Rep: OEB Doc: 13895 Rev: 0 ONTARIO ENERGY BOARD Volume: 6 16 AUGUST 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0253 2 IN THE MATTER OF a hearing held on Monday, 16 August 2004, in Toronto, Ontario; IN THE MATTER OF the Ontario Energy Board Act, 1998; AND IN THE MATTER OF an application by Tribute Resources Inc. and Tipperary Gas Corp. for an order designating a gas storage area; AND IN THE MATTER OF an application by Tribute Resources Inc. and Tipperary Gas Corp. for an order authorizing the injection of gas into, storage of gas in, and removal of gas from a gas storage area; AND IN THE MATTER OF an application by Tribute Resources Inc. and Tipperary Gas Corp. for an order granting leave to drill two wells in the proposed designated storage area; AND IN THE MATTER OF an application by Tribute Resources Inc. and Tipperary Gas Corp. for an order approving or fixing just and reasonable rates for the storage of gas. 3 RP-2003-0253 4 16 AUGUST 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 GEORGE VEGH Board Counsel ZORA CRNOJACKI Board Staff KATHI LITT Board Staff CHRIS LEWIS Tribute Resources and Tipperary Gas Corp. JED CHINNECK Tipperary Storage Landowners' Association JONI PAULUS Northern Cross Energy FRANK THIBAULT Market Hub Partners Ltd. MARILYN BROADFOOT Huron County Federation of Agriculture and Landowner GLENN LESLIE Union Gas JUG MANOCHA Ministry of Natural Resources 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [19] CLOSING ARGUMENT BY MR. LEWIS: [39] 10 EXHIBITS 11 12 UNDERTAKINGS 13 ORAL ANSWER TO UNDERTAKING F.3.2: TO PROVIDE AN INDEPENDENT REVIEW OF THE TYPE AND VALUE OF INSURANCE REQUIRED TO RUN THE PROJECT [21] ORAL ANSWER TO UNDERTAKING F.5.1: TO CONFIRM WHETHER THE ALLOCATION OF RESIDUAL GAS COMPENSATION AMONG LANDOWNERS AS PROPOSED IN SECTION 1 OF EXHIBIT E.2.1 IS THE SAME AS THE ALLOCATION AMONG LANDOWNERS THAT IS AGREED TO IN THE OIL AND GAS LEASES [30] 14 --- Upon commencing at 9:05 a.m. 15 MR. BETTS: Good morning. 16 We have a good turnout, despite the fact that we are in the argument phase, but that's good to see everybody on a Monday morning, a beautiful day at that. 17 We are sitting today in day 6 of this hearing of application RP-2003-0253, and the purpose of today's sitting is to hear arguments from the applicant or submissions in chief with respect to this application. 18 Before we begin, are there any preliminary matters for the Panel's consideration? 19 PRELIMINARY MATTERS: 20 MR. LEWIS: Just one, Mr. Chairman. 21 ORAL ANSWER TO UNDERTAKING F.3.2: TO PROVIDE AN INDEPENDENT REVIEW OF THE TYPE AND VALUE OF INSURANCE REQUIRED TO RUN THE PROJECT 22 MR. LEWIS: Upon reviewing the transcripts, it appears that there was an undertaking given by the applicant, F.3.2, which is referred to in volume 3 of the transcript, paragraph 292, and that undertaking, I believe, was never responded to. The undertaking was to provide an independent review of the type and value of insurance required to run the project or to respond to that request. 23 The applicant, in answering that undertaking, I have been advised, is basically providing the same answer to that undertaking as it provided to Undertakings 3.6 and 3.7, which answers are referred to in volume 4 of the transcript, at paragraph 51. 24 Essentially, to paraphrase that answer, the applicant has undertaken to obtain from its insurers, AON Reed Stenhouse, insurance coverages similar to other storage operators in the province, and to provide copies of any risk assessment studies or reports required in connection with obtaining those studies -- or, pardon me, those coverages to the landowners. And, again, I'm paraphrasing from the answer to the undertaking. 25 So to be clear, the applicant is not prepared to provide an independent review of the type and value of insurance required to run the project, as it feels that, and as indicated on the transcript, its own insurers, AON Reed Stenhouse, are currently advising as to the types of insurance coverages held by other storage operators, as testified by Ms. Lowrie, and it would be through their own insurers that this additional coverages that would be similar to other storage operators would be obtained. 26 So that is my client's answer to Undertaking F.3.2. 27 MR. BETTS: Thank you. Anything further Mr. Lewis? 28 MR. LEWIS: No. 29 MR. BETTS: Mr. Chinneck? 30 ORAL ANSWER TO UNDERTAKING F.5.1: TO CONFIRM WHETHER THE ALLOCATION OF RESIDUAL GAS COMPENSATION AMONG LANDOWNERS AS PROPOSED IN SECTION 1 OF EXHIBIT E.2.1 IS THE SAME AS THE ALLOCATION AMONG LANDOWNERS THAT IS AGREED TO IN THE OIL AND GAS LEASES 31 MR. CHINNECK: While we're on the topic of undertakings, I understand my client gave an undertaking, F.1, which was to confirm whether the allocation of residual gas compensation among landowners as proposed in section 1 of Exhibit 2.1, which I believe was the amending agreement, is the same as the allocation among landowners that is agreed to in the oil and gas leases. 32 The response to that undertaking was forwarded by e-mail yesterday to all interested parties, and essentially it is that the TSLA is unable to confirm whether the answer is in the affirmative or negative with respect to the question posed above, and also with respect to the allocation among landowners that is agreed to in the unit agreements. 33 It just wasn't clear to them whether or not it was the same gas. 34 MR. BETTS: Thank you. 35 Any further items? 36 And, Mr. Lewis, are you ready to proceed with your submission? 37 MR. LEWIS: Yes, Mr. Chairman. 38 MR. BETTS: Then please do so. 39 CLOSING ARGUMENT BY MR. LEWIS: 40 MR. LEWIS: In this proceeding, Tribute Resources Inc. and Tipperary Gas Corp. have made five requests in their applications: One, an order designating a gas storage area; two, an order authorizing the injection of gas into, storage of gas in, and removal of gas from a gas storage area; three, an order granting leave to drill one vertical leg and two horizontal legs in the proposed designated storage area; four, an order approving or fixing just and reasonable rates for the storage of gas; and five, an order to set fair and equitable compensation rates. 41 Mr. Chairman, the last few days of the hearing of evidence in cross-examination, following the submission of evidence and interrogatory process, have been enlightening for all of us. I can probably say for all of us in the hearing room that we have learned a great deal from one another. Undoubtedly, my client's operations will have improved having had the benefit of this process. 42 No one is opposed to the granting of these applications. The TSLA have clearly stated this, and I refer you to volume 4 of the transcript, paragraphs 1180 to 1182, wherein Mr. Dutot has confirmed their support for these applications. 43 Northern Cross aren't opposed to these applications, but are asking that they be put on hold pending the M16 review, and I would refer you to volume 5 of the transcript, paragraphs 1206 to 1207, in regards to Mr. Thompson's evidence on that point, and also to the pre-filed evidence of Northern Cross at Exhibit B.2, paragraph 12, page 1, wherein they essentially ask that the applications be put on hold pending the M16 review. 44 The company is appreciative of the input and cooperation it has received from both the Board Staff, the landowners, and other parties to the proceeding where this has been the case. We are hopeful that the record is complete and accurate, thereby allowing for an early oral decision from the Board, possibly with reasons to follow at a later date. 45 Two of the key practical factors driving this request are the need to install the pipeline and the desire of the municipality to pave the road which they have been waiting to do pending the construction of the pipeline this September. So weather is a factor in our request for an early decision, and I refer you to volume 2 of the transcript, paragraph 735. 46 Now, I'd like to hand out the Gantt chart, which appears in Exhibit C.1.6. 47 MR. BETTS: I think we are all set here. Thank you. 48 MR. LEWIS: As can be seen from this project timetable, in the first block entitled "Regulatory and Legal," it's contemplated that a decision and an order -- or the order of the Board could be obtained prior to September, and I would submit that many of the other items set forth on this timetable are driven by a favorable decision of this Board in connection with these applications. 49 Mr. Fisher, when cross-examined by Ms. Paulus, stated at paragraph 1636 of volume 3 of the transcript that he didn't anticipate a material impact on anything in project timing based upon, I would submit, the September 1st -- an order by September 1st. So the applicant is committed to proceeding with the project based upon this timing if a favorable decision can be obtained prior to September the 1st. 50 Both Tribute and Tipperary, which I will be referring to throughout my argument as "the companies" or "the applicants," are essentially before the Ontario Energy Board requesting permission to construct and undertake the operations of a small private gas storage company in Huron County. And perhaps at this stage it may be instructive to briefly review the corporate structure of the applicants. 51 Mr. Chairman, Members of the Board, I thought it would be helpful to review Exhibit E.1.8 which lays out the corporate structure of Tribute and the Tipperary entities. Exhibit E.1.8 is an organizational chart for Tribute Resources Inc. and Tipperary Gas Corp. As can be seen from this chart, Tribute is a public corporation whose shares are traded on the TSX Venture Exchange. Its shares are held as indicated on that chart with Ms. Lowrie and related entities holding 25 percent and Mr. Crich's company, Crich Holdings and Buildings Limited and related entities, holding 22 percent of the outstanding shares. Tribute holds 100 percent of the outstanding shares in Tipperary Gas Corp., which is the general partner of the Huron Tipperary limited partnership number 1. 52 The limited partners of the partnership are Tribute Resources Inc., holding 1,700 units which were issued to it in exchange for the transfer of the gas storage leases, and I would refer you to volume 3 of the transcript, paragraph 5 -- I'm sorry, volume 3 of the transcript, paragraphs 154 and 159, which contains Ms. Lowrie's evidence on that aspect of the contribution in exchange for the 1,700 units. The value of these storage rights that were contributed by Tribute to Tipperary Gas Corp. was 1.7 million dollars, and in cross-examination Ms. Lowrie indicated that that value was negotiated between Mr. Crich and Tribute at a time when Mr. Crich had approximately 1 percent -- a 1 percent interest in Tribute and that evidence is set out in volume 3, paragraph 182 of the transcripts. 