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Energy Law Update 
November 2004
The Energy Law Update is prepared by the members of the Energy Group at 
Stikeman Elliott LLP and reports on issues affecting Canadian and International business

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OEB Releases Enbridge Gas
Distribution 2005 Rate Decision

by David Brown

On November 1, 2004 the Ontario Energy Board released its final decision on the application by Enbridge Gas Distribution Inc. (EGD) for 2005 rates (RP-2003-0203). Although most issues raised by the application were settled without a hearing, the OEB was required to decide several issues of note.

Since the fall of 2002 EGD had been bundling the natural gas commodity together with utility assets to create transactional services such as peak storage, loans and exchanges. The OEB decided that it would be contrary to efforts to create competitive markets for natural gas to allow EGD to bundle commodity gas with utility assets and the Board directed EGD to refrain from such activities by January 1, 2005. The Board signalled its interest in EGD promoting an open market for surplus transportation and storage assets, and asked EGD to develop a methodology for making such surplus assets known and available to unrelated market participants on a non-discriminatory basis as soon as possible.

A second issue involved a new storage contract EGD negotiated with Union for 19.9 bcf of storage for the period 2004 to 2014. EGD’s prior storage contract with Union had used cost-based storage rates; the new one used market-based rates that exceeded the cost-based ones. Earlier this year Union obtained OEB approval for the parties to, period of and space that was subject to the new contract. In its rates case EGD sought Board approval for the cost consequences of the new contract. The Board declined to give its approval. Citing concerns over the lack of solid evidence about ratepayer benefits under the new contract and the lack of detail and transparency in the RFP process that underpinned the negotiated Union price, the Board denied EGD’s request for recovery of the cost consequences of the contract. As a result, the existing cost-based storage rates will continue until 2006, at which time EGD and Union must negotiate new market rates.

The Board’s decision also brought to an end the long saga surrounding the deferred tax issue relating to EGD’s transfer of its water heater rental business to an affiliate in 1999 and the eventual sale of that business to Centrica plc in 2002. The Board allowed EGD to recover, in equal instalments over three years, $23.9 million for the deferred taxes that became payable between 1999 and 2002.

Finally, the OEB approved a number of rate-making consequences flowing from EGD’s decision to change its year-end from September 30 to December 31 in 2005. Relying on last year’s Board decision approving EGD’s unique request to use a simplified CPI-adjusted methodology to set 2004 rates, EGD proposed that the Board employ a similar methodology to set rates during the stub period, October 1 to December 31, 2005. The Board refused to grant a rate increase for the stub period, holding that EGD did not provide sufficient evidence that costs would increase during the stub period.

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Federal Government Announces Quadrupling
of Wind Power Production Incentive
(WPPI)

by Aaron Atcheson

With almost 95% of the current $260 million WPPI budget allocated to wind energy projects existing or in the process of construction or final planning, the recent announcement that funding for this popular program will be quadrupled was welcome news to the wind energy industry. How WPPI will change as part of this process was the subject of several sessions at the 2004 Canadian Wind Energy Conference in Montreal, October 17 – 20.

When the WPPI program was first introduced, limited to qualifying projects commissioned on or after April 1, 2002, the stated goal was to encourage the development of a wind power industry in Canada and to assist in the installation of 1000 MW of wind energy in Canada over five years, not to mention contributing to meeting Canada’s goals under the Kyoto Protocol. In order to ensure that smaller developers and jurisdictions with less mature wind energy industries not be excluded, caps were placed on the amount any jurisdiction and any developer could receive. These restrictions, which set limits of 300 MW of WPPI-supported production per province/territory and $64 million total in WPPI funds to any recipient, are now one of the main subjects of debate as the program is expanded. With Alberta now at 270 MW of installed capacity, the Canadian Wind Energy Association and others are advocating the raising or elimination of these caps.

The original WPPI program also specified that WPPI funding could not be coupled with other federal incentives. For example, electricity from test wind turbines installed under the Canadian Renewable and Conservation Expense (CRCE) provision of the federal Income Tax Act is not eligible for WPPI funding. (CRCE allows the cost of acquisition and installation of a test wind turbine to be 100% deductible and such deductions can be passed through to owners of flow-through shares.) Similarly the greenhouse gas reduction credit trading scheme being developed by Environment Canada will not include power supported by WPPI. These restrictions are currently being questioned by industry and advocacy groups.

Finally, WPPI program administrators are also looking for ways to support more projects with the funding they have received. For example, National Resources Canada (NRCan) is considering limiting the WPPI funding to 30% of the nameplate capacity on any project; although capacity factors on existing WPPI recipient developments were commonly estimated at 40% by developers, NRCan has found that most projects have operated at around the 30% capacity factor level, meaning that funds allocated to projects have not been paid out as scheduled and opportunities to support additional wind farms have been lost.

Overall, the industry is encouraged by continued federal government support and is looking forward to receiving the details of the next version of the WPPI program.

