Rising Gas rates: A painful proposition

Enbridge Gas NB ran into some serious opposition this week with a proposed rate increase for the large commercial accounts.   Although they represent only 1% of the customers of the gas company, they have big political pull.  EGNB is proposing that the distribution charge for this group of customers would be increased from $2.39 to $4.54 per GigaJoule, which is still less than the other classes.  This is a substantial increase of between 10% and 18% based on the volume that the customer uses.

The natural gas franchise was authorized in 2000 for New Brunswick but it takes time and a lot of money to build a network like we see in other provinces like Ontario. Roughly seven years later, they have 8000 customers while NB Power still has a substantial, roughly 60% of the heating market, which translates into perhaps 190,000 electric heat customers. Its not unusual that Enbridge shows up at each rate hearing for NB Power insisting that electric rates classes should by modified and the rates raised. The more electricity you use, the cheaper it gets. This isn’t fair to the environment or the poor.

Enbridge is supposed to make money from its gas distribution system as a fixed rate of return. It also adds onto the bill the actual cost of the gas commodity itself, which includes the cost of transmission from Sable Island to NB on the Maritimes and Northeast pipeline.

Enbridge obtained approval from the EUB in 2000 for a market-based rate system commonly used to build a customer base. The company ensures that the price of natural gas is always lower by a certain percentage than oil, which provides the incentive to switch. This incentive required may vary between classes and Enbridge has taken considerable losses to do so. The worst case is when the price of natural gas is high and the cost of oil is low. The best case is  when oil is high (like now) giving the company room to raise rates and still have a competitive product (10% savings for this class over light fuel oil).

In 2006, EUB document filings indicate that Enbridge NB lost $4.3 million dollars, and increased its regulatory deferral account by $19.2 million – effectively losing $23.5 million. This increased that account to a total of $102 million dollars in 2006. This account shows the shortfall between revenue and the cost of service. The company has until 2040 to recover the debt in the deferral account from rates. If we assume that 2007 continued with a loss of $20 million, then the deferral account is now $122 million in the hole. The development period was extended to 2010 at a hearing in 2005. It can be seen that Enbridge NB is in a difficult position with inadequate customer base for its fixed cost, rates that do not recover enough revenue and a large deferral account.

The EUB will be faced with considerable pressure to moderate the proposed rate increases in the industrial rate, but oil is at $90 and not likely to retreat. This rate increase was based on $80 oil so a further increase may be justified in 2008. OPEC, by refusing to increase oil supply, essentially indicates they consider $90 as the floor price.

What is the effect of the rate increase on industrial customers on the products they produce? I considered two cases with gas at 10% or 40% of an industrial company’s total expenses. The rate increase affects customers from 10% to 18% based on volume of usage, as the commodity cost is a fixed value. Multiplying the figures gives a range of between 1% and 7.2% in product cost.

Is a 1 % increase acceptable? Is 7.2% too much? What kind of pill will the EUB prescribe for the patients complaining of increasing and severe gas pain? Will they require a cost of service review as part of the examination? Part of the hearing may require the industrial customers to provide financial information to back up their claims. After all, the price of energy is rising in other jurisdictions. At some point the end consumers of the products have to pay for the real costs to manufacture.

A question that might be asked is how long the parent company of Enbridge NB will allow mounting losses to accumulate before calling it a day. The large volume users have been allowed a bypass by the Gas Distribution Act – the single end user franchise for a mere $50,000 a year. In addition, there are provisions in the Act for a LNG franchise (Irving), which will give considerable latitude in serving large industrial concerns and perhaps others. On the electrical side, will the EUB insist on the abolition of the declining block rate at NB Power ordered by the PUB well over a decade ago? Should the EUB pursue the merging of the general service rates as suggested by its PUB predecessor?

The industrial companies, Enbridge Gas NB, and NB Power are in a zero sum game. What helps one hurts the other. Enbridge is ailing from a Catch 22 situation – lack of customer base and rates too low to support it. If they raise rates too much, they lose customers. NB Power wants to raise rates to reduce its heavy debt but the political heat is too great to get more than 6% at the moment. Their low rates and declining block structure cuts Enbridge off at the knees.

Will the EUB be similar to a doctor who would like to, but dares not prescribe the medicine that is required? There is a strong possibility that we will to see the same patients back at the clinic on a yearly basis looking for a fix.

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How far does your tank take you?