53 Mr. Crich, through his company Crich Holdings and Buildings, has 700 units in the limited partnership, and Lowrie Holdings has 100 units, for a total of 2500 issued units in the limited partnership. Mr. Crich injected $800,000 in cash into the limited partnership, which it spent on seismic, reworking wells and project development, and Ms. Lowrie attested to that in volume 3, paragraphs 168 to 170 of the transcript. 54 The gas storage leases are being held by Tribute in trust for Tipperary and the limited partnership, and the legal title will be transferred to Tipperary, which is the beneficial owner of these gas storage leases, upon designation. Similarly, all petroleum and natural gas leases will be transferred by Tribute to Tipperary upon designation for additional partnership units, and Tipperary will be the operator. And I refer you to volume 4, paragraphs 630 to 636 of the transcript, wherein Ms. Lowrie confirmed that the P&NG rights would be transferred after designation by Tribute to Tipperary Gas Corp. in exchange for more units. 55 I would also refer you to Exhibit 1.4, tab 5, which is a letter from Tribute to the OEB dated June 29th, 2004, confirming the operatorship in the name of Tipperary Gas Corp. and the responsibility for the obligations in both Tribute and Tipperary Gas Corp. Mr. Crich, or his corporation, will make further investment in the limited partnership by subscribing for more units at $1,000 per unit. Ms. Lowrie indicated that amendments to the limited partnership agreement were necessary and needed to permit the limited partnership to issue more units to raise capital to further develop the project, but she anticipated no problems in getting these amendments finalized, and I would refer you to volume 4, paragraphs 952 to 961 of the transcript, wherein, I believe under the cross-examination of Ms. Paulus she made this clear. 56 The extra cash which will be injected into the limited partnership by the subscription for additional units is an equity investment in the project, not a debt investment. And this extra cash will be used to build the infrastructure which will enhance the value of the assets owned by Tipperary on behalf of the limited partnership. These assets, I would submit, are the security for all of the obligations of Tipperary. They have significant value now, and they will have increased value immediately upon designation should these orders be granted, and this value will further increase with all further investments and expenditures by Tipperary. 57 Exhibit C.2, which are the answers of the applicant to supplementary interrogatories, tab 1, contains the audited consolidated financial balance sheet of Tribute Resources Inc. for the year ended December 31, 2003. This balance sheet consolidates Tribute's financial statements with Tipperary's, as well as Tribute's interest in the limited partnership, which at this point in time is 1,700 units out of 2500 units. You can see from that financial statement that the shareholders' equity is, as at December 31, 2003, $1,136,356. 58 Ms. Lowrie has confirmed on the record that both Tribute and Tipperary will be responsible for paying landowner compensation, and that confirmation is at volume 1 of the transcript, paragraph 734. 59 Ms. McConnell gave an undertaking of similar effect, which is set out in volume 2 of the transcript at paragraph 52. 60 I would also refer you to paragraphs 253 and 254 of volume 3 of the transcripts where Ms. Lowrie confirmed to Mr. Vegh on cross-examination Tribute's obligations under the amending agreement. 61 The assets of the limited partnership are held by Tipperary as general partner. They are subject to the claims of creditors of the limited partnership before any of the limited partnership assets can be withdrawn from returned to the limited partners. 62 I would just like to hand out some sections of the Limited Partnerships Act and go through them briefly to reinforce this notion that Tipperary and the limited partnership have an obligation to creditors before any of the assets of the limited partnership can be extracted for partnership purposes, either through the extraction of capital or the payment of income from the partnership. 63 MR. BETTS: Thank you, please proceed. 64 MR. LEWIS: I have just handed up excerpts from the Limited Partnerships Act of Ontario. 65 Firstly, section 8 refers to the rights of general partners, and it reads: 66 "A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners..." 67 And then it goes on to indicate certain functions that can only be entered into by the general partner with unanimous consent. 68 The important portion of section 8 is the fact that the general partner is subject to all the restrictions and liabilities of a partner in a partnership without limited partners. And what that means, I would submit, is that the general partner, in this case, Tipperary Gas Corp., is responsible for all of the restrictions and liabilities of the partnership generally as would be the case in a non-limited partnership. 69 Section 9 is the section that deals with the liability of a limited partner, and it reads: 70 "Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property he," the limited partner, "contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners." 71 That is the section that limits the liability of the limited partners, and the preface to that section, "subject to this Act," refers to section 15, which is just over the page, which states that: 72 "A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business." 73 And Ms. Lowrie referred to Tribute's obligations which were unlimited by virtue of the fact that Tribute has taken part in the management of Tipperary Gas Corp. and the partnership generally. I would submit that she was making reference to section 13(1) of this Act and, as a matter of law, the limited liability of Tribute has been essentially lost by virtue of its participation in the project. 74 Ms. Lowrie went on to indicate that, in her view, it was fair and reasonable that this be the case because, I believe to use her words, this was really Tribute's project. 75 In any event, I believe, based upon the references I've given you, notwithstanding the legal liability of Tribute, there have been commitments on the part of Ms. Lowrie that Tribute would be responsible for the obligations of Tipperary in connection with these orders, including the conditions of approval. 76 Section 11(2), back one page, of the Act indicates or states that: 77 "No payment of a share of the profits or other compensation by way of income shall be made to a limited partner from the assets of the limited partnership or of a general partner if the payment would reduce the assets of the limited partnership to an amount insufficient to discharge the liabilities of the limited partnership to persons who are not general or limited partners." 78 And I would submit that that is an affirmation of this notion that the limited partners cannot extract profits from the venture unless there are sufficient assets left in the partnership to address third party liabilities. 79 Section 15(2) of the Act reads: 80 "Notwithstanding subsection (1), a limited partner is not entitled to receive any part of his" the limited partner's, "contribution out of the limited partnership assets or from a general partner until, (a), all liabilities of the limited partnership, except liabilities to general partners and to limited partners on account of their contributions, have been paid or there remains sufficient limited partnership assets to pay them." 81 Again, an affirmation of the general notion that limited partners are not entitled by law to withdraw their capital from the limited partnership if the effect would be to effectively render the partnership insolvent or unable to meet its liabilities to third party creditors. 82 Section 16(2) of the Act states that: 83 "A limited partner holds as trustee for the limited partnership, (a), specific property stated in the partnership agreement as contributed by him," the limited partner, "but which has not in fact been contributed or which has been returned contrary to this Act." 84 And the applicability of this section is that the evidence is clear that Tribute has effectively vended into the limited partnership the gas storage rights for $1,700,000 in exchange for 1,700 units. It's also clear that the legal transfer of title to those gas storage rights has yet to occur, and that will occur upon designation by way of an assignment of the gas storage leases from Tribute to Tipperary Gas Corp. as general partner for the limited partnership. 85 This section 16(2) basically affirms that even though those gas storage leases are now held -- the legal title is held by Tribute Resources Inc., the beneficial title and ownership is that of the limited partnership. And as I've indicated, there's an undertaking to move those leases legally over to the limited partnership, Tipperary Gas Corp., by Tribute upon designation. 86 Section 16(3) reads: 87 "Where a limited partner has received the return of all or part of his" the limited partner's "contribution, the limited partner is nevertheless liable to the limited partnership or, where the limited partnership is dissolved, to its creditors for any amount, not in excess of the amount returned with interest, necessary to discharge the liabilities of the limited partnership to all creditors who extended credit or whose claims otherwise arose before the return of the contribution." 88 Again, this is an affirmation of the notion that the assets of the limited partnership stand ready to discharge liabilities of third parties, and if there has been any return of capital or assets to limited partners, those assets effectively can be traced by third party creditors to the extent of their contributions. 89 And lastly, section 24 states: 90 "In settling accounts after the dissolution of a limited partnership, the liabilities of the limited partnership to creditors, except to limited partners on account of their contributions or to general partners, shall be paid first, and then, unless the partnership agreement or a subsequent agreement provides otherwise, shall be paid in the following order: " 91 And then there's an ordering of the return of contributions. 