BRITISH COLUMBIA UTILITIES COMMISSION COLUMBIA UTILITIES COMMISSION . ... The Panel is of the view that in a case such as this one, ... Fully recover the capital cost of the fuelling

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

EVIDENCE OF

FERUS LNG

C8-5-1

markhuds

FORTISBC ENERGY – AES OFFERING

TABLE OF CONTENTS

A. INTRODUCTION .................................................................................................. 1

1. Ferus ......................................................................................................... 1 (a) Ferus Inc. ........................................................................................ 1 (b) Ferus LNG ...................................................................................... 1

2. Focus of Ferus LNG Evidence ................................................................ 2

3. Goal of Establishing a Robust Market for LNG Related Services ....... 2

B. REVIEW OF PAST COMMISSION DECISIONS AND FINDINGS ....................... 2

1. CNG-LNG Decision .................................................................................. 2

2. EEC-NGV Decision................................................................................... 4

3. Past Decisions Directionally Consistent with NGV/LNG Market Development ................................................. 5

C. THE MARKET FOR NGV/LNG SERVICES ......................................................... 5

1. FortisBC .................................................................................................... 5

2. Ferus LNG ................................................................................................ 5

3. Other Parties ............................................................................................ 5

(a) Clean Energy. ................................................................................. 5 (b) BC Transit. ...................................................................................... 6 (c) EnCana ........................................................................................... 6 (d) Shell. ............................................................................................... 7 (e) Gaz Metro ....................................................................................... 7

4. Recent Changes Affecting the Development of a Competitive NGV/LNG Market .................................................... 8

D. REGULATION AND COMPETITION ................................................................... 9

1. Maintaining a "Level Playing Field" – Avoiding Cross-Subsidization........................................................ 9

2. FortisBC Can Choose Which End of the Field to Play On – Others Cannot................................................................................ 10

E. ROLE OF THE BCUC IN REGULATING NGV/LNG SERVICES ....................... 10

1. Public Interest ........................................................................................ 10

2. LNG Use Supports BC Energy Initiatives ............................................ 11

F. STAND ALONE REGULATION FOR NATURAL UNREGULATED SERVICES ..................................................... 11

1. Natural Unregulated Services ............................................................... 11

2. Stand Alone Regulation ........................................................................ 12

3. Stand Alone Regulation Enhanced Through Separate Classes of Services .......................................................... 13

G. PROPOSED GUIDELINES ................................................................................ 15

1. General ................................................................................................... 15

2. Inquiry Issues and Proposed Guidelines ............................................. 16

(a) Issue 1(a) ...................................................................................... 16 (b) Issue 1(b) ...................................................................................... 16 (c) Issue 1(c) ...................................................................................... 18 (d) Issue 2(a) ...................................................................................... 19 (e) Issue 2(b) ...................................................................................... 20 (f) Issue 3(a) ...................................................................................... 20 (g) Issue 3(b) ...................................................................................... 20 (h) Issue 3(c) ...................................................................................... 21 (i) Issue 3(d) ...................................................................................... 21

EVIDENCE OF FERUS INC., LNG DIVISION 1

BRITISH COLUMBIA UTILITIES COMMISSION 2

FortisBC Energy Utilities 3 An Inquiry into FortisBC Energy Inc. 4

Regarding the Offering of Products and Services in 5 Alternative Energy Solutions and Other New Initiatives 6

7

A. INTRODUCTION 8

1. Ferus 9

(a) Ferus Inc. 10

Ferus Inc. ("Ferus") is a privately-held, western Canadian corporation providing 11 integrated solutions to the energy industry for well stimulation, well completions and 12 enhanced oil recovery applications. With strategically located production and 13 transportation facilities in the Western Canadian Sedimentary Basin as well as the 14 northwest and northeast regions of the United States, Ferus provides a dedicated 15 supply of cryogenic fluids (nitrogen (N2) and carbon dioxide (CO2)), as well as the 16 related logistical equipment and services to deliver those products to its customers. 17

Ferus is very active in British Columbia ("BC"), and in June, 2011 was certified a BC-18 Based Business by Energy Services BC. In November, 2011 Ferus commissioned its 19 first liquid N2 plant in BC with a production capacity of 180 tonnes/day. In addition, 20 construction has begun on a second 180 tonne/day N2 plant coupled with a new 21 logistics base in Dawson Creek. Altogether, Ferus will have invested over $50 million in 22 the province of BC, creating no less than 23 full-time jobs and numerous construction 23 jobs by hiring local contractors. 24

(b) Ferus LNG 25

In recent years the fundamentals of the alternative fuels market have changed 26 substantially and there are now significant opportunities for a competitive market to 27 develop in BC and elsewhere. In particular, as the demand for these fuels has grown, 28 there has been a corresponding increase in the need for companies capable of 29 producing and delivering these fuels either directly to customers or to more publically 30 available fueling stations. 31

To capture this opportunity, and to capitalize on its operational expertise in, and natural 32 synergies with, cryogenics, Ferus has created an LNG division ("Ferus LNG") to 33 produce and distribute liquefied natural gas for use as an alternative fuel. Following on 34 the successful model underlying its N2 and CO2 operations, Ferus LNG's business plan 35 includes the construction and/or operation of LNG production plants and LNG logistics 36 equipment across North America. Beginning in 2012, Ferus LNG intends to invest 37 significant capital into the robust energy industry in northeastern BC. 38

Investment decisions are made on a world-wide basis and investors into the NGV 39 market carefully monitor regulatory developments with respect to potentially anti-40

FortisBC - Inquiry into Alternative Energy Solutions and New Initiatives Page 2 of 21 Ferus LNG Evidence December 2, 2011

competitive signals. In order for Ferus LNG to justify investment, it is critical that the BC 1 market remain founded on principles of fair competition and equal access for all players. 2 Ferus LNG recognizes that Fortis BC Energy Inc. ("FortisBC" or "FEI") may have a role 3 to play in stimulating that market and firmly believes the nascent NGV market, if it is to 4 be developed in BC in a timely manner, will need as many competitive players as 5 possible. However, the tilting of the playing field significantly in the direction of one 6 player, which may result if players in the market are allowed to use economic leverage 7 arising from their utility status, will send an alarming signal to investors and will 8 disadvantage BC relative to other jurisdictions in North America which are also 9 clamoring for private sector investment into alternative fuels. 10

2. Focus of Ferus LNG Evidence 11

The subject matter of this inquiry is the various offerings by FortisBC in the Alternative 12 Energy Solutions (AES) and New Initiatives marketplace. Since, with respect to New 13 Initiatives, Ferus LNG currently operates only within the LNG sector; its evidence is 14 focused on FortisBC’s recent expansion of its activities into that market. 15

3. Goal of Establishing a Robust Market for LNG Related Services 16

In providing this evidence, Ferus LNG would like to first confirm that the development of 17 the NGV market not just in BC but on a worldwide basis has been difficult and has 18 experienced a number of "false starts". This difficulty has almost always directly or 19 indirectly resulted from the inherent inertia that occurs in moving from one well 20 established source of fuels (i.e. gasoline and diesel fuels) to another. 21

Therefore, Ferus LNG would like to emphasize to the Commission that although new 22 entrants represent competition to Ferus LNG, they are also a critical factor to the 23 sustainable development of the NGV market. As a result, Ferus LNG welcomes 24 initiatives that will enhance the establishment and operation of a robust market for LNG 25 and LNG related services in British Columbia. In this respect, Ferus LNG looks forward 26 to competing with all market participants. 27