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OEB Clarifies "Special Circumstances" for Transmission LTC Exemptions

by Patrick Duffy

Proponents of major transmission line construction or expansion projects first require leave from the Ontario Energy Board. Section 95 of the OEB Act allows the Board to exempt any person from the leave-to-construct requirements without a hearing if in the Board’s opinion "special circumstances of a particular case so require." In December 2003 the OEB granted an exemption to Hydro One Networks for the construction of its Parkway transmission line just north of Toronto. Equating the phrase "special circumstances" with circumstances that are "unusual, uncommon or exceptional," the OEB allowed Hydro One’s application, despite the utility’s failure to file it in a timely manner, because the exemption was necessary to avert rolling blackouts in the Greater Toronto Area during the summer of 2005.

In a recent application by Falconbridge Limited (RP-2004-0204/EB-2004-0412), the OEB was again asked to grant an exemption from a formal leave to construct hearing. Falconbridge proposed to construct a new dedicated transmission line for one of its mines near Sudbury. Falconbridge originally proposed to supply the mine by means of a short tap from an idle transmission line owned by INCO Limited, but abandoned the plan after negotiations with INCO ended unsuccessfully. In its application Falconbridge pleaded "special circumstances" on the basis that it was unable to reach an agreement with INCO in time to meet the mine’s project development timelines, and therefore required an exemption to be able to complete construction of the new line in a timely fashion.

In its September 27, 2004 decision, the OEB accepted that "special circumstances," in the sense used by the Board in the Hydro One decision, might exist. Nonetheless, the Board declined to exercise its discretion in favour of Falconbridge. In the Board’s view, Falconbridge should have been more prudent in its project planning by pursuing alternative options for the supply of electricity at an earlier stage. Nor was the Board satisfied that Falconbridge had provided sufficient reasons for the considerable delay in formulating an alternative supply proposal and filing for leave to construct.

The Board did recognize Falconbridge’s commercial need to proceed with the proposed line on an expedited basis and without undue delay. However, the Board ruled an exemption was not necessary because it was willing to grant a leave-to-construct order. The panel noted that this approach preserved the ability of the Board to proceed on the basis of its usual process without any adverse consequences to Falconbridge. After satisfying itself that the proposal was in the public interest, the Board granted Falconbridge leave to construct.

The Falconbridge decision signals that special circumstances alone may not be sufficient to justify an exemption order. In addition to demonstrating that the circumstances are "unusual, uncommon or exceptional," a future applicant for an exemption likely will need to show that it acted in a timely manner and could not be accommodated under the normal leave-to-construct process without suffering adverse consequences.

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Register Now for Seminar!

Hail to the Chief!

The Impact of the 2004 U.S. Presidential 
Election on Canada-U.S. Energy Relations

The Energy Group of Stikeman Elliott LLP will be hosting a complimentary breakfast seminar on "The Impact of the 2004 U.S. Presidential Election on Canada-U.S. Energy Relations." The last session of congress left comprehensive energy legislation on the table. The panellists at this seminar will offer their views of what the future will hold for U.S. energy policy under the newly elected administration and whether the next few years will see a different direction in U.S.–Canada energy relations.

Topics will include:

  • Opportunities for Canadian companies to engage the new administration and Congress on energy issues

  • The chances of a comprehensive energy bill passing next year, and what that will mean for Canadian companies

  • How some high-profile energy issues – energy security, supply, environment – will play out and what that means for Canadian companies

  • Whether clean air and climate change issues will assume greater prominence next year

Guest Speakers:

Bonnie A. Suchman, Of Counsel, Troutman Sanders LLP

Ms. Suchman is Of Counsel in the Washington, DC office and practices energy law. She provides legislative and strategic advice to the Canadian Electricity Association regarding electricity policy issues and issues related to U.S. energy bills. Ms. Suchman also provides advice to a Canadian governmental agency regarding transmission reliability issues and advice to a number of U.S. investor-owned utilities.

Timothy Egan, President, High Park Group; Senior Advisor, Canadian Electricity Association

Mr. Egan is president of the High Park Group, a public policy consulting firm that focuses largely on energy issues out of its offices in Toronto and Ottawa. He is retained by the Canadian Electricity Association on a range of issues, including U.S. advocacy (monitoring the U.S. Congress and Administration on issues of interest to the Canadian electricity industry).

Date and Time:

Thursday, December 2, 2004
7:30 a.m. – 9:00 a.m.

Location:

Stikeman Elliott LLP – Toronto Office
53rd Floor, Commerce Court West, 199 Bay Street, Toronto, Ontario
(southeast corner of King St. West and Bay St.)

To register, or for more information, contact:
Shannon Gilleland by
E-MAIL or at (416) 814-7901.

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For information regarding any of the above material, you are invited to contact any member of our Energy Group:

TORONTO

David M. Brown

James Harbell

Brenda Hebert

MONTREAL

Jean Carrier

Alain Massicotte

Erik Richer La Flèche

CALGARY

Glenn Cameron

Luigi A. Cusano

C. Kemm Yates, Q.C.

There are representatives in other offices that can assist as well, please contact:

OTTAWA

Stuart C. McCormack

VANCOUVER

Ross A. MacDonald

NEW YORK

Kenneth Ottenbreit

LONDON

Shawna Miller

SYDNEY

Brian Hansen

This newsletter is published by Stikeman Elliott LLP  and is intended to provide general information about developments in law. It is not intended as legal advice.
Stikeman Elliott LLP publishes many newsletters on a wide range of legal issues. To view a list or retrieve a copy from our archives, visit the Publications section of our Website.
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