92 So again, on dissolution, the rights of third party creditors are dealt with first and have a first charge on the assets of the partnership before any of the limited partners or general partner can receive any contributions back. 93 MR. BETTS: Mr. Lewis, could I get you to sit a little further back from your mike. Some of the mikes are more sensitive to that volume, and that one looks like it is. 94 MR. LEWIS: Sorry. 95 MR. BETTS: That would be fine. 96 MR. LEWIS: I would refer you to Exhibit C, which is the applicants' response to Board Staff interrogatories, white tab 1, buff tab 1, and you will see in that a balance sheet for the partnership as at December 31, 2003, which shows equity of $2.5 million. 97 Mr. Vegh took Ms. Lowrie through the balance sheet for Tipperary Gas Corp., which is the general partner, and pointed out that there was only I believe a $10 contribution shown there and essentially there were no assets whatsoever. I would submit that it is the balance sheet of the partnership that's relevant here, not the balance sheet of the general partner, which in effect is the entity that holds the assets of the partnership for the limited partners. And the overall effect of the limited partnership structure is to make the assets of the limited partnership subject to the claims of creditors before they can be distributed to the limited partners or the general partner. Because the investment to date and the future investment in the limited partnership will be by way of issuance of additional units, which is equity, there will be considerable security for all present and future obligations of Tipperary Gas Corp. 98 The storage project the applicants are undertaking is akin to assembling a relatively complex puzzle; there are many pieces. Some are easy to find and assemble; others are more difficult to find and place. The applicants' project team has been putting the puzzle together for many months, constructing the puzzle is not always easy, but eventually it takes shape and has meaning. The risk is hopefully worth the reward. 99 The Board's role in the assembly of the project puzzle represents the critical regulatory juncture on the path to successful completion. Not only is the Board's decision a necessary cornerstone piece; it is also instructive and guiding through its decision, orders and conditions of approval. 100 If we can just turn to the conditions of approval, the applicants wish to state and reaffirm at the outset of this argument that they are committed to fulfilling all the Board's conditions of approval which have been the subject of discussion periodically during this proceeding and confirming their commitment in writing. Ms. Lowrie confirmed that both Tipperary and Tribute will be bound by the Board's draft conditions of approval and will be accountable if there is a failure to meet any of those conditions. And I refer you to the transcript, volume 1, paragraphs 705 to 711. 101 The draft conditions of approval are set out in Exhibits 2.9 and 2.10. Ms. Lowrie did request a slight amendment to paragraph 1.6 of Exhibit 2.9 by adding the words "until the problem is rectified," as a qualifier on the applicants' requirement to supply water to the landowners if a problem arose. 102 On August 5th, 2004, and I would just like to make a few remarks on the issues list, the Board issued Procedural Order No. 4, which contained the draft issues list for this proceeding. A slight revision was made to this draft issues list and was made Exhibit E.1.1 to this proceeding. That slight revision pertained to the financial capabilities of the applicant. 103 There was some debate as part of the hearing of the applicants' motion prior to the commencement of the evidentiary portion of these proceedings respecting amendments to the issues list. The Board's decision on the applicants' motion resulted in a revision to Exhibit E.1.1, as set out in volume 1 of the transcript, paragraphs 664 and 665. 104 The issues list as amended by the Board's order provided in the company's submission a helpful and reliable guide to all parties throughout the evidentiary portion of this proceeding. I intend to refer to the issues list during the presentation of my argument in chief. 105 Mr. Chairman, Members of the Board, it is my intention to focus primarily on the key issues in this proceeding which attracted the largest amount of debate and discussion. I believe that the record is complete in all other respects, subject to any questions the Board Members may have. 106 I should say at the outset of this argument, for the purposes of clarity, that the applicants, apart from the storage of gas, do not plan on carrying out other activities such as transmission, distribution or selling gas in Ontario. And I would refer you to the transcripts, volume 1, paragraphs 749 to 758. 107 In an exchange between Mr. Leslie and Mr. Francis, which is set out in volume 3, paragraphs 348 and 349 of the transcripts, it was confirmed by Mr. Francis that the companies have no application for a certificate of convenience or necessity for a franchise in their plans at this stage. 108 The applicants also wish to be clear that they are not asking the Board to forbear in respect of setting rates for gas storage, and I will return to this rate-setting issue later in my argument. 109 I will now turn to issue 1, which is the order designating a natural gas storage area. In the company's submission, the Board has heard and reviewed sufficient evidence to grant an order designating a natural gas storage area to the applicants. By way of background, the Board heard evidence from Ms. McConnell that the south and north Tipperary pools were unitized in 1977 and that these areas were produced from 1980 until June of 2004, and I refer you to volume 2 of the transcript, paragraphs 124 and 135. 110 Dr. Walsh referred the Board to the geological and geophysical evidence justifying the company's interpretation to support using the Tipperary pool to store gas, and that is at Exhibit A, volume 1, tab 3, minor tab 2, which was pre-filed evidence of the applicant dealing with geological matters and geophysical matters. That was amended by Exhibit 1.4, tab 1, which is an amendment that Mr. Walsh made to Mr. Welychka's geological interpretation, and further refined by Exhibit E.1.5, which were the blue sheets that were put into the record by Dr. Walsh on day one of these proceedings. 111 At transcript volume 1, paragraphs 464, 507 and 509, and also paragraph 516, Dr. Walsh testified from a technical standpoint the gas that is injected into the pool will be contained within the restructure and will not migrate away from what is determined as the appropriate designated storage area. 112 Dr. Walsh reconfirms this at paragraph 509 and 507 of volume 1 of the transcript, where he said that the field has all the characteristics required of it to be a suitable gas storage facility. 113 Finally, Dr. Walsh confirmed that, from a geological perspective, the characteristics of this gas storage facility are consistent with other gas storage facilities in Ontario. Dr. Walsh's testimony was tested but remained uncontroverted during cross-examination by Board Staff counsel, Mr. Vegh, and I refer you to volume 1 of the transcript, paragraphs 797 to 909. 114 Counsel to the TSLA, Mr. Chinneck, was unable to undermine the evidence of Dr. Walsh in respect of the anhydrite caprock as being an excellent seal, and I would refer you to the transcript, volume 3, paragraph 554. Dr. Walsh advised Mr. Chinneck that faulting or fracturing is not an issue with the caprock. That's at paragraph 574 of volume 3. 115 Dr. Walsh also undertook to provide the results of the caprock analysis to the Board and all parties in Undertaking 3.5. The caprock analysis is currently underway at a laboratory in Calgary. The location and dimensions of the pool storage -- of the proposed storage area. 116 The company witnesses testified that the location and dimensions of the proposed storage pool were sufficiently accurate and no northern surface boundary amendment was necessary from a technical standpoint. I refer you to the transcript, volume 2, paragraphs 101 to 103. 117 Dr. Walsh testified that the company was not prepared to adjust the proposed designated storage area at this time. He states: 118 "We have no evidence. Based on our evaluation, we feel that the proposed designated storage area is more than sufficient to meet those needs, so we do not see a reason for extending it from that standpoint." 119 Mr. Manocha, on behalf of the MNR, has recommended to the Board that the northern pool boundary be extended northward to the concession road so that spacing units will not be bisected, and his pre-filed evidence is in Exhibit B.1. His evidence is that the current boundary "sterilizes" land outside the boundary. That's at volume 5 of the transcript, paragraphs 1416 and 1417. 120 In support of this, he refers to section 8 of Ontario regulation 245-97, and he reads those references in at volume 5 of the transcript, paragraphs 1439 to 1443. 121 His reasons for recommending that the pool boundary be expanded to the north are difficult to follow, but it is clear that they relate to oil and gas extraction. He says: 122 "You know, that is our recommendation, and to respect the tracts in terms of land development, in terms of oil and gas extraction." 123 And that reference is at volume 5 of the transcript, paragraph 1447. 124 The applicant would urge the Board, based on the evidence, to accept the proposed DSA boundary and not expand it to the north for the following reasons: 125 Number one, the pool is entering the gas storage phase now, so concerns regarding "oil and gas extraction," as alluded to by Mr. Manocha, are irrelevant, at least insofar as the DSA is concerned. 126 Number two, the MNR has power to amend its spacing units outside the DSA in the area contiguous to the north boundary under section 7.1 of the Oil, Gas and Salt Resources Act, and that section was read into the record by myself at volume 5 of the transcript, paragraphs 1554 and 1555. 127 According to Mr. Manocha, the MNR would do this today, that is, amend the tract boundaries, so the tracts wouldn't be split. He indicated this in response to my question to him, and that is in volume 5 of the transcript, paragraphs 1556 to 1558. 