Ferus LNG’s participation in this Inquiry is not intended to thwart any LNG related 28 initiatives, be they carried out by FortisBC or other parties, but rather to ensure that 29 such initiatives do not create an unlevel playing field that in itself may stifle the 30 development of a freely operating, competitive market in LNG services. Ferus LNG 31 considers the development of such a market is critical to the ultimate success of the 32 NGV/LNG industry and, Ferus LNG submits, would be in the public interest of all British 33 Columbians. 34

B. REVIEW OF PAST COMMISSION DECISIONS AND FINDINGS 35

1. CNG-LNG Decision 36

In Decision G-128-11 ("CNG-LNG Decision"), the Commission ruled: 37

1. …the Panel finds that a CNG/LNG fuelling infrastructure has no natural 38 monopoly characteristics and the service offerings applied for would not be 39


subject to regulation, unless the services were being provided by an organization 1 that is already a regulated public utility.1

2. …the Panel finds that, given the risks involved and the potential presence of 3 unregulated competition in the NGV market, it is neither in the public interest nor 4 fair and just that FEI’s existing ratepayers subsidize the NGV fueling facilities.

2

2

3. …the Panel finds that while the benefits of GHG [green house gas] emission 6 reduction provides a justification for FEI's proposed NGV program, FEI's 7 ratepayers must be insulated, to the greatest extent possible, from the costs and 8 risks of the program.

5

3

4. The Panel is of the view that in a case such as this one, the public interest 10 requires that, if FEI is to provide CNG/LNG services in its capacity as a public 11 utility, it must do so without utilizing any potential economic leverage which it may 12 have as a result of its status as a monopoly distributor of natural gas.

9

4

5. The Commission Panel is of the view that the obligation to serve stems from the 14 nature of a monopoly provider of services with infrastructure which has natural 15 monopoly characteristics such that a competitive market structure does not make 16 economic sense. In the circumstances of this Application, the fuel dispensing 17 service has no natural monopoly characteristics and could potentially be supplied 18 by any number of competitors. As such, there is no corresponding requirement to 19 recognize an obligation to serve such potential customers.

13

5

6. We believe there should be as little potential for cross-subsidization as it is 21 possible to achieve.

20

6

7. Given that FEI may be in competition with other non-regulated businesses, the 23 Commission Panel is concerned about the potential for cross subsidization by 24 FEI’s existing ratepayers. The Panel considers that the public interest would not 25 be served by effectively providing FEI with a competitive advantage over other 26 potential market participants in the industry by allowing FEI to subsidize the costs 27 of what would otherwise be an unregulated service, with existing ratepayer 28 money. This again supports the Panel’s determination that, to the extent 29 possible, the full cost of CNG and LNG service is to be recovered from the CNG 30 and LNG customers, respectively.

22

7

8. In the Panel’s view, the public interest will not be protected without strong 32 measures in place to ensure that the proposed CNG or LNG customer pays for 33 the full associated cost of service…While FEI states that it supports the concept 34 of cost recovery, we have found that the actual proposed General Terms and 35 Conditions do not, in fact, recover all, or even a sufficient proportion of the costs 36

31

1 CNG-LNG Decision, page 4. 2 CNG-LNG Decision, page 4. 3 CNG-LNG Decision, page 17. 4 CNG-LNG Decision, page 19. 5 CNG-LNG Decision, page 19. 6 CNG-LNG Decision, page 24. 7 CNG-LNG Decision, page 29.


of the CNG/LNG offerings from the customers of those offerings to make the 1 Application, as filed, in the public interest.8

9. The Commission Panel would be prepared, however, to approve revised General 3 Terms and Conditions which…in addition to the “Take or Pay” commitment, 4 require that the rates charged to customers: 5

2

• Use actual construction costs as opposed to forecast cost; 6

• Fully recover the capital cost of the fuelling station (including estimated 7 negative salvage value) within the term of the contract or include 8 provisions requiring the customer to purchase the equipment for its 9 undepreciated capital cost; 10

• Ensure that actual operating and maintenance costs are recovered as fully 11 as possible; 12

• Inflate operating and maintenance costs by the regional CPI annually; 13

• Reflect no amount for capitalized overhead such that all operating and 14 maintenance costs are recovered from the CNG/LNG customer over the 15 term of the contract; and 16

• Provide an allowance for overhead and marketing to be recovered from 17 the CNG/LNG customer.9

10. The promotion of natural gas in place of diesel as a fuel, although reducing 19 carbon emissions, does not, in the Panel’s view, necessarily support energy 20 conservation and/or energy efficiency…the term “clean or renewable resource” is 21 defined in the Clean Energy Act and does not include natural gas. Therefore, the 22 Panel finds that this particular objective is not applicable to the circumstances of 23 this Application.

18

10

2. EEC-NGV Decision 25

24

In Decision G-145-11 ("EEC-NGV Decision"), the Commission ruled: 26

1. The Commission Panel finds that the NGV program is not a “demand-side 27 measure” as defined in the Clean Energy Act.11

2. The Commission Panel finds that long term benefits to existing customers from 29 increased throughput on the delivery system have not been established.

28

12

3. The Panel…directs that only programs or measures that meet the definition of 31 demand-side measures…be included in the EEC category.

30

13

8 CNG-LNG Decision, page 30.

32

9 CNG-LNG Decision, page 30. 10 CNG-LNG Decision, page 32. 11 EEC-NGV Decision, page 10. 12 EEC-NGV Decision, page 17. 13 EEC-NGV Decision, page 18.


3. Past Decisions Directionally Consistent with Market Development 1

It is Ferus LNG's position that the Commission's findings in the CNG-LNG Decision and 2 the EEC-NGV Decision referred to above are directionally consistent with the 3 expectations of investors looking for open functioning markets for NGV/LNG service 4 offerings on a competitive basis. 5

C. THE MARKET FOR NGV/LNG SERVICES 6

1. FortisBC 7

FortisBC’s LNG related activities appear to focus on: (i) production of LNG; (ii) storage 8 of LNG: (iii) transportation of LNG by tanker fleet; and (iv) provision of LNG fueling 9 services for the return-to-base, on-road transportation market. These are all areas in 10 which FortisBC is currently active.14 In addition, FortisBC has indicated that it is 11 exploring at a high level the use of LNG for remote generation of electricity, among 12 other uses.15

2. Ferus LNG 14

13

Ferus LNG’s immediate business plan includes: (i) production of LNG; (ii) storage of 15 LNG; (iii) transportation of LNG by tanker fleet; (iv) provision of LNG fueling services for 16 the off-road high-horsepower market; and (v) provision of LNG for the remote power 17 generation market (primarily drilling operations). In the future, Ferus LNG may provide 18 further LNG related services, such as a fueling services for the on-road heavy-duty 19 transportation market. 20

It is apparent that FortisBC presently operates in service sectors that Ferus LNG will be 21 operating in and FortisBC may expand into further service sectors planned to be served 22 by Ferus LNG. 23

3. Other Parties 24

FortisBC and Ferus LNG are not alone in their plans to serve the LNG market in British 25 Columbia. Ferus LNG is currently aware of a number of private sector parties already in 26 the NGV/LNG market or with significant plans to participate in this sector in the near 27 future. These parties have the expertise and technical capability to operate safely and 28 efficiently in the marketplace for NGV and LNG services. 29

