Central Canadian distributors have won the right to stake a claim on natural gas from offshore of Nova Scotia, after a hard-fought contest against production and transportation interests primarily bent on expanding deliveries to the United States.

In a technical but potentially far-reaching decision for Canada’s fledgling East Coast gas industry, the National Energy Board erected a roadblock to a pipeline strategy that allowed Nova Scotia output to be reserved almost entirely for exports. The ruling prohibits Maritimes & Northeast Pipeline from effectively stalling construction of a proposed new link to Quebec by requiring its sponsors to pay a special fee up front plus a surcharge on future shipping tolls.

The link’s backers will be allowed at least to make a case for having M&NP build part of the connection and “roll in” the costs to tolls paid by all the system’s users. A further application to the NEB is expected soon.

The dispute centred on a grand design for giving Quebec and eastern Ontario access to Nova Scotia supplies by closing the last gap in Canada’s coast-to-coast gas pipeline network. The ambition dates back to the 1970s, and this latest proposal to accomplish it has been struggling through inconclusive negotiations for about 18 months. The plan calls for completing a 522-kilometer (325-mile), east-west link in two pieces: 262-kilometer (164-mile) Cartier Pipeline along the Saint Lawrence River between Quebec City and the western boundary of New Brunswick, and from there to a point on M&NP’s mainline near Fredericton, another 260 kilometers (161 miles) of pipe titled the Northwest Facilities.

The grand design’s sponsors, Enbridge Inc. of Calgary and Montreal’s Gaz Metropolitain, say they are willing to build and pay for C$270-million (US$180 million) Cartier. But they want the Northwest Facilities to be built by M&NP, a consortium led by North Carolina-based Duke Energy with a 75% majority interest, thanks to its takeover of Westcoast Energy. Their price tag has been estimated at about C$250 million (US$165 million), although work on the proposed M&NP share of the connection has not progressed to the point of nailing down costs.

The tangle before the NEB focused on whether M&NP was entitled to define the proposed Northwest Facilities as just a “lateral” arm off its main line to Boston from the Sable Offshore Energy Project. If allowed to do so, M&NP would be entitled to define the project as risky and shelter its established transportation customers against any resulting cost increases with a requirement for the Cartier team to cover them by paying an “aid-to-construct” fee plus toll surcharges. The provision was created to let M&NP choose economic options from among a host of proposals in the virgin gas market of Atlantic Canada and to ensure tolls remain at levels that keep Nova Scotia gas competitive in the U.S.

In testimony before the board, M&NP officials made it plain that they regard Quebec and Ontario as unreliable customers for Nova Scotia gas. Evidence before the NEB made it plain that from the perspective of SOEP and M&NP, the central Canadians only want Nova Scotia gas as a supplementary supply source, while it stands out as a developing mainstay in the northeastern U.S. The NEB directed M&NP to forget trying to define the proposed new link as a lateral and instead to treat it as a “mainline extension,” meaning a candidate for construction, without tacking on special charges for the interests seeking the new service.

The cost dispute is not over, however. The ruling only ensured that the issue will receive a thorough airing in the regulatory arena, after negotiations failed. The board stressed that its technical decision on the definition does not necessarily foreshadow a final ruling that M&NP has to build the Northwest Facilities and cover the costs with current tolls as part of its utility obligation to serve.

An “incremental,” user-pay approach remains a possibility, depending on evidence submitted during the forthcoming proceedings, the ruling said. The Cartier group is expected to fight for the project, although the dispute has put a stop to promises to have the new connection up and running by late 2004.

Gaz Metro and Enbridge Consumers’ Gas of Toronto have told the NEB that their distribution markets in Quebec and eastern Ontario are growing. They rate the Cartier-Northwest plan as essential to secure, expand and diversify central Canadian gas supply portfolios with additional and competitive sources beyond traditional reliance on production from the western provinces.

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