Recently my gas mileage doubled when I replaced my mechanically challenged car with a well worn but newer diesel-powered car. Do I feel greener? Perhaps a little, but deep down you know that mileage has to get much better before we can say that a car qualifies as being green. We just don’t have the same choice in public transport that Toronto, New York or London does, so a car is a requirement for many people.

It does make a real difference in finances when you fill up every two weeks rather than on a weekly basis. If the price goes up a little, well it isn’t a panic. More of my money stays in Canada rather than going to Norway or Venezuela or Saudi Arabia. Not that there’s anything wrong with international trade but our outflows on fuel have almost doubled in the past year.

But is doubling mileage ratings good enough to save people a lot of financial pain? A typical person may drive 20,000 km per year or 384 km per week. At 25 mpg (11.32L / 100 km), it is 43 liters a week (a tank), 50 mpg = 22 liters (1/2 tank) and at a fictional 100 mpg, it is 11 liters. When the price of fuel rises to $3 per litre, the average car would use $129 of fuel per week or $516 per month. The double mileage car costs $66 / week and the non-existent supercar would use only $33 / week.

Canada annual gas and diesel sales at the retail pumps are roughly 55 billion litres. In comparison New Brunswick uses about 1.5 billion litres each year. Cutting fuel use in half would save NB drivers roughly $750 million dollars a year at $1 per liter pump prices. Road transportation is roughly 35% of Canadian total oil use and 23% here in New Brunswick as there is large use of heavy oil for power generation.

There is some hope on the horizon. Heard about the X prize for Space? The X PRIZE was inspired by the $25,000 Orteig Prize, offered in 1919 by wealthy hotelier Raymond Orteig, to the first pilot who could fly non-stop between New York and Paris. The winner was Charles Lindbergh and an era of air transportation began.

This year an automotive X prize was announced for the development of a realistic 4-person vehicle that will achieve 100 miles per gallon equivalent. This means that electric or diesel can also apply. A multi-million prize will be awarded to the group who designs a vehicle that can win a long distance race and meet the various standard demand such as emissions, features, and cost of vehicle. 100 mpg is roughly four times higher than the present “CAFE” fuel standards for the auto industry.

Why pick a target of 100 miles per US gallon, you might ask? The foundation estimates that at 20 miles per gallon today, it takes five gallons to go 100 miles. At 100 mpg, it just takes one gallon. Therefore, 4 gallons are saved. Above 100 mpg the law of diminishing returns kicks in harder. If 200 mpg had been chosen, then only ½ gallon more would have been saved but it becomes much more difficult to build an attractive, marketable vehicle.

There are 43 groups that have signed a letter of intent to compete and 300 who have inquired about the contest. One of the entrants is a BC company called Fuel Vapour Technologies who had been developing a three-wheel sportster called the “Alé”.

Vehicle mileage is related to the weight of the car, to its wind resistance profile, the engine technology and the speed at which it is driven. It is likely that the vehicles in this contest will be much lighter than the 2727-kg GMC Yukon or the 1135-kg Toyota Corolla. As we have seen in the aircraft industry, there is a tendency to move to lighter material such as carbon fiber due to the strength to weight ratio. Costs of this material are decreasing.

Strangely absent from the X prize list are the major automotive companies, although GM actually produced a concept car in 1992 called the Ultralite, with a carbon fiber frame – total vehicle weight of 636-kg, top speed of 135 mph and 88 miles per US gallon. Volkswagen has the L1, which uses 1 liter of diesel per 100 km or 270 mpg. GM’s subsidiary Opel developed the Eco-Speedster, whose top speed is 155 mph and gives 108 mpg. In North America, perhaps the largest impediment to production of these cars is the high profitability of big vehicles, the low return on small efficient cars and the lack of understanding of how precarious our energy position is.

 eco-speedster.jpg

 A private foundation is trying to stimulate the production of good mileage vehicles in North America. We know that it is possible to do so. We see the beginning of an unprecedented energy problem. We know that GM doesn’t want to raise the “CAFE” requirements. It clear that Canada’s “New” government will not set independent higher fuel standards from the US. The federal government did introduce a vehicle subsidy program that was politically skewed, but a small start. Here in NB, Shawn Graham cut the 3.8-cent gas tax to get elected, which was exactly the worst thing he could have done.

There are a number of things that could be done to get us ready for high prices and the eventual rationing of gas. Yes, rationing of gas is coming. High mileage diesels are available in Europe but few are on sale here. Does GM determine our energy policy? Should we institute a carbon tax on fuel to help fund subsidies on the purchase of good mileage vehicles? Maybe we could lower the speed limits on highways. Perhaps the annual vehicle registration fee could have an aggressive carrot and stick approach. There are so many ways we can adjust to extreme prices that are inevitable, but we haven’t seen much interest from the very people we elected only a short time ago.