128 The third reason is that the north boundary conforms with the north boundary of the unitization agreements that have been in place since 1997 without comment or interference from the MNR, and I believe Mr. Manocha indicated that he was not aware of any MNR concerns or comments regarding this and he did that in volume 5 of the transcript, paragraphs 1545 and 1546. 129 Number four, nothing from a geological or engineering standpoint justifies moving the boundary north, as indicated by Dr. Walsh. 130 Number five, the people potentially affected by the sterilization, none of them have come to this hearing. They would be the landowners to the north, Ms. Guindon, Mr. Postill, Mr. Steenstra, and Steve Feddes, which is a different Feddes than Mr. Feddes who attended the hearing on behalf of his son Dwayne. They have all been served with the application as abutting landowners; none of them have come to this proceeding to complain about this sterilization. 131 In fact, Ms. Guindon was not prepared to sign a consent to include her lands within the DSA when Mr. Jordan approached her, and that's alluded to in volume 2 of the transcript at paragraph 342. I would submit that this implies that she is not in favour of the MNR's recommendation. Also, Ms. Guindon does not have a gas storage lease on part of her lands, as indicated by Mr. Jordan in volume 4, at paragraph 27 of the transcript. So this could conceivably create compensation issues regarding a portion of her lands. 132 MR. BETTS: Mr. Lewis, could I just interrupt for one second, just to get straight how you would like the Panel to deal with questions. And the options would be either that we could wait until you are finished and ask any questions at that point, or we could ask our questions as they pop into our mind; which way would you prefer to do it? 133 MR. LEWIS: My preference would be to handle the questions at the end of my submissions, if that would be convenient. 134 MR. BETTS: Fair enough. That will be fine. Yes, thank you very much. 135 MR. LEWIS: Okay. 136 My sixth reason is, when Mr. Manocha was asked by you, Mr. Chairman, as to the practical implication of not moving the boundary of the DSA to the north, he was not, I would submit, able to clearly articulate any rationale for doing so. And that exchange was at volume 5 of the transcript, paragraphs 1626 to 1631. 137 And my last reason is that it appears that since the unitization in 1977, the tract boundaries changed to the current configuration, thus creating the problem, and Mr. Jordan comments on this change in his evidence at volume 2 of the transcript, paragraph 1010. 138 So to comply with any legal non-conforming concept or the concept of grandfathering, the MNR has the power, as previously mentioned under section 7.1 of the Oil, Gas and Salt Resources Act, to revise the spacing units in and around the north boundary, thus eliminating any perceived problems. 139 Mr. Chairman, Members of the Board, the applicants submit that the evidence supports the company's request for an order to inject and withdraw gas. 140 In regards to this issue of the maximum operating pressure for the pool, Mr. Gorman, who appeared as the company's reservoir engineer, testified as to the anticipated maximum allowed operating pressure for the reservoir of 1,096 psia. Prior to achieving this pressure, the applicant is performing caprock testing, as previously indicated, to demonstrate the integrity of the caprock so that it will not be compromised by delta pressuring. And the references on that issue are in volume 1 of the transcript, paragraphs 952 to 957. 141 Mr. Gorman is confident that delta pressuring would likely be successful. In regards to caprock testing, Mr. Gorman confirmed that the company would operate in conformity to CSA standard Z341, which appeared as schedule 5 to the evidence filed by the Ministry of Natural Resources. 142 As part of that undertaking, Mr. Gorman testified that the company had sent its caprock test sample to the laboratory in Calgary for testing. In response to questions of Mr. Vegh, both Ms. Lowrie and Mr. Gorman confirmed that the applicants would be bound by the restriction that, A, they would not proceed to pressurize the reef without receiving the caprock test results; and B, the applicants would return to the Board for leave to delta pressure once the test results were received as a condition of draft approval. And that's referenced in volume 1 of the transcript, paragraphs 963 to 975. 143 So I would submit that there is no supportable evidence that was introduced by any party which indicated that the company's storage operations could not be conducted safely. To the contrary, witnesses for the companies testified that there was a long history of storage operations in Ontario which have been operated safely for decades. 144 If I can just now turn to the issue of landowner compensation, the applicants have petroleum and natural gas leases and gas storage leases with all of the landowners within the designated storage area, except that only part of the Dwayne Feddes lands is covered by these agreements, 63 acres out of his 65 acres, and part of the Vermues' lands are covered by these leases as well. And I would refer you to volume 4 of transcript, paragraphs 723 to 726 and paragraphs 731 to 736 on this issue. 145 All of the gas storage leases contain similar terms to that of the Feddes lease, which is set out in Exhibit A, volume 1 of 3, coloured tab 5, white tab 4, buff tab 8. This gas storage lease in respect of Mr. Feddes' lands, and this is Dwayne Feddes' lands, was entered into by his predecessors in title, the Van den Brands, as lessors, as was the case with many of the gas storage leases now binding the current owners in the DSA. More specifically, clauses 16 to 19 inclusive in these gas storage leases deal with this issue of compensation. 146 In respect of residual gas, some of the gas storage leases refer to 6 and a quarter percent and others 12 and a half percent. I would submit that this difference is not relevant in view of the fact that the applicants' current offer in respect of residual gas is for 12 and a half percent of residual gas. 147 If these provisions are examined, they contemplate an offer of compensation being made prior to designation and injection. I refer you to clauses 16 and 17 of those leases. These offers were made by the applicants on May 14th, 2004, by Mr. Jordan delivering his covering letter dated May 11th, 2004, which is Exhibit 3.3, along with the draft amending agreement appearing in Exhibit C, tab 13, which was delivered, according to Mr. Jordan, to all landowners, and I believe he states that in volume 2 of the transcript, page 249. 148 These offers were essentially the same as the compensation package awarded to the Lambton County Storage Association and detailed in Exhibit 4.1, which is the decision of this Board in RP-2000-0005. This offer was rejected in writing on or about May 20th, 2004 by the TSLA. 149 Between May 14th, 2004, and July 27th, 2004, discussions took place between Mr. Jordan on behalf of the applicant and Mr. Dutot on behalf of the TSLA regarding the language of a new clause 7, which is an adjustment mechanism for the rates of compensation. I would refer you to volume 4, paragraphs 750 to 786 for Mr. Jordan's explanation of what transpired between May 14th, 2004, and July 27th, 2004. 150 In any event, on July 27th, 2004, a black-lined amendment to the May 14th offer was given to Mr. Dutot by Mr. Jordan. This amending offer is Exhibit 2.1, and the new paragraph 7 provides for a mechanism to adjust compensation rates in the future. It provides that adjustments will be made to try and keep the compensation equal to that paid by Union to the Lambton County landowners, subject to the right of either the applicant or the landowners applying to this Board to amend compensation rates. 151 The evidence shows that a counteroffer was presented to the applicants by the TSLA on August 10th, 2004, and this is Exhibit 5.1. This counteroffer contains two notable revisions to the applicants' July 28th, 2004 offer. Firstly, the residual gas compensation clause was changed to provide for residual gas compensation on a surface acreage basis based upon a different reservoir interpretation from that proposed by the applicant; secondly, the language of clause 7 dealing with the method of adjusting rates was changed. 152 The applicants' offer for residual gas compensation, as contained in both its May 14th offer and its July 28th offer, is based upon a reservoir interpretation consistent with the unit operation agreements for the north Tipperary pool and the south Tipperary pool. This has been the basis of royalty payments and compensation since the pools were put into production in 1980. 153 These unit agreements were signed in 1977, and as I have indicated, were entered into by the predecessors in title to both the landowners and the applicants. This is also the basis of compensation that has been agreed to by both Goff Brand and Adrian Brand, who signed amending agreements on August 9th, 2004, which are in the evidence as Exhibits 2.2 and 2.3. Each of these signed amending agreements contain a residual gas clause and a rate adjustment clause on the same terms as the July 28th amending agreement tendered to the TSLA. 154 The applicants are somewhat indifferent as to how the residual gas is split because the total compensation payable by the applicants for residual gas will be the same, regardless of what method is used. The applicants submit that the more just and equitable method for determining the split of residual gas is the method proposed in the two offers that have been made by the applicant, which is the same method that has been agreed upon by Messrs. Goff Brand and Adrian Brand. This method is consistent with the pool interpretations that have been agreed to for production purposes by all landowners and although potentially inconsistent with the extent of the reservoir as identified by 3-D seismic, it should, I would submit, be adhered to for the purpose of residual gas compensation unless there is unanimity amongst all landowners. And Dr. Walsh discusses this rationale under cross-examination by Mr. Vegh in volume 2, paragraphs 1066 to 1088. 