Beyond the parties mentioned below, Ferus LNG fully expects there may well be other 30 non-regulated service providers who will be encouraged to enter the BC market 31 provided there is a level playing field amongst all service providers. 32

14 FortisBC Response to Ferus LNG IR 1.1. 15 FortisBC Response to Ferus LNG IR 1.5.


(a) Clean Energy 1

As noted in the evidence of FortisBC, Clean Energy has provided NGV non-regulated 2 options in the BC market for quite some time.16

(b) BC Transit 4

3

As noted in the evidence of FortisBC, BC Transit has provided NGV non-regulated 5 options in the BC market for quite some time.17

(c) EnCana 7

6

EnCana's plans for participating in the development of the NGV/LNG market are 8 summarized in the article referenced in FortisBC's evidence:18

Encana has already converted several of its fleet pickup trucks to natural 10 gas and by the end of this year will be running 150 vehicles on CNG. It's 11 developing corporate CNG fuelling stations in western Canada (two in its 12 core Palliser Triangle area east of Calgary, near Strathmore and 13 Drumheller, another at Fort Nelson, in northeastern British Columbia), 14 Colorado, and Louisiana; is in the process of converting its drilling rigs to 15 run on natural gas; and is in discussions with various other natural gas 16 producers on the potential for joint-venture fuelling facilities elsewhere. 17

9

. . . 18

On a wider front, Encana is working with various provincial, state and 19 federal governments to develop natural gas corridors in western Canada 20 (linking Vancouver, Calgary, and Edmonton), eastern Canada (from 21 Windsor in southern Ontario through Toronto, Ottawa, and Montreal to 22 Quebec City), and Colorado. 23

. . . 24

Unlike light-duty vehicles, transit and highway transport fleets are better 25 served running on liquefied natural gas (LNG) as opposed to compressed 26 natural gas, since the higher density of LNG gives the range a transport 27 truck needs. 28

. . . 29

The brass ring, Marsh says, is a new Canadian industry serving the 30 natural gas transportation needs of the country. By 2025, Encana's 31 national vision is for 145,000 trucks fuelled by LNG, 2.4 million light-duty 32 vehicles running on CNG, upwards of 50 LNG plants scattered across the 33

16 FortisBC Evidence: Section 5.3.4.2, page 93. 17 FortisBC Evidence: Section 5.3.4.2, page 93. 18 FortisBC Evidence: Section 5.4.5, page 97, Footnote 67.


country, and a network of more than 900 CNG and LNG fuelling stations 1 stretching coast to coast. 2

(d) Shell 3

Attachment 1 contains a Globe and Mail article summarizing a recent announcement by 4 Royal Dutch Shell PLC ("Shell") describing its plans to enter the market for LNG fueling 5 stations. While the plan is in its early stages, it calls for first sites in Alberta followed by 6 movement into Vancouver. Specifically: 7

…The plan is among the most ambitious attempts to date by an energy 8 company to push natural gas into the transportation sector, which has 9 become a key aim for an industry mired in low prices. 10

. . . 11

We've looked at natural gas in transport, and we see a real opportunity in 12 heavy duty transport for LNG," said Bob Taylor, Shell's Canadian manager 13 of commercial fuels, business development and marketing. 14

The plan remains in its early stages…But "our goal ultimately is to be able 15 to have coverage basically from Fort McMurray down through Edmonton, 16 Calgary, and then along to Vancouver." Mr. Taylor said. 17

. . . 18

"It's very clear someone with Shell's stature, size and scale provides a 19 great deal of credibility and confidence to any major fleet that LNG 20 infrastructure will be available," said Darren Seed, Westport's vice 21 president of investor relations and communications. "This helps answer 22 the infamous question: 'Where do I fill-up?' " 23

(e) Gaz Metro 24

As noted in the evidence of FortisBC, Gaz Metro's involvement in the NGV business is 25 through Gaz Metro Transport Solutions, an unregulated company that is wholly owned 26 by a subsidiary of Gaz Metro.19

Attachment 2 contains a news release from Westport Innovations Inc. describing the 28 sale of LNG trucks to Robert Transport of Quebec, which will be fueled by Gaz Metro 29 Transport Solutions as part of its plans to develop fuelling stations along the "Blue 30 Road" in Quebec. While Gaz Metro's initiatives are not aimed at the BC market, they do 31 provide a case study for the development of the NGV/LNG market via a non-regulated 32 utility subsidiary. Specifically: 33

27

"Natural Gas for transportation is an integral part of our future," said 34 Sophie Brochu, Gaz Metro's President and CEO. "We look forward to 35

19 FortisBC Evidence: Section 5.4.1, page 96.


establishing the first natural gas 'corridor' in Canada and doing our part to 1 help reduce carbon emissions." 2

. . . 3

Helping drive innovation and improve carbon footprints in Quebec, the 4 government announced that that the depreciation rate applicable to 5 commercial trucks or tractors was increased from 40% to 60% for any new 6 equipment acquired after March 31st, 2010. Furthermore, an additional 7 85% cut for amortization reduction is granted if the truck or tractor runs on 8 LNG. 9

Thus the Quebec government has put in place key elements to foster a 10 supportive and progressive environment to develop a greener future in the 11 field of transportation.” 12

It is worth noting that in other jurisdictions industry support has been made available on 13 a "level-playing field" basis (i.e. tax incentives generally made available to the entire 14 marketplace which do not, as such, stifle competition). 15

4. Recent Changes Affecting the Development of a Competitive NGV/LNG 16 Market 17

The interest of private sector parties in developing the NGV/LNG market is driven, to a 18 large extent, by relatively recent developments, some of which are highlighted in the 19 EnCana article cited in the FortisBC evidence:20

"The way we look at it is that over the last four or five years, we have seen 21 a phenomenal renaissance in the natural gas industry," says Eric Marsh, 22 Encana's executive vice-president, Natural Gas Economy. "I've spent 28 23 years in the industry, and believe that in no time during that 28 years has 24 there been more change than in the past three or four years." 25

20

The shale gas revolution, he says, is driving the renaissance by making 26 vast volumes of natural gas available to North American consumers at 27 prices that are cheaper than they were a decade ago, even as global oil 28 prices are again heading higher. It is that disconnect—and daily 29 production of some 3.6 billion cubic feet per day—that is driving Encana's 30 push to put more natural gas vehicles on North American roads, and it's 31 launching its mission from its own back alley. 32

In conjunction with the fleet order for 180 LNG trucks referenced in section C.3(e) 33 above, Westport Innovations commented at the time: 34

"This is the single largest order for LNG Trucks powered by Westport HD," 35 said David Demers, CEO of Westport Innovations, "It's evidence that 36

20 FortisBC Evidence: Section 5.4.5, page 97, Footnote 67.


natural gas is gaining momentum as a mainstream transportation fuel in 1 Canada…" 2

Ferus LNG would contend that based on the evidence of significant interest from well 3 established (and financed) industry players, the failure of NGV/LNG programs to 4 develop traction in the past should not lead to the conclusion today that the industry is 5 not viable without artificial aid in the nature of cross-subsidization. The emergence of 6 plans from non-regulated industry players to develop the market is, in fact, strong 7 evidence that the opposite is true. 8