Premier Graham’s no Robichaud

What does Shawn Graham have in common with Louis J. Robichaud? No, this isn’t the start of a joke.

Both were members of the Liberal Party and have been the Premier of New Brunswick. And Shawn has the desk that Louis used in his office back in the 60’s.

Beyond that, any similarities are difficult to find at this moment. Louis Robichaud succeeded in making revolutionary changes in the administration of New Brunswick. Today, most people see his legacy as positive and progressive. He was involved in the building of schools and universities and the principles of equality of opportunity for all. The creation of a province with two official languages recognized the reality of New Brunswick but was difficult politically and yet very necessary at the same time.

Louis J. Robichaud was a courageous and visionary politician.

Certainly, our latest premier has the best of intentions. He wants to follow in the footsteps of Robichaud and Hatfield in transforming our province. What we may not understand is his vision and how his actions will accomplish the task.

Since being elected, he has announced studies and commissions galore on large sectors of public administration. The public has been invited to respond with their ideas but it has become clear that the course has already been determined. The reports are pre-written and public consultation is only part of change management techniques.

It is also possible that the continual vague announcements of the self-sufficiency task force and the recent speech from the throne are part of a technique to pummel the masses with boredom and remove ammunition from the opposition. When the day of shock and awe arrives, the changes will be legislated quickly. The citizens of the province will be so tired of the empty promises that they will accept any harebrained scheme as an alternative to no government action.

Each year the federal government sends us a big cheque courtesy of the people of Ontario and Alberta, which amounts to 1.5 billion in 2007/08. Thank you very much! The idea of a province of only 750,000 people, operating on an annual deficit of $1.5 billion, spending its way to prosperity by building highways is fairly ridiculous. Adding 100,000 new people with high paying jobs is another dream. Other provinces with greater populations clearly show us that 100,000 is not nearly enough to succeed.

The self-sufficiency agenda presumes that the economy of the world is likely to remain the same till 2026. Nothing could be further from the truth. Almost all oil analysts foresee a peak of oil production by 2020 and most see a peak within five years. Production for the past 18 months has been at a plateau of 85 million barrels per day. In an industrial society like ours, the decline of oil production, at a rate of perhaps 3% per year, will cause a large increase in price eliminating any possibility of economic growth. In fact, we will see hardship in many areas due to our exposure to the cost of oil in transportation, heating, electricity and other products that are based on oil.

The crown jewel in the energy hub concept is a new refinery. However, the new refinery in Saint John may just be a mirage. If world oil production is nearing the peak, perhaps at 87 to 90 million barrels, financing for an unnecessary refinery may be hard to find. Refineries around the world will be shutting down in the next fifty years at the rate of 10 a year, due to lack of crude.

Is the Premier playing ” pin the tail on a donkey?” He knows that he wants a vigorous economy that will support New Brunswick without handouts and that is a good thing. Unfortunately, he had a blindfold on his eyes and can’t see the future of our world. Being very generous, his transformational philosophy might be perceived as adequate according to the economic theories of the last 50 years. However, the game has changed and for New Brunswick to survive and perhaps prosper, we have to change radically our focus and expenditures.

New Brunswick uses 34 million barrels of oil each year, which at $55 a barrel costs roughly $1.8 billion in 2006.  If the price of oil now averages $90, then we will be paying to sources outside of Canada over $3 billion. This is an extra $1.2 billion taken out of our pockets. What is the government’s plan to deal with this? What has Efficiency NB accomplished in the almost two years of its existence. How many barrels of oil has it saved? How many kWh’s are being saved by customers? Where is its annual report?

The Energy Department has moved to Saint John. They have started the Lepreau 2 review and accelerated the windpower program. Has the move to Saint John accomplished anything? Can we expect a revised energy policy? How are we going to reduce our exposure to oil price volatility. Shall we wait until oil is $200 a barrel? Many questions exist but are our eyes wide open?

No one doubted that Louis Robichaud had the interest of the people at heart. His battles with the industrial interests of the province are proof. How will Shawn Graham be remembered?

His handling of the Post Secondary Education review, the self-sufficiency task force, his orientation towards energy exports leave little doubt which group is guiding his agenda.

Captain Graham might think of that when his ship of state gets a little closer to the iceberg.