155 The issue of the language of this clause for the adjustment of rates, or the language of the clause, pardon me, for the adjustment of rates as proposed by the TSLA in their August 10th amending agreement causes the applicants some concern. It is very broad and could lead to an adjustment in rates if any one landowner affected by the Lambton compensation case, that's RP-2000-0005, received "any increase in compensation." 156 The applicant asks this Board to deal with this issue of compensation now under section 38(3) of the Act in respect of those landowners who have not entered into a compensation agreement with the applicant. That would be all of the landowners within the proposed DSA except for Goff Brand and Adrian Brand. The applicant asks that the compensation order be on the same terms as that accepted by the Brands as contained in Exhibits 2.2 and 2.3, with the exception of paragraph 7 of those agreements pertaining to future adjustment of compensation rates. In this regard, the applicants ask that the Board make an order on the same terms as that made in the Lambton case as follows: 157 For the years after 2008, the landowners within the Tipperary storage pool DSA to which this order applies shall be entitled to just and equitable compensation as agreed upon by such landowners with Tipperary Gas Corp. or, failing which, as determined by the Board pursuant to the Act. 158 And that language or -- language, subject to the changes in the names of the parties, is in Exhibit 4.1, paragraph 27 of the Board's decision in the Lambton case. 159 The applicants submit that the separate phase of this hearing regarding compensation as alluded to in your decision, Mr. Chairman, set out in volume 2 of the transcripts, paragraphs 59 to 63, can and should be dealt with now. 160 On the issue of notice, Mr. Chinneck, I would submit, represents the TSLA and he has known that the compensation issue has been before this Board since August 9th, 2004. He was retained on or about August 6, 2004. 161 His clients, being all of the members of the TSLA, have known that this Board would determine compensation if an agreement could not be reached. Mr. Jordan testified on re-examination that he told this to each of the landowners, and that is in volume 4, paragraphs 744 to 747. 162 In addition, this is the mechanism contained in each of the gas storage leases signed by all of the landowners or their predecessors in title. I would, again, direct you to paragraphs 16 to 19 of the gas storage leases. Even Dwayne Feddes and the Vermues are aware of this because their gas storage leases cover part of their lands, so they are certainly mindful that this mechanism is in those gas storage leases. 163 All of the landowners have notice that this issue will be dealt with by the Board by virtue of their gas storage leases, and this should assuage the Board's concerns regarding notice. 164 The landowners are also prepared to have the Board determine compensation, and although they're requesting that this be deferred for 60 days, that acknowledgment and acceptance of the Board's jurisdiction in this matter is set out in Mr. Dutot's evidence on cross-examination at volume 5 of the transcript, paragraphs 704 to 709. 165 On the issue of whether sufficient efforts to achieve settlement have occurred, I would submit that the record is complete on this issue and little will be served in delaying the hearing for more negotiations. 166 Mr. Dutot may be more motivated about trying to obtain more leverage, to use his words, by postponing the issue than negotiating this. This is really an issue between the landowners themselves that may now be somewhat complicated by the fact that two of the landowners have opted for a split of residual gas on the basis of the old unit operation agreements. It is clear that Mr. Dutot doesn't favour this methodology of splitting residual gas because he was never happy with this, as evidenced by his testimony regarding his exclusion from the participating areas of the unit operation agreements. And that is alluded to by Mr. Dutot under cross-examination by myself at volume 5 of the transcript, paragraphs 553 to 604. 167 I would also refer you to the actual unit operation agreements that are in evidence. The unit operation agreement for the north Tipperary pool is at Exhibit A, volume 2 of 3, white tab 8, buff tab 5, and it is located behind the P&NG lease, and the unit operation agreement for the south Tipperary pool is in the same volume, white tab 8, buff tab 4, behind the oil and gas lease. 168 Mr. Dutot would not get any part of the residual gas based upon the scheme proposed by the applicant. The applicant urges the Board to deal with this issue as aforesaid without delay. 169 In regards to the issue of the plugging of the Imperial 368 and 397 wells, I would submit the following: 170 Ms. McConnell testified that neither she nor anyone at the Ministry of Natural Resources had ever heard of a formerly plugged well over a gas storage reef either leaking or blowing out once the plugs had been secured, and that reference is in volume 2 of the transcript, paragraphs 360 to 387. 171 Ms. McConnell concluded at paragraph 383, and I quote: 172 "I do not believe that any of the plugged wells will leak. We still use the lead plug and wooden plug method to plug wells to this day, and I believe, I believe it will provide an effective seal." 173 At paragraph 391 of the transcript, volume 2, Mr. Gorman echoed Ms. McConnell's comments, noting: 174 "...I believe these plugs are good plugs and they won't compromise the 'integrity'." 175 In response to Undertaking 2.1 in respect of the suggestion that current abandoned wells, Imperial 368 and 397, should have plugs installed to bring them up to the CSA standards as a condition of OEB approval, Dr. Walsh and Mr. Gorman testified that replugging wells to today's standards is not required under those standards, and that is set out in volume 3 of the transcript, paragraph 50. 176 More specifically, Dr. Walsh pointed out at paragraph 48 of volume 3 of the transcript that, in his experience in the last 20 years, he could not recall a condition of this type being applied on any designation application to inject, store or withdraw gas before this Board. 177 His conclusion was that he did not believe it was appropriate for the applicant to agree to such an undertaking. And Ms. McConnell specifically researched the issue of plugged -- old plugged wells over three existing DSAs, and confirmed that they did exist and had not been replugged, and there were no issues with these, notwithstanding the delta pressuring of these three reefs. 178 Furthermore, Dr. Walsh testified that these two wells, plugged in the 1950s, did not encounter gas in the reservoir and were not in communication with the reservoir, and he confirms that in volume 2, paragraphs 797 to 805. 179 Mr. Gorman confirmed this in answering the Undertaking 2.1, and his answer is in volume 3 of the transcript, paragraphs 36 to 51. Mr. Gorman said that there was no need to replug these wells. 180 I would also direct you to the grandfathering provision in CSA Z341.1, if it was determined that that, in today's day, could possibly apply to these wells. That excerpt from CSA Z341.1 is Exhibit 3.1, section 1.6, which essentially says that that CSA standard is not intended to apply retroactively to existing installations. 181 In regards to the order to drill an injection well, as one of its applications, the company has requested an order from the OEB to drill three injection wells. As pointed out by Mr. Vegh, what the applicant really seeks is a favorable report to the MNR under section 40 of the OEB Act, and that was confirmed on his cross-examination at volume 1 of the transcript, paragraphs 740 to 741. 182 I would refer you as well to Exhibit 1.9, which is the letter from the MNR to the OEB, referring the well-drilling applications under section 40. And I would submit that in that letter the one well application is in respect of the vertical leg of the injection well that we heard evidence on, and the other two well applications are in respect of the two lateral legs that the applicant proposes to drill if it's successful on these applications. It's somewhat confusing to say that there are three applications; I would submit that there is one well, which is the vertical well that Ms. McConnell described, and from that vertical well there will be two lateral -- or horizontal legs drilled out into the reservoir formations, as indicated by Dr. Walsh. 183 The applicants respectfully submit that there is a need for an injection well to be drilled into the reservoir; the existing wells will not suffice for injection purposes. In respect of the standards for drilling operations, Ms. McConnell confirmed that there are drilling standards in CSA Z341, as well as under the Oil, Gas and Salt Resources Act, its regulations and the provincial operating standards under that Act. 184 Ms. McConnell confirmed that the companies would not have any reservations about agreeing to comply with all of those standards and requirements as a condition for approval -- sorry, as a condition of approval for operating the wells, and that is in volume 2 of the transcript, paragraph 1152. 185 Ms. McConnell testified that the site for the injection well was chosen on Mr. McCulough's property, that is, lot 39, concession 9, for geological and geophysical reasons. Ms. McConnell stated: 186 "It was chosen so that we could core the caprock and it was also chosen to improve the 3-D seismic and also to give us a sufficient setback into the productive part of the reef for horizontal drilling." 187 That's at volume 2 of the transcript, paragraph 175. The companies submit that these are valid and justifiable reasons for choosing Mr. McCulough's property for the injection well site. 188 In respect of water issues, the Board has heard a considerable amount of evidence respecting the design of the injection well. The Board has also heard concerns from the TSLA about contamination of fresh water aquifers in the vicinity of the storage field. The applicants take the landowners' concerns seriously in respect of water quality issues, as Ms. McConnell advised the Board; see volume 2 of the transcript, paragraphs 393 to 428. 