D. REGULATION AND COMPETITION 9

1. Maintaining a "Level Playing Field" – Avoiding Cross Subsidization 10

It is the position of Ferus LNG that a successful marketplace must be based on one 11 where no single competitor is provided, intentionally or unintentionally, with an unfair 12 competitive advantage. While an anti-competitive market may continue to function, it will 13 not achieve its full potential and will function poorly, ultimately at a direct cost to 14 consumers. In its evidence, FortisBC stated its concern that if third-party providers of 15 CNG-LNG service emerge over time, they should have to compete with FortisBC.21

Should FortisBC wish to carry on business in sectors that do not exhibit natural 19 monopoly characteristics, it should only be allowed to do so in a manner that does not 20 provide it with an inherently unfair competitive advantage by virtue of its ability to move 21 the associated costs and risks of that market to its ratepayers. As the Commission 22 noted in the CNG-LNG Decision: 23

16 Ferus LNG is ready, willing and able to compete with all service providers but expects to 17 be able to do so on a level playing field. 18

…the public interest would not be served by effectively providing FEI with 24 a competitive advantage over other potential participants in the industry by 25 allowing FEI to subsidize the costs of what would otherwise be an 26 unregulated service, with ratepayer money.22

Cross subsidization can occur through the transfer of costs onto other ratepayers, which 28 was the focus of the EEC-NGV Decision, or through the transfer of costs and risks onto 29 other ratepayers, which was the subject of the CNG-NGV Decision. 30

27

From a public interest and policy perspective, the Commission should guard against a 31 situation where a public utility such as FortisBC enters an industry sector that would 32 otherwise be unregulated, and through cross-subsidization of costs and/or risks, inhibits 33 the development of a freely operating, competitive market in that sector. 34

The guidelines resulting from this Inquiry should set forth basic principles that will in the 35 future continue to prevent public utilities from competing in markets that have no natural 36 monopoly characteristics with the advantage of subsidization (cost or risk) from other 37 21 FortisBC Evidence: Section 5.3.4.3, page 94. 22 Fortis BC CNG-LNG Decision, Reasons for Decision, July 19, 2011, page 29.


ratepayers. The CNG-LNG Decision and the EEC-NGV Decision go some way toward 1 establishing such principles. However, although these principles have been previously 2 enunciated, Ferus LNG believes such principles are sufficiently important to the 3 successful outcome of the Inquiry that they should be incorporated by the BCUC in any 4 guidelines developed in this proceeding. 5

2. FortisBC Can Choose Which End of the Field to Play On – Others Cannot 6

FortisBC has argued that it has the prerogative, in its sole discretion, as to whether to 7 conduct new initiatives that have no natural monopoly characteristics on a regulated or 8 non-regulated basis.23

As noted by the Commission in the CNG-LNG Decision: 13

As part of its evidence in this proceeding, Ferus LNG notes that 9 this choice is simply not available to private sector, non-regulated service providers. 10 Ferus LNG believes that this too creates an inherent tilting of the playing field in favour 11 of FortisBC. 12

…it is only because FEI is already "otherwise a public utility" that this new 14 business is required to be regulated. FEI would be free to pursue this 15 business through a non-regulated subsidiary and thereby avoid 16 Commission oversight. Other companies, not otherwise public utilities, 17 may enter the industry and will not be subject to regulation.24

This conclusion by the Commission appears to have been accepted by FortisBC when it 19 says "…CNG/LNG Service is not regulated unless it is provided by an entity that is 20 otherwise a public utility."

18

25

If the Commission intends to ensure that the development of the NGV marketplace 22 takes place in an environment of effective competition, then the option FortisBC 23 reserves to itself of deciding which "end of the field" to operate on, i.e. as either a 24 regulated or unregulated undertaking, requires extra vigilance by the BCUC. The 25 Commission must ensure that in making such a choice, FortisBC does not do so with 26 the knowledge that the regulated "end of the field" has already been unfairly tilted to the 27 advantage of the public utility, which will inhibit the development of a robust, well 28 functioning market in a sector that, as the Commission has already ruled (a ruling that 29 Ferus LNG would suggest the evidence strongly supports), exhibits no natural 30 monopoly characteristics. 31

21

E. ROLE OF THE BCUC IN REGULATING NGV/LNG SERVICES 32

1. Public Interest 33

As noted by FortisBC, the "public interest" involves the weighing of competing interests 34 of all the affected members of the public.26

23 FortisBC Evidence: Section 5.3.4.3, page 94; Section 8.2, pages 171-172.

This includes potential competitors. It also 35 includes the interests of all British Columbians, not just the rate payers of one regulated 36

24 CNG-LNG Decision, page 18. 25 FortisBC Evidence: Section 5.3.4.3, page 94; Section 8.2, pages 171-172. 26 FortisBC Evidence: Section 3.1, page 62.


entity, in seeing a competitive marketplace develop for the provision of NGV and LNG 1 related services. 2

2. LNG Use Supports BC Energy Initiatives 3

The value of the provision of LNG and LNG fuelling services to customers currently 4 using more greenhouse gas ("GHG") intensive fuels (primarily diesel) to reduce GHG 5 emissions is well established. However, the reduction of GHG emissions occurs 6 regardless of the party producing the LNG or providing the LNG service. As such, the 7 BC government's stated policy objective of reducing provincial GHG emission levels is 8 not advanced by having a utility involved in the LNG value chain, per se. 9

It is advanced, however, by achieving the maximum displacement of more GHG 10 intensive fuels. Ferus LNG submits, and believes this position is supported by the 11 evidence of FortisBC, that the maximum opportunity for a significant reduction in GHGs 12 will be realized if the NGV/LNG marketplace can reach a sustainable size and mass. 13 This, in turn, is most effectively accomplished by ensuring there are no artificial barriers 14 to new entrants. 15

Policies that encourage the development of a competitive LNG industry are in harmony 16 with the goal of maximizing the displacement of more GHG intensive fuels. Policies that 17 inhibit the development of a competitive marketplace are not. Providing incentives to 18 advance a utility's penetration of the marketplace at the expense of wider industry 19 participation, for example, may result in winning the battle and losing the war. 20

F. STAND ALONE REGULATION FOR NATURAL UNREGULATED SERVICES 21

1. Natural Unregulated Services 22

As noted above, FortisBC has argued that it has the right to reserve the ability to 23 provide services on a regulated basis even when those services have no monopoly 24 characteristics and are only considered "regulated" due to the fact that FortisBC is 25 already a regulated public utility. Ferus LNG does not agree that the inherent character 26 of a service changes as a result only of the identity of the service provider. Services that 27 have no natural monopoly characteristics are inherently non-regulated services, 28 irrespective of which company, regulated or not, chooses to provide them. As noted by 29 the Commission: 30

While this new business may or may not be a natural extension of FEI’s 31 existing regulated business, as argued by FEI at page 19 of the 32 Application, the retail distribution of liquefied or compressed natural gas 33 has no monopoly characteristics. Accordingly, non-regulated entities are 34 free to enter this marketplace. This is a significantly different situation from 35 that faced by FEI in the regulated distribution of natural gas to consumers 36 and businesses.27

