upstream
9
NOVA system. Pipelines which are typically dealing with receipts from Producers such
10
as NOVA and Westcoast either do not impose penalties for differences between receipt
11
nominations and receipt quantities or have more flexible balancing procedures. Gaz
12
Métro should also develop an intra-day gas nomination procedure which would also
13
assist to minimize daily imbalances.
14
TCPL's imbalancing penalties which are based on TCPL's rather large Eastern Zone Toll
15
is an appropriate reflection of any costs which Gaz Métro might incur as a result of an
16
imbalance. While the $1.6381/GJ basis may be appropriate to reflect TCPL's costs, Gaz
17
Métro has not provided sufficient justification to demonstrate why it also reflects Gaz
18
Métro's costs of addressing an imbalance between a receipt nomination and the actual
19
deliveries of natural gas at a receipt point.
20
Q.47 What are the problems with Gaz Métro's proposed change to Section 8 of the
21
22
Finally, QOGA questions whether the use of
Service Conditions in respect of requesting a security deposit from a Producer?
A.47
In respect of the security deposit for a Producer, Gaz Métro is proposing three separate
23
changes where Gaz Métro is placing more onerous conditions on Producers in a receipt
24
rate contract than it does for its other customers including large industrial customers.
25
These three changes are:
26

the amount of the security deposit for a receipt rate contract is set at an amount
27
equal to the charges for 12 months of service (Section 8.2.3), while the maximum
28
amount for other users is the sum of the highest two consecutive bills (including
APGQ/QOGA Evidence
September 30, 2010
Page 22 of 23
1
any gas commodity charge) during a 12 month period (Section 8.2.1 and
2
Section 8.2.2);

3
the initial retention period for a deposit for a receipt rate contract would be 60
4
consecutive months rather than 12 consecutive months for domestic use
5
customers and 36 consecutive months for other consumer customers
6
(Section 8.4); and

7
Gaz Métro can ask for a security deposit from a Producer at any time in respect of
8
a receipt rate contract (Section 8.1.3) while it can only do so after the initial
9
retention period in respect of other customers in the event that the customer has
10
failed to pay a bill during the last 12 months (Section 8.1.2.2).
11
Gaz Métro has not provided sufficient justification as to why more stringent requirements
12
are needed for receipt rate contracts.
13
Q.48 Is QOGA objecting to each of the three changes discussed in A.47?
14
A.48
No, not at this time. QOGA appreciates that receipt rate service is a new service and as
15
with anything new, a transition process may be required. QOGA is not objecting, at this
16
time, to Gaz Métro's proposal to set the security deposit amount at 12 months of charges
17
even though this time period is not only in excess of what is required from Gaz Métro's
18
other customers but also exceeds the maximum required by other pipelines for receipt
19
service (NOVA and Westcoast). QOGA is also not objecting, at this time, to Gaz Métro's
20
proposed requirement for an initial security deposit retention period of 60 months.
21
QOGA does, however, reserve the right to revisit these items in the future. The adoption
22
of these two additional requirements should provide Gaz Métro with sufficient assurances
23
that a Producer will pay its bills and affords Gaz Métro significantly additional protection
24
than it is allowed to seek from its existing customers including larger industrial
25
customers. QOGA is not, however, prepared to accept Gaz Métro's third proposed
26
change which would allow Gaz Métro to request a deposit beyond the initial retention
27
period of 60 months where a Producer has not missed a payment. This additional
28
requirement could prove to be unduly onerous to a Producer which has always paid its
APGQ/QOGA Evidence
September 30, 2010
Page 23 of 23
1
bills but still could be subject to a discretionary request by Gaz Métro to provide a new
2
security deposit. There are no qualifiers on Gaz Métro's right to make a request to a
3
Producer in its proposed Section 8.1.3, i.e. that the deposit could only be requested if Gaz
4
Métro has reasonable grounds for believing that the Producer cannot pay its bills as they
5
are rendered.
6
treatment between the Producers and the other customers of Gaz Métro. If Gaz Métro
7
feels that it needs to have the right to request a deposit at any time after the initial
8
retention period, then the same rules should apply to all of Gaz Métro's customers be they
9
Producers, large industrial customers, commercial customers or domestic gas users.
However, QOGA's more fundamental concern is the difference in
10
Q.49 Does this conclude the direct evidence of QOGA in this proceeding?
11
A.49
Yes, at this time.