189 Ms. McConnell confirmed that the injection well has been appropriately designed in compliance with CSA standards. Ms. McConnell further explained how the cementing process is undertaken in order to protect the potable water zone. She indicated at paragraph 408 of volume 2 of the transcript that the company has four casing strings, three cemented to surface, protecting the potable water zone. 190 Under cross-examination in volume 3, paragraphs 724 to 726, and paragraph 732, Dr. Walsh assured the Board that there would be no contamination of the potable water zone. Even after delta pressuring, Ms. McConnell confirmed at paragraph 426 of volume 2 that there is no chance of contamination along this wellbore path. 191 Ms. McConnell also confirmed that the CSA requirement in the vicinity of the potable water zone is for one cemented string to surface. The well that is being drilled for injection purposes by the applicant has three cemented strings to surface, exceeding CSA standards. 192 Mr. Gorman and Ms. McConnell gave similar assurances to that given to the Board by Dr. Walsh in response to questions from Ms. Nowina, and those assurances are in volume 4 of the transcript, paragraphs 1033 to 1039. 193 So the evidence is clear, Mr. Chairman, and it remains uncontroverted that the injection well as designed will allow for no chance of contamination along the wellbore path which could cause water table contamination. No intervenor was able to produce any evidence to the contrary to prove that there is a risk to the water table being contaminated. And when I took Mr. Dutot through the evidence on this issue, he was not prepared to admit that the technical explanations given in any way addressed his concerns. I would submit that that statement is patently unreasonable in that some of his concerns, surely, had to have been addressed or allayed in regards to these explanations. 194 Notwithstanding the careful design of the wellbore and the extensive cement work which will be undertaken, the company has also agreed to monitor water quality in nearby water wells and to follow the recommendations in the Stantec Environmental report. 195 As previously indicated, the applicant has agreed, as an additional condition of approval, to obtain additional insurance coverages so as to have policies of insurance similar to other storage operators and to provide copies of any environmental or risk assessment studies required by its insurers in order to obtain such additional coverages, and that is at volume 4 of the transcript. Ms. Lowrie gave that answer to an undertaking at paragraph 51. 196 The companies hope that the measures they will take to protect the freshwater aquifers and to monitor the water quality thereafter will provide certain comfort and assurances to the members of the TSLA. 197 Asked by Board Staff counsel as to whether the companies would consider bringing the existing well plugs up to current CSA standards, the companies, as I have indicated, undertook to consider that request, and that reference is in volume 2 of the transcript, paragraph 830, and I have already addressed his answer to that in my previous submissions. Dr. Walsh added that, in his experience in the last 20 years, he could not recall any condition of this kind being applied to any designation application or applications to inject, store, and withdraw. 198 In regards to the range rate order requested, it is an important order which the applicants have requested, is the rate order for selling storage services. The applicants have requested the Board to set a range rate similar to the Union Gas C1 range rate approved by the Board. 199 At volume 2 of the transcript, paragraphs 489 to 490, Mr. Francis indicated why the applicants initially applied to the Board for forbearance from the setting of rates under section 29 of the Act and why that initial relief was abandoned and an amended application was filed requesting range rates. 200 Mr. Francis explained that the applicants had several discussions with Board Staff regarding rates. Staff had recommended that the applicants include and file for rates within the application. Staff apparently felt that the application was incomplete without a rates request and that it would assist in moving things along if rates were included. Mr. Francis indicated in his testimony that the C1 range rate that Union utilizes was discussed and it was agreed "that they would be appropriate for this storage application." And that's in volume 2 of the transcript, paragraph 494. 201 Dr. Walsh added at paragraph 516 of volume 2, and I quote: 202 "...when looking at a rate mechanism that needs to exist in order to encourage additional development of storage in the province, a rate similar to the mechanism that Union has in its C1 rate allows opportunity for the market to price storage and allows the developer of storage to understand what the value is for their storage as they develop it. And without that kind of mechanism, it makes it extremely difficult to promote the development of storage in this province." 203 Dr. Walsh went on to say at paragraph 517 of volume 2 of the transcript that he believed that the C1 range rate mechanism is just and reasonable and provides for further development of storage in the province. 204 In support of the companies' rate application, the companies produced Exhibit 2.5 entitled "Rate-making Methodologies". Mr. Francis explained to the Board the reasons why the historical cost-of-service/cost-allocation methodology rate design approach would not work for the applicants. Rather, the applicants proposed market-based methodologies are more realistic for the private storage company -- for a private storage company funded by investors taking risk. 205 The companies submit that there is no real practical alternative to the applicants but to request the C1 range rate which the companies' experts testified should attract customers and is just and reasonable. 206 Mr. Chairman, for the benefit of the Panel and in terms of completeness, volume 2 of the transcript also deals with the issue of rates from paragraphs 1153 to 1239. 207 It's noteworthy to point out that the Board may adopt any method or technique that it considers appropriate in approving a range rate, and that is set out in section 36(3) of the OEB Act and was, I believe, an amendment that came into effect in 1998. 208 To now turn to other aspects of the applicants' proposed storage pool and its operation, firstly, under the issue of insurance and responsibility, the company advised the Board at volume 3, paragraph 824, that it will carry environmental insurance as part of its general liability policy. Dr. Walsh confirmed at paragraph 939 of volume 3 that if the companies are at fault for anything that occurs as a result of their operations, they will be liable to replace whatever's been damaged to remediate the situation. 209 Ms. Lowrie testified: 210 "We have requested of our current insurers, AON Reed Stenhouse, who have our liability policy for the oil and gas operations, a policy to deal with storage operations. They tell us that they have other policies for other storage companies and we have requested a policy coverage similar to that, and that Mr. Fisher's currently evaluating that. Our intention is to have insurance consistent with other storage operators in the province." 211 And that reference is in volume 3 at paragraph 1015 of the transcripts. 212 I have already alluded to Ms. Lowrie's answer to Undertakings 3.6 and 3.7 also in connection with this issue of insurance, and I put on the record at the beginning of my submissions as a preliminary matter the applicants' position regarding an independent assessment under the undertaking at 3.2, I believe. 213 The Board can take comfort that the company will behave as any other storage operator in respect of its insurance coverage responsibilities. 214 Under the issue of financial capacity, understandably, when the Board considers approving a project such as this, the Board will want some comfort respecting the applicants' financial capability to fund the project. In order to assist the Board and give it confidence with its ongoing regulatory responsibilities, Ms. Lowrie responded to Undertaking F.3.4 at volume 4, paragraph 39, by stating: 215 "The applicant is prepared to annually file, on a confidential basis with the Board's Energy Returns Officer, the annual financial statements for Tribute Resources Inc. and Tipperary Gas Corp. The applicant is prepared to accept this as a condition of approval." 216 At volume 2 of the transcript, paragraph 568, counsel to the applicants asked Ms. Lowrie how the applicants intended to finance the completion of the project if the applicants were successful. In that exchange, Ms. Lowrie introduced Exhibits 2.6 and 2.7, which, as the Board knows, were letters confirming financial capability dated as recently as August 9th, 2004. 217 Ms. Lowrie confirmed that Mr. Crich had been a partner since 1989, possesses the necessary financial capability to undertake project funding, and has always followed through with what he has committed to do in the past. 218 The applicants note that no ratepayer funding has been requested, unlike the traditional utility model. The private funders of the project will continue to take all the risk. 219 My previous submissions on the limited partnership structure are applicable in detailing how additional capital will be raised by issuing more limited partnership units, effectively an equity contribution, not a debt contribution. 220 In regards to the issue of the applicants' expertise to own and develop and operate the proposed DSA, Mr. Fisher confirmed at transcript paragraphs 588 to 612 of volume 2 that: 221 "There are resources and expertise in place to complete the operations side of the project. The financial resources are in place. It's a proven technology. And it's just a question of completing the contractual arrangements and we'll have an operational asset." 222 Mr. Fisher further undertook, and this is Undertaking F.3.1, to complete and file with the Board operating and maintenance guidelines and an emergency response plan before the commencement of injection. 223 On the issue of Union's delivery system, Mr. Fisher further states that Union's gas delivery system will be able to accommodate the tie-in of the storage project. Mr. Fisher expressed confidence that the M16 contract with Union, based on firm parameters, will allow the companies to sell their storage at Dawn on a firm basis, which is very important to the contractual and commercial arrangements to be entered into by the applicants. 224 And he indicates that in volume 2 of the transcript, paragraphs 607 and 608. 