27 CNG-LNG Decision: Appendix A, page 29.

37


Indeed, this view is supported by the fact that the governing legislation does not cover 1 such activities absent their being carried out by providers of other "natural regulated 2 services" (i.e. those exhibiting natural monopoly characteristics). As noted by the 3 Commission, where a service has no natural monopoly characteristics and could 4 potentially be supplied by any number of competitors, there is no corresponding 5 requirement to recognize an obligation to serve such potential customers.28

Ferus LNG proposes that Natural Unregulated Services, to the extent they are 11 "regulated" by the BCUC by virtue of being provided by entities that are already public 12 utilities, must, in order to be fair to all potentially affected parties, be regulated on a 13 basis that ensures there is no cross-subsidization of costs or risks between the 14 customers of the Natural Unregulated Services and the public utility’s other ratepayers. 15 Such an approach is consistent with the findings of the Commission in the CNG-LNG 16 Decision. 17

Ferus LNG 6 believes the Commission was correct in its previous decisions when it distinguished 7 natural regulated services (i.e. those displaying monopoly characteristics) from services 8 that are not naturally regulated, including LNG related services, which Ferus LNG refers 9 to hereinafter as "Natural Unregulated Services." 10

2. Stand Alone Regulation 18

In order to avoid cross-subsidization of costs and risks, the regulation of Natural 19 Unregulated Services should be conducted on a stand-alone basis ("Stand Alone 20 Regulation") where existing ratepayers are fully insulated from the costs and risks of the 21 Natural Unregulated Services. Such an approach will allow the Commission to regulate 22 where required to do so but in a manner that will preserve competition and the ability for 23 markets to develop in sectors that are not natural monopolies. 24

FortisBC has argued that a significant benefit of its offering LNG related services arises 25 from the increased overall throughput on its system and the associated reduction in unit 26 costs. Ferus LNG believes that the potential benefits accruing to FortisBC’s other 27 ratepayers from increased throughput (which long-term benefits the Commission 28 determined in the EEC-LNG decision had not been established with respect to LNG 29 related services29

Stand Alone Regulation is consistent with the Commission's previous findings related to 36 NGV service to the effect that: 37

) do not justify the harm those same ratepayers (and other BC 30 residents as well) will suffer when cross-subsidization acts to inhibit the development of 31 a properly functioning market. By artificially attempting to "kick-start" a market through 32 cross-subsidization, there is significant risk that in fact the opposite may occur and 33 markets may actually be stifled. The Commission’s rulings in the CNG-LNG Decision 34 are consistent with this conclusion. 35

…it is neither in the public interest nor fair and just that FEI’s existing 38 ratepayers subsidize the NGV fueling facilities.30

28 CNG-LNG Decision, page 19.

39

29 EEC-NGV Decision, page 17. 30 CNG-LNG Decision, page 4.


. . . . . 1

…FEI's ratepayers must be insulated, to the greatest extent possible, from 2 the costs and risks of the program.31

. . . . . 4 3

…the public interest requires that, if FEI is to provide CNG/LNG services 5 in its capacity as a public utility, it must do so without utilizing any potential 6 economic leverage which it may have as a result of its status as a 7 monopoly distributor of natural gas.32

. . . . . 9 8

We believe there should be as little potential for cross-subsidization as it is 10 possible to achieve.33

. . . . . 12 11

Given that FEI may be in competition with other non-regulated 13 businesses, the Commission Panel is concerned about the potential for 14 cross subsidization by FEI’s existing ratepayers. The Panel considers that 15 the public interest would not be served by effectively providing FEI with a 16 competitive advantage over other potential market participants in the 17 industry by allowing FEI to subsidize the costs of what would otherwise be 18 an unregulated service, with existing ratepayer money. This again 19 supports the Panel’s determination that, to the extent possible, the full cost 20 of CNG and LNG service is to be recovered from the CNG and LNG 21 customers, respectively.34

To the extent FortisBC or any other public utility that decides for its own corporate 23 interests to provide Natural Unregulated Services believes it is disadvantaged in doing 24 so, it always has the ability to pursue such services through a non-regulated entity. The 25 opposite choice is, of course, one that is not open to non-regulated service providers 26 that have no monopoly services or ratepayers. 27

22

3. Stand Alone Regulation Enhanced Through Separate Classes of Service 28

While Ferus LNG is not expert in ratemaking and has not commissioned such expertise 29 for the purposes of this high-level inquiry, Ferus LNG encourages the Commission to 30 consider whether establishing Natural Unregulated Services as new classes of service 31 under Section 60(1) of the UCA may be warranted in order to more efficiently implement 32 Stand Alone Regulation. 33

In the case of NGV service, this would seem to be in accord with the Commission's 34 finding that such service is "…a significantly different situation from that faced by FEI in 35

31 CNG-LNG Decision, page 17. 32 CNG-LNG Decision, page 19. 33 CNG-LNG Decision, page 24. 34 CNG-LNG Decision, page 29.


the regulated distribution of natural gas to consumers and businesses." 35

FortisBC did not identify any impediments to treating new initiatives as different classes 2 of service, noting that what is or is not within an existing class of service is primarily a 3 question of fact for the Commission to determine.

1

36

Indeed, structuring Natural Unregulated Services as separate classes of service should 7 significantly facilitate the proper separation and allocation of costs. The following 8 rationale provided by FortisBC for establishing Thermal Energy Systems ("TES") as a 9 separate class of service applies equally to Natural Unregulated Services: 10

It certainly appears open to the 4 Commission to treat Natural Unregulated Services, such as NGV service and LNG 5 production, as separate classes of service. 6

The proper allocation of costs is key to the effective offering and regulation 11 of multiple classes of service. The FEI 2010-2011 RRA NSA stipulates 12 that the costs of developing thermal energy systems will be recovered 13 from TES customers. The customer or group of customers for a particular 14 TES project will have a separate cost of service, rate or rates and, if 15 applicable, contribution calculation. Having separate rates and cost of 16 service for the TES class of service protects natural gas customers and 17 leads to just and reasonable rates for both gas and alternative energy 18 customers.37

Stand Alone Regulation for Natural Unregulated Services also appears to be in 20 harmony with the attributes of different classes of service as referenced in the EEC 21 Consulting report appearing in Appendix F-6 of the FortisBC evidence. While using 22 different classes of service to implement Stand Alone Regulation would still allow 23 FortisBC to achieve cost efficiencies by sharing overhead for administrative functions, it 24 would at the same time avoid cross-subsidization. As noted by EEC Consulting: 25

19

The existence of multiple products generally allows for cost efficiencies in 26 the areas of management, engineering, billing and customer service. 27 Where rates are set on a cost of service basis, these efficiencies tend to 28 reduce costs for customers in the various product classes.38

. . . 30

29

In our opinion regulated utilities with multiple product classes see sufficient 31 regulatory oversight to ensure that there is not cross-subsidization 32 between the various product classes, thereby protecting the customers in 33 each product class.39

35 CNG-LNG Decision: Appendix A, page 29.

34

36 FortisBC Response to Ferus IR 2.2. 37 FortisBC Evidence: Section 6.4.2.3, page 124. 38 FortisBC Evidence: Appendix F-6, EES Consulting TES Report, at p. 8. 39 FortisBC Evidence: Appendix F-6, EES Consulting TES Report, at p. 11.


Further, under its discussion of "Regulation of Utilities with Multiple Product Classes", 1 EEC Consulting also cites an example where the same company offers both regulated 2 and unregulated products: 3

There are instances where companies offer certain regulated products 4 and other products that are unregulated. This is particularly true in 5 jurisdictions where a product has become unregulated. For example, in 6 California San Diego Gas & Electric previously provided full service 7 electricity that included generation, transmission and distribution service 8 on a blended basis to the end user. When the electric market was 9 deregulated, Sempra Energy became the parent company with SDG&E 10 still providing electric transmission and distribution and Sempra 11 Generation being a non-regulated provider of generation.40

The example cited by EEC Consulting relates to the same energy source (electricity) 13 but notes that multiple services are provided, some as regulated products (transmission 14 and distribution) and some as unregulated products (generation). The fact that NGV or 15 LNG initiatives arguably relate to the same energy source (natural gas) as FortisBC's 16 traditional transportation services should not be an impediment to establishing such 17 initiatives as different classes of service for FortisBC. To the extent that a Natural 18 Unregulated Service is provided as a "regulated" product, separation (no "blending") 19 similar to that obtained by providing it as an unregulated product can be achieved by 20 treating the Natural Unregulated Service as a separate product or service class. 21

12

G. PROPOSED GUIDELINES 22

1. General 23

Ferus LNG provides below its position on the guidelines to be developed in this 24 proceeding ("Guidelines") on some of the issues the Commission has determined to be 25 within the scope of this proceeding. 26

Ferus LNG notes that FortisBC has chosen not to address certain issues, in particular 27 Issues 1(a) and 1(b) as they relate to its NGV service offering, stating: "The FEU submit 28 that, in light of the recent NGV Decision, there is no need for the Commission to 29 articulate further guidelines and principles regarding the NGV offering itself."41

It is Ferus LNG’s position that the Guidelines should be as comprehensive as possible 34 in summarizing Commission policy on the issues at play. It is neither efficient nor 35 sufficient to rely on past Commission decisions to provide some of the "guidelines" 36 relevant to the issues addressed in this proceeding. That will result in a patchwork set of 37 guidelines, with industry participants not sure of whether they understand the proper 38 context or extent of Commission policy in relying on the Guidelines. 39

To the 30 extent FortisBC is saying that principles enunciated in past FortisBC decisions relevant 31 to issues within the scope of this Inquiry need not be articulated in this proceeding, 32 Ferus LNG disagrees. 33

40 FortisBC Evidence: Appendix F-6, EES Consulting TES Report, at p. 9. 41 FortisBC Evidence: Section 7.4.4, page 162.


While the Guidelines may be informed by past Commission decisions, they should also 1 incorporate those decisions to the extent they are relevant to the issues within the 2 scope of the present proceeding. Only such an approach will result in Guidelines that 3 provide industry and stakeholders with the desired clarity as to Commission policy on 4 these issues. 5

Further, in Commission Order G-118-11 setting out the scope of issues for the Inquiry, 6 the Commission noted at page 1 of Appendix B: "The Inquiry will focus on the activities 7 of FEI. However it is the expectation of the Commission that principles established in 8 this Inquiry may be of wider application beyond FEI to other utilities dealing with the 9 same subject matter in future proceedings." Clearly, the Guidelines are anticipated to 10 have wider application, beyond FortisBC. As such, they should be as comprehensive 11 and generic as possible. 12

2. Inquiry Issues and Proposed Guidelines 13

Below, Ferus LNG provides its views on proposed guidelines for some of the issues 14 raised by the Commission. 15

(a) Issue 1(a) 16

When evaluating AES and other new initiatives, what principles or 17 guidelines should be followed by the BCUC to protect the public interest 18 including: 19

• the interest of utility ratepayers; 20 • the impact on the broader public including potential competitors; 21 • the furthering of British Columbia energy objectives; and 22 • the rights of the utility shareholder. 23

In evaluating LNG related service initiatives, the Commission should be governed by the 24 overall public interest that encompasses all of the above considerations, including BC 25 environmental objectives. 26

Ferus LNG proposes the following guideline: 27

1. In evaluating new initiatives to be undertaken by public utilities, including 28 service offerings related to the NGV and the LNG market, the Commission 29 will be guided by the overall public interest, including: 30

• the interest of utility ratepayers; 31 • the impact on the broader public including potential 32

competitors; 33 • the furthering of British Columbia energy and environmental 34

objectives; and 35 • the rights of the utility shareholder. 36


(b) Issue 1(b) 1

What process should the BCUC utilize and how comprehensive should its 2 analysis be before it allows the utility to undertake AES or other innovative 3 technologies as part of its regulated business? 4

Ferus LNG believes that the Commission should make a threshold determination with 5 respect to any initiative a public utility under its jurisdiction wishes to undertake. That 6 determination should be: (i) whether or not the activity underlying the initiative has 7 natural monopoly characteristics; and (ii) whether the service offering applied for would 8 not be subject to regulation, unless the service was being provided by an organization 9 that is already a regulated public utility. 10

If a determination is made that the service offering has no natural monopoly 11 characteristics and is only subject to regulation as a consequence of being proposed by 12 an organization that is already a public utility, the Commission should approach the 13 "regulation" of such service on a basis that ensures no cross-subsidization of costs or 14 risks between the customers of the new service offering and the public utility’s other 15 ratepayers. As per the goal of establishing a robust market for LNG related services 16 discussed in Section A.3 above, Ferus LNG urges the Commission to pursue a 17 regulatory regime that will encourage maximum participation in a competitive NGV/LNG 18 marketplace. 19

Ferus LNG proposes the following guidelines: 20

2. With respect to LNG related services (including the production, 21 transportation and storage of LNG and the provision of LNG for 22 transportation or power generation purposes), the Commission finds that 23 such services have no natural monopoly characteristics and would not be 24 subject to regulation unless the services were being provided by an 25 organization that is already a regulated public utility. As such, these 26 services constitute "Natural Unregulated Services." 27

3. In evaluating other new or innovative services proposed to be undertaken 28 by public utilities, the Commission shall determine as a threshold issue: (i) 29 whether such services have natural monopoly characteristics; and (ii) 30 whether such services would not be subject to regulation, unless the 31 services were being provided by an organization that is already a regulated 32 public utility. 33

4. If the Commission determines that a service: (i) has no natural monopoly 34 characteristics; and (ii) would not be subject to regulation, unless the 35 service were being provided by an organization that is already a regulated 36 public utility, then such service shall constitute a Natural Unregulated 37 Service. 38

5. All Natural Unregulated Services provided by a public utility shall be 39 regulated by the Commission on a stand-alone basis ("Stand Alone 40 Regulation") to ensure there is no cross subsidization of costs or risks 41


between the Natural Unregulated Service and the public utility’s other 1 services. 2

5. The overriding objective of Stand Alone Regulation is to ensure that the 3 public utility provides the relevant service without utilizing any economic 4 leverage which it may have as a result of its status as a monopoly provider 5 of other services. 6

6. Components of Stand Alone Regulation will include terms and conditions 7 requiring that rates charged to a customer of a Natural Unregulated 8 Service: 9

• Incorporate actual construction costs of facilities constructed to 10 provide the service ("Facilities"), as opposed to forecast costs; 11

• Fully recover the capital cost of the Facilities (including estimated 12 negative salvage value) within the term of the contract or include 13 provisions requiring the customer to purchase the equipment for its 14 undepreciated capital cost; 15

• Ensure that actual operating and maintenance costs are recovered 16 as fully as possible; 17

