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Alberta Board Protecting Consumers, Rejects Asset Sale
Foiled bidders, led by an American producer, for a package of prize natural gas assets have learned the hard way that — in Canada’s top supplier province, at least – energy free trade does not erase inherited responsibilities to consumers. Burlington Resources Canada Energy Ltd., NCE Petrofund Corp. and NCE Energy Corp. got the lesson from the Alberta Energy and Utilities Board.
It arrived in delayed reasons for a decision handed down in May to deny permission for the companies to buy gas-producing properties described as a “legacy asset” from Atco Gas North. Burlington Canada, a wholly-owned subsidiary of its namesake in Houston, accounted for about 90% of the foiled transaction.
The AEUB said a 78-year-old heritage of obligations associated with the assets gave it no choice but to turn down the purchases. The properties – known as the Viking Kinsella and Beaverhill gas fields were found to be a cornerstone of Atco Gas North, the dominant distribution company in northern Alberta. Ownership of the 327,960 gas-rich acres (512 square miles) of mineral rights dated back to the distributor’s birth in 1923 as Northwestern Utilities, with the then-customary exclusive franchise both to develop a pipeline grid and supply the gas carried in it.
The sale deals, made in December at the height of last winter’s spike in gas prices, valued the properties at C$512 million (US340 million).
The AEUB calculated that would not be enough to compensate consumers in the Atco Gas North franchise region for the resulting loss of distributor-owned production.
In announcing the transaction in December, Atco Group president Craighton Twa said, “Since Atco Gas is a regulated company in a deregulated environment, the sale offers us the opportunity to move out of the production side of the business and concentrate fully on the distribution of natural gas to our customers.” The AEUB declared that if the company keeps its distribution franchise, it must own up to duties that go with having exclusive ownership of the pipeline grid. Those include recognizing, in consumer rates, the value of assets that had also come to be known as COP or company-owned production.
Atco asked the board to consider the contested properties to represent 15% of supplies for consumers in the northern Alberta franchise area. The board found that reliance on the company-owned production in practice ranged from 12% to 97%.
The AEUB also found that Atco used the legacy assets as a significant hedging tool to control average costs of its gas supplies, which in turn held down consumer rates. Rising prices on the open, international gas market made the distributor-owned production increasingly valuable to northern Alberta gas consumers. The AEUB calculated that as a result of Atco’s practices of charging itself only production costs and royalties for the legacy gas, tapping the legacy assets spells savings for consumers whenever prices on the open market top C$2 per gigajoule (US$1.40). In the current market cycle, Atco customers have been reaping benefits from the legacy gas since 1996. At the peak of the cycle during last heating season’s price spike, it was calculated that the value to consumers of the distributor-owned production reached C$49.1 million (US$32 million) during the five-month period of Jan. 1 through May 31, 2001.
The board observed that the gas properties involved in the case truly deserved their title as a special legacy. Appraisals by petroleum engineers indicated that the biggest package – Viking, the one Burlington wanted to buy – is so rich that it will still be producing in 2025 even at accelerated rates contemplated by Atco.
The AEUB said that even though the Alberta gas market is being opened up to retail competition and it is presiding over other cases intended to remove barriers, it still has “a very broad mandate to protect consumers.” The board said it “remains bound to weigh all competing factors, including the impact on consumers . . . while the encouragement of the development of competition may be an important policy goal, it is not over-arching.”
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