225 In regards to the contractual arrangements with Union, Mr. Fisher, at paragraph 607, pointed out that in order to capture full value for these assets, the project manager is going to need to enter into firm contractual arrangements to provide services on a firm basis for supply and redelivery of gas. 226 Again, at paragraph 608, Mr. Fisher confirmed: 227 "Underpinning those firm obligations, you must have firm injection and withdrawal supply capabilities to back them up. To enter into such an arrangement on an interruptible basis is done by people in the industry, and I have seen people suffer extreme consequences for so doing. It's unwise; it's foolish." 228 Mr. Francis confirmed that the applicants have an M16 contract with Union and also a hub-balancing agreement. That's in volume 2, paragraphs 595 and 596. 229 The applicants have taken all of Union's firm capacity in the area and all of Union's interruptible capacity, and that's set out in volume 2, paragraphs 597 to 600. 230 The company is satisfied that its contractual arrangements with Union Gas will allow it to bring the project to fruition. However, the applicants are aware that the M16 rate is currently under review and the rate may be amended. The applicants are prepared to participate in that review and live with the results of it, whatever they may be. The expected charges to the applicant by Union under the M16 contract are set out in Exhibit 2.8 and were detailed by Mr. Francis. Again, in regards to the draft Board conditions of approval, I have mentioned those at the outset of my introductory remarks. The companies are prepared to abide by the Board's draft conditions of approval in Exhibits 2.9 and 2.10, with the slight change that I noted at the commencement of my submissions to clause 1.6 by adding the words "until the problem is rectified." That's clause 1.6 of Exhibit 2.9. Ms. Lowrie indicated that in volume 2 of the transcript, paragraphs 714 to 724. 231 I would also emphasize that, similar to the CanEnerco application where certain draft conditions of approval were attached, the applicants in this proceeding intend to keep the Board informed as the project is developed and then thereafter, as the project is operated, as to the status of meeting the draft conditions. 232 In regards to the Affiliate Relationship Code, Ms. Lowrie agreed with Mr. Vegh that the companies would be seeking an exemption from the Affiliate Relationships Code for gas utilities, which includes storage companies, and she indicated that in volume 2 of paragraph 1240. 233 Notwithstanding that the outcome of that application is not before the Board at this time, Ms. Lowrie confirmed that the companies were prepared to proceed in the absence of that exemption at this time. She takes comfort in the recent decision in the NRG case regarding exemptions from that code, which decision I believe was rendered by this Board on or about August the 4th of this year. 234 On another note, regarding the companies' commitments to continuously improving field conditions, I would submit that it is noteworthy that Ms. Lowrie has purchased oil and gas fields in Ontario that are in need of clean-up and repair, and has strived to plug wells and rectify problems over time. The experience that she related in regards to the Lagasco properties are an example of such efforts made by her, and that experience was related at volume 3, paragraphs 1500 to 1514. 235 In regards to the Tipperary pools, the applicant has undertaken to decommission the production facilities from the Feddes and McCulough lands if these applications are successful and to restore these lands to the same condition so far as practicable as existing before the use of the same by the applicants pursuant to the P&NG leases, and that undertaking was given in volume 2 of the transcript, paragraphs 360 to 361. 236 Mr. Feddes admitted that the applicants have cleaned up his son's lands during the last three months, and that's set out in volume 5, paragraph 621 to 626, and I would submit that the applicants' pictures somewhat confirm efforts to clean up the production facilities in anticipation of storage. Even Mr. Dutot acknowledged that the major spill at the Feddes property was caused by the applicants' predecessors before 1998 and he did acknowledge that in volume 4 of the transcript, paragraph 1400 and in volume 5 at paragraph 453. 237 In any event, Mr. Feddes confirmed that a class 4 examiner's certificate under section 5.16 of the operating standards under the Oil, Gas and Salt Resources Act would satisfy him regarding his son's property after decommissioning, and he indicated that in response to Mr. Vegh's cross-examination at volume 5 of the transcript, paragraphs 461 to 466. I was somewhat confused by his answer to his counsel's questioning in that line in re-examination, and taking his evidence in its totality, he agreed on the one hand that the class 4 examiner's certification of clean-up under the operating standards would be sufficient, and then on the other hand, he seemed to be alluding to some certificate under the Environmental Protection Act, the particulars of which we are not sure would be given or could be given. 238 So I would submit that on that point the Oil, Gas and Salt Resources Act and paragraph 5.16 of the standards should be a sufficient protection for Mr. Feddes, and there is a condition of approval requiring compliance with that legislation. 239 In conclusion, I would ask that the Board grant the orders requested, that the Board's orders in this matter be issued prior to September the 1st, and that reasons for decision perhaps follow at a later date. There have been no intervenors asked that these applications be denied, and I thank you for listening to my submissions. Those are my submissions. Thank you. 240 MR. BETTS: Thank you very much. 241 MR. SOMMERVILLE: A couple of points, Mr. Lewis. 242 The question of compensation, is it your view that compensation for residual gas is on the same footing, from a statutory point of view, as compensation with respect to gas and oil rights? I am looking at section 38(2), and it occurs to me that the legislation refers to making the owners -- and I am paraphrasing to some extent -- making the owners of any gas or oil rights or of any right to store gas in the area just and equitable compensation in respect of the gas or oil rights. It doesn't refer specifically to commodity. Is that a distinction that we should exercise ourselves about? 243 MR. LEWIS: I would submit that the Board, under section 38(2)(a) has the right to make an order as to residual gas under the phrase "gas or oil rights." 244 MR. SOMMERVILLE: Okay. Because I understand that the residual payment or the residual gas payment is related to commodity itself, not any right related to the gas and oil underground. That is not a distinction that interests you? 245 MR. LEWIS: Just as the P&NG lease grants to the lessee the right to enter the property and extract oil and gas, as a practical matter the extraction of gas can only take place to a certain pressure, operating pressure. So effectively, I would submit the P&NG lease rights are spent once the field is produced down to a certain pressure, but there remains as a residual -- as residual gas certain gas that cannot be extracted from the reservoir by the lessee under the P&NG lease. 246 I would submit that that gas, that residual gas remains the property of the landowner and is a right in respect of gas that effectively needs to be expropriated by the applicants in connection with these proceedings. I would submit that the oil and gas lease is effectively spent because, as I have indicated, it's impossible for the applicants to withdraw that residual gas. But compensation has to be made to the landowner for that property, and that property, to me, is a right. 247 The gas storage leases specifically contemplate that that will be compensated -- that there will be compensation made by the applicants to the landowners for that residual gas. The mechanism is set out in paragraphs 16 to 19 of those gas storage leases. I would submit that an offer has been made, it's been rejected, and that within the meaning of those leases, and under section 38(2)(a), this Board has jurisdiction to effectively determine that compensation for that gas which effectively is going to be expropriated by the applicants and for which the landowners must receive compensation. 248 I don't know if I've confused the issue, and maybe the distinction you're making I'm missing, but I would submit that, under the language "any gas or oil rights" could and should be interpreted as being the property right of the landowner to the residual gas. 249 MR. SOMMERVILLE: Okay, thank you. 250 The question on spacing requirements and the boundary issue that is raised by the Ministry of Natural Resources, I'm not clear why the regulation, 245/97, doesn't create a mandatory -- as we progress in the designation of this area, why that regulation doesn't create a mandatory requirement for a whole tract-spacing methodology. Could you explain that to me. I'm looking, for example, at paragraph 8 of that regulation. 251 MR. LEWIS: There is spacing in place under section 8 of the regulation, and the evidence is clear that that spacing will remain in place whether this designation proceeds or not. 252 The practical effect of bisecting the spacing unit is that anyone wishing to drill to the north of the designated storage area will require a pooling of the spacing unit, which is bisected by the unit boundary, because there's another -- there are other requirements in section 8 that no one can drill a well effectively without having the spacing unit pooled. 253 In practical terms, there has never been any drilling in the north boundary for many, many years, since the date that the existing spacing came into place. It is fully within the Ministry's power to amend the spacing, as they do from time to time. And if you examine section 8(4) of the regulations, and I took Mr. Manocha to this, on a unitization, which could be a compulsory unitization ordered by the Mining and Lands Commissioner, the Ministry, effectively when the unitization is completed, will revise the spacing to conform with whatever the unit is determined to be. 254 Again, that whole -- so that, I would submit, shows flexibility in this notion of spacing; in other words, the spacing units should and will be supplanted by a unitization order, and the purpose of unitization, of course, would be to produce oil and gas leases as a unit so that rights aren't lost over time. 255 That's a production phase. We're not there. This application has little or nothing to do with unitization. We are into a storage phase. Production has been completed. 