• Inflate operating and maintenance costs by the regional CPI 18 annually; 19

• Reflect no amount for capitalized overhead such that all operating 20 and maintenance costs are recovered from the customer over the 21 term of the contract; and 22

• Provide an allowance for overhead and marketing to be recovered 23 from the customer. 24

• Are based on a separate determination of the rate of return for each 25 Natural Unregulated Service, depending on the risks and other 26 circumstances of that service. 27

Ferus LNG encourages the Commission to consider whether establishing Natural 28 Unregulated Services as new classes of service under Section 60(1) of the UCA may be 29 warranted to more efficiently provide for Stand Alone Regulation. 30

(c) Issue 1(c) 31

To what extent and under what conditions could EEC or other funding be 32 made available to support AES and other new initiatives? 33

The Commission has already ruled that EEC funding is not available to FortisBC’s NGV 34 initiatives. Ferus LNG believes that under no conditions should EEC or any other 35 funding not available to regulated and non-regulated service providers alike, be made 36 available to support NGV and LNG related services. Doing so will allow FortisBC to 37 exercise economic leverage it has as a result of its public utility status, a result contrary 38 to the Commission’s previous rulings in the CNG-LNG Decision: 39


The Panel is of the view that in a case such as this one, the public interest 1 requires that, if FEI is to provide CNG/LNG services in its capacity as a 2 public utility, it must do so without utilizing any potential economic 3 leverage which it may have as a result of its status as a monopoly 4 distributor of natural gas.42

. . . . . 6 5

The Panel considers that the public interest would not be served by 7 effectively providing FEI with a competitive advantage over other potential 8 market participants in the industry by allowing FEI to subsidize the costs of 9 what would otherwise be an unregulated service, with existing ratepayer 10 money. 11

Ferus LNG notes that incentive funding to NGV customers to date has been significant. 12 As the Commission noted in the CNG-LNG Decision: "…FEI provided incentive funding 13 to Waste Management to cover the entire incremental cost of purchasing 20 CNG 14 fuelled vehicles over 20 diesel fuelled vehicles."43 Total FortisBC ratepayer funding to 15 date to commercial fleet NGV customers is in the order of $3.5 million, with FortisBC 16 having committed itself to another $2.2 million in future funding, for a total of some $5.7 17 million.44

For the reasons outlined herein, Ferus LNG submits that no similar funding should be 19 permitted in the future with respect to Natural Unregulated Services, unless such 20 funding is available in a non-discriminatory manner to the benefit of all industry 21 participants. However, Ferus LNG understands FortisBC's position to be that incentives 22 need to be tied to the use of its system. 23

18

Ferus LNG proposes the following guideline [Note that should the Commission 24 determine that incentives are to be made available in a non-discriminatory manner (i.e. 25 not tied to the use of the FortisBC system) then Ferus LNG would be supportive of such 26 incentives as they would not have anti-competitive effects]: 27

7. No funding recovered from a public utility’s other ratepayers, including 28 EEC funding, shall be used by a public utility to support a Natural 29 Unregulated Service. 30

(d) Issue 2(a) 31

What are the principles that should be applied to determine whether an 32 AES or other new initiatives activity can or should be pursued as a 33 regulated business? 34

Ferus LNG’s views on this issue are subsumed in the guidelines proposed under Issues 35 1(a) and 1(b). 36

42 CNG-LNG Decision, page 19. 43 CNG-LNG Decision, page 22. 44 FortisBC response to Ferus IR 3.2.


(e) Issue 2(b) 1

Where an AES activity or other new initiative has been undertaken by a 2 regulated utility to allow it to be proven or established and after that it is 3 determined that it should be spun out as an unregulated activity, what 4 costs/benefits should accrue to the ratepayer and/or the utility 5 shareholder? What principles or guidelines should the Commission follow 6 in assessing an application to spin out a regulated activity to a non-7 regulated entity? 8

By following Stand Alone Regulation for any Natural Unregulated Service, as discussed 9 under Issues 1(a) and 1(b), Ferus LNG believes that any future application to spin-out a 10 Natural Unregulated Service offered by a public utility will be simplified. The absence of 11 any cross-subsidization of costs or risks should allow for the assets to be transferred to 12 a non-regulated entity without requiring the type of complex review that might be 13 necessary had the service been intermingled with the public utility’s other service 14 offerings. 15

(f) Issue 3(a) 16

When ratepayers are paying for AES and other new initiatives what 17 standards should the BCUC apply to determine whether the activity is 18 being carried out in the most cost-effective manner? 19

Ferus LNG's position is that ratepayers (Ferus LNG assumes the reference to 20 ratepayers here is to the utility’s other ratepayers and not the customer of the new 21 service) should not pay any costs related to Natural Unregulated Service. Adopting that 22 approach, there would be no need to ensure the other ratepayers are "getting their 23 money’s worth" since they should have no money at stake. 24

While it can be argued that ratepayers may benefit from some increased throughput and 25 therefore should share some risks, it could similarly be argued that the LNG customers 26 benefit from the existing infrastructure and therefore should absorb some of the costs 27 and risks of the other utility ratepayers for services not directly related to LNG. Ferus 28 LNG would urge the Commission to avoid having to address either argument going 29 forward by avoiding cross-subsidization of LNG services, period. 30

(g) Issue 3(b) 31

What principles or guidelines should be applied to ensure that where 32 feasible competitive forces can be utilized to maximize the efficiency and 33 effectiveness of AES activities and other new initiatives? 34

By adopting Stand Alone Regulation for Natural Unregulated Services, the Commission 35 will ensure that where feasible competitive forces will be utilized to maximize the 36 efficiency and effectiveness of such initiatives. This flows from the fact that Stand Alone 37 Regulation will ensure the marketplace for Natural Unregulated Services is allowed to 38 develop without adverse impacts from regulated public utility’s utilizing economic 39 leverage they have as a result of their status as monopoly providers of other services. 40


(h) Issue 3(c) 1

What guidelines should utilities follow in making EEC incentive funds 2 available for addressing issues such as (i) who can access the funds, and 3 (ii) transparency of funding programs? 4

Ferus LNG’s position is that no funding from other ratepayers, including EEC funding, 5 should be made available for Natural Unregulated Services, unless such funding is 6 made available in a non-discriminatory manner (see comments under Issue 1(c) above). 7

(i) Issue 3(d) 8

What criteria should be used to assess whether an AES or new initiative 9 activity has been successful in meeting the initial objectives set out for the 10 activity? If the activity has not been fully meeting the goals set out in the 11 initial application, what criteria should be used to determine when the 12 program should be terminated? What portion of the risk of program failure 13 should rest with the ratepayer? 14

To the extent a new initiative involves a Natural Unregulated Service, which forms the 15 focus of Ferus LNG’s interest in this Inquiry, whether or not it is successful should not 16 involve any risk to FortisBC’s other ratepayers under the Stand Alone Regulation model 17 proposed by Ferus LNG. 18

FortisBC - Inquiry into Alternative Energy Solutions and New Initiatives Ferus LNG Evidence – Attachment 1 December 2, 2011

Attachment 1

To the Evidence of Fortis LNG dated December 2, 2011

Filed in the BCUC AES and New Initiatives Inquiry

Globe and Mail Article September 7, 2011

"Shell to produce LNG for heavy-duty trucks"

FortisBC - Inquiry into Alternative Energy Solutions and New Initiatives Page 1 of 2 Ferus LNG Evidence – Attachment 1 December 2, 2011

Shell to produce LNG for heavy-duty trucks By Nathan Vanderklippe Globe and Mail September 7, 2011 Ambitious plan targets liquefied natural gas supply to network of Alberta stations

Royal Dutch Shell PLC (RDS.A) hopes to fuel the trucks powering Canada’s oil sands with natural gas as it works to build a network of new fuelling stations across Alberta.