256 So I don't know if I have answered your question, but I would submit that the regulations and the Act itself, and in particular section 7.1, are flexible enough that the Minister can and does amend and change spacing as contingencies arise, as things arise. And on this point, I would simply say that the Ministry's recommendation isn't or hasn't been properly, in evidence, supported, and you are not, I would submit, constrained by this legislation and section 8 of the regulations. 257 The spacing can remain as it is, bisected. If someone wanted to drill on one of the spacing units to the north of the DSA, they could come to the applicant and ask to pool the spacing unit so that a well could be located to the north. And if the applicant did not consent to that, then, under the legislation, that pooling could be forced by the Mining and Lands Commissioner by way of a compulsory pooling of that spacing unit. 258 So the Ministry has two courses of action: They can leave the spacing as it is, bisected, notwithstanding their objections to that and anyone to the north still can proceed to drill, or the Ministry can simply change the spacing configuration to the north and perhaps lay down, as we say, those units so that they are not bisected by the DSA. 259 I don't know whether I've made it any clearer or... 260 MR. SOMMERVILLE: I think you suggested in your submissions that the spacing provided for in the designated area as it's proposed is grandfathered; I think that's the language that you use. Is there a specific provision that you look to to provide that, or are you simply saying that the Minister can -- if the Minister is unhappy with the spacing that is imposed, that the Minister has the right to change it? 261 MR. LEWIS: It's the latter. There is no specific grandfathering provision in this Act and these regulations when it was rewritten in '97, and I would submit that any flexibility could and would be exercised by the MNR through an amendment -- through their amending powers under section 7.1. 262 MR. SOMMERVILLE: Thank you. 263 MR. BETTS: Ms. Nowina. 264 MS. NOWINA: Mr. Lewis, I have got just a couple of clarification questions on insurance. 265 So you stated that the applicant was going to ask their insurer, AON Reed Stenhouse, to look into storage operations, other storage operations to see what their level and type of insurance was, I assume, and that the applicant was willing to make their insurance comparable to those. 266 The storage companies that the insurer will look at, those include storage companies beyond those that are customers of the insurer? 267 MR. LEWIS: My understanding from the evidence is that it would be insurance companies that are customers of AON Reed Stenhouse. That was, I believe, Ms. Lowrie's evidence on the point. I don't know how AON Reed Stenhouse could or would have access to insurance particulars for storage companies that are not their customers. 268 MS. NOWINA: Okay. Thank you for the clarification. 269 One further question. Would that include looking at both general and environmental insurance? 270 MR. LEWIS: Based upon the evidence, I would submit that AON Reed Stenhouse would look at any and all coverages that other storage operators have, including environmental coverages outside of the general liability section of the policy, and would then come back with recommendations and suggestions on the types of insurance, including environmental, that other storage operators have. And the applicant has committed to effect coverages similar to those other storage operators. 271 That was the undertaking that was given by Ms. Lowrie, and I would expect that there may be issues of deductibility and limitations, et cetera, and I think the notion is that the applicant is prepared to abide by industry standards on this issue of insurance, and if that includes environmental coverages, then they have said they would be on for that. 272 MS. NOWINA: Thank you. 273 MR. BETTS: I have two or three questions as well. 274 First of all, I have heard several times a reference to the applicants' hope or desire to have a decision by September 1st, let's say. And I would like to understand the implications of that. Does that suggest that if a decision is not available by September 1st, that there is no rush until next year? Do the wheels come off at that point? 275 MR. LEWIS: I am told no, the wheels don't come off. I think it just puts the applicant in a very difficult position with respect to contracting for and planning the installation of a pipeline, the ordering of the compressor, the improvement -- I mean, I know the township have an interest in seeing this go through so as to hopefully pave and improve the municipal road running through the area before the bad weather sets in. 276 So I don't believe the wheels will completely fall off, but it may somewhat delay the entire productions -- the entire project timetable that I handed up and push it into the spring for certain construction items like the pipeline, et cetera. 277 MR. BETTS: So if it takes a week longer, it basically delays the schedule by a week, it takes two weeks longer, it delays the schedule by two weeks? Or is it more complicated? 278 MR. LEWIS: I can't see a week or two making a huge difference here, but as it slips into -- as weeks slip into months, then I can see the whole timing slipping from the fall into the next spring because there will be a point in time when forces and resources can't be organized for construction prior to the bad weather. 279 I don't think it is a science in terms of determining when the drop-dead date is, but we would certainly like to see it, if it is going to be delayed beyond September 1, we would like to see it as weeks, not months. 280 MR. BETTS: Thank you. And I don't know that I have heard this provided anywhere, but what is the impact to the applicant of requiring the northern boundary to be changed? How does that impact in real terms the applicant? 281 I asked Mr. Manocha what were the real implications of not changing it, and I'll ask the applicant what are the real implications of changing it? Does it cause delays, added expense? What are the issues? 282 MR. LEWIS: Well, I suppose on the issue of compensation, it creates somewhat of a problem, because we now have Ms. Guindon, who does not have a gas storage lease on her property, who is not represented by the TSLA and is not part of the TSLA, now having to become part of the compensation issue, and so because she is not represented by the TSLA and because she hasn't been part of the storage offers and the representations by Mr. Jordan, that if we can't get this negotiated, then the Board will be determining this under the terms of your lease. We've now got a landowner who presumably we would have to go back and re-serve the application on her and get her brought up to speed as to the compensation issue, because she does not have a lease on part of her lands, a gas storage lease. 283 So I see that as being problematic. And I also see, I mean, based on her unwillingness to sign a consent to be included, I interpret that as her not being in favour of being included. So we would be including somebody in the unit who really doesn't want to be part of the unit. 284 I suppose, apart from those two items, if we bump the boundary up to the north, we do have the other landowners in the unit, again, and I can't tell off the top of my head, but I know some of those landowners have lands within the DSA so have been part of the compensation negotiations. I cannot sit here and tell you whether the same problem that I see with Mrs. Guindon, i.e., that they're not represented by the TSLA, they haven't been part of the compensation negotiations to date, I can't tell you whether that might pertain to Postill, the other Feddes and I think it is Steenstra. I believe at least two of those landowners do have lands within the DSA, so it might not be an issue. 285 So apart from what I have just said, it would certainly make the compensation issue more unwieldy, but aside from that, bumping the boundary to the north, these people have outside acreage and it wouldn't be a huge event to the applicants, although we don't prefer to go there and, again, I would submit because the MNR who have made this recommendation weren't able, I would submit, to clearly articulate why we should go that way, I think the compensation problems, which Mr. Manocha acknowledged he wasn't really able to speak to with any knowledge or precision, those issues outweigh the need to, I would submit, appease the MNR or follow their recommendation because of their legislation. They have full and complete powers to change that, and even if it is not changed, that is not the end of the world. Someone can still drill to the north, provided they come to us and pool the acreage. And there is the restriction of performing any operations within 1.6 kilometers of the DSA if those operations were likely to undermine or cause problems with the DSA. There is that restriction in the legislation as well. 286 So I don't know if I have answered your question clearly enough, but -- 287 MR. BETTS: Yes, you have, thank you. 288 My last question relates again to insurance. I've heard evidence here that this particular area, if not unique, certainly has some characteristics associated with the agriculture that sets the requirement to protect the water source as particularly high and it may be higher than many of those other storage arrangements that your insurer may be reviewing. 289 It seems to me that when one is considering the risks in operating the storage facility you are talking about, as your insurer is supposedly doing for you, one has to consider the specific risks associated with the area of that operation, and comparison is not necessarily the best way to do that. 290 Can you tell me or give me some assurances or for the record identify how your client would deal with this specific issue of water source requirements for the businesses that exist above the surface of your storage area, and particularly how the insurance company will address those specific concerns? 291 MR. LEWIS: And you are referring to in the event that there is, in fact, a casualty that pertains to the water table? 292 MR. BETTS: That's correct. 293 