Sometime next year, Shell plans to open a liquefied natural gas pump at a Shell Flying J truck stop in Alberta, the first in a series of new refuelling facilities the company intends to build.

It’s part of a broad-based effort that will also see Shell build a new liquefied natural gas (LNG) manufacturing plant outside of Calgary and work with the makers of natural gas truck, rail and marine engines to promote the technology. The plan is among the most ambitious attempts to date by an energy company to push natural gas into the transportation sector, which has become a key aim for an industry mired in low prices.

Natural gas holds the promise of reducing tailpipe emissions in heavy highway trucks, relative to the diesel fuel that powers virtually the entire trucking industry.

“We’ve looked at natural gas in transport, and we see a real opportunity in heavy duty transport for LNG,” said Bob Taylor, Shell’s Canadian manager of commercial fuels, business development and marketing.

The plan remains in its early stages. Shell has not, for example, yet decided how many LNG fuelling stations to build. But “our goal ultimately is to be able to have coverage basically from Fort McMurray down through Edmonton, Calgary, and then along to Vancouver,” Mr. Taylor said.

“We’re looking at the Calgary-Red Deer-Edmonton corridor to be the first sites,” Mr. Taylor said.

LNG offers several advantages for truckers. It’s a cleaner-burning fuel, and features a 20- to 30-per-cent reduction in carbon emissions. At current prices, it’s also cheaper, in part because it’s not subject to the federal and provincial fuel taxes that add 13 cents to the cost of a litre of diesel in Alberta.

But it also comes with a potentially serious downside: installing an LNG engine into a truck tractor adds $50,000 to $60,000 to the cost of a $150,000 vehicle. A report by the Natural Gas Use in Transportation Roundtable found that it would take between 1.8 and three years to pay back natural gas engines on different kinds of heavy trucks. In a five-year period, the investment would produce an internal rate of return of 20 to 50 per cent, the report found.

Industry, however, has been more skeptical. Robert Transport, the Quebec-based firm that has ordered 180 LNG trucks, has said it expects a six-year payback, in part because maintenance costs are expected to be a fifth higher. And Robert benefits from a generous Quebec tax writeoff allowance for LNG vehicles.


In Alberta, where no such tax benefit exists, the trucking industry believes LNG is a losing proposition.

“Right now, there’s zero incentive,” said Carl Rosenau, president of Edmonton-based Rosenau Transport Ltd., which runs a fleet of 300 trucks. By his calculation, “the payback is not even close.”

Don Wilson, executive director of the Alberta Motor Transport Association, said LNG technology is “kind of neat but I think I’d be staying with the old diesel for a little while.” Among the association’s membership, Mr. Wilson has heard from no one “that says they’re even in to trying it at this point.”

Still, the new fuelling sites are a potential boon to Westport Innovations Inc., the Vancouver-based maker of LNG truck engines. Part of the Shell plans include a co-marketing program with Westport, which sees substantial benefits to working alongside a major global energy player work.

“It’s very clear someone with Shell’s stature, size and scale provides a great deal of credibility and confidence to any major fleet that LNG infrastructure will be available,” said Darren Seed, Westport’s vice president of investor relations and communications. “This helps answer the infamous question: ‘Where do I fill up?’ ”

Licensed from The Globe and Mail for republication in Evidence to be filed with the BC Utilities Commission

FortisBC - Inquiry into Alternative Energy Solutions and New Initiatives Ferus LNG Evidence – Attachment 2 December 2, 2011

Attachment 2

To the Evidence of Fortis LNG dated December 2, 2011

Filed in the BCUC

AES and New Initiatives Inquiry

Westport Innovations News Release October 28, 2010

"Westport Announces Robert Transport Order for 180 Peterbilt LNG Trucks

Powered by Westport HD Systems; LNG Truck Order in Concert with

Refuelling Station Installations by Gaz Metro"


Westport Announces Robert Transport Order for 180 Peterbilt LNG Trucks Powered by Westport HD Systems; LNG Truck Order in Concert with Refuelling Station Installations by Gaz Metro October 28th, 2010 VANCOUVER, BC – Westport Innovations Inc. (TSX:WPT / NASDAQ:WPRT), a global leader in alternative fuel, low-emissions transportation technologies, today announces that Robert Transport of Boucherville, Quebec has issued a purchase order for 180 Peterbilt liquefied natural gas (LNG) trucks featuring Westport HD Systems. Robert Transport is one of Canada’s largest for-hire trucking companies with an estimated 1,100 tractors and 2,300 employees. The new trucks, powered by Westport HD, will be used on line haul routes between Montréal and Québec City, and Montréal to Toronto. Fueling the Robert Transport fleet is Gaz Métro Transport Solutions, a wholly-owned subsidiary of Gaz Métro, the main distributor of natural gas in Quebec, who plans to install three LNG refuelling sites along the Ontario –Quebec 401/ Highway 20 Corridor between the greater Quebec City area and the greater Toronto area. “This is the single largest order for LNG Trucks powered by Westport HD,” said David Demers, CEO of Westport Innovations. “It’s evidence that natural gas is gaining momentum as a mainstream transportation fuel in Canada. With the imperative to reduce GHG emissions from heavy-duty transport and the Quebec government’s incentives, companies like Robert Transport and Gaz Métro are helping deploy natural gas transportation solutions to help reduce emissions.” “Operating natural gas trucks helps reduce one of our largest input costs and reduces our carbon footprint,” said Claude Robert, President and CEO of Robert Transport. “This is a win-win for both the environment and our company.” “Natural gas for transportation is an integral part of our future,” said Sophie Brochu, Gaz Métro's President and CEO. “We look forward to establishing the first natural gas ‘corridor’ in Canada and doing our part to help reduce carbon emissions.” “Peterbilt trucks with LNG systems continue to grow in popularity”, said Bill Jackson, General Manager at Peterbilt Motors. ”We are excited to work with Robert Transport and Westport to deliver a high quality product that provides the performance and environmental characteristics to support their business.” Helping drive innovation and improve carbon footprints in Quebec, the government announced that that the depreciation rate applicable to commercial trucks or tractors was increased from 40% to 60% for any new equipment acquired after March 31st, 2010. Furthermore, an additional 85% cut for amortization reduction is granted if the truck or tractor runs on LNG. Thus the Quebec government has put in place key elements to foster a supportive and progressive environment to develop a greener future in the field of transportation. The Westport HD System consists of the GX 15-litre engine, proprietary Westport fuel injectors, LNG fuel tanks with integrated cryogenic fuel pumps, and associated electronic components to facilitate robust performance and reliable operation. The Westport HD GX engine is certified and compliant to 2010 U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) emission limits in North America.

Documents

BRITISH COLUMBIA UTILITIES COMMISSION COLUMBIA UTILITIES COMMISSION . ... The Panel is of the view that in a case such as this one, ... Fully recover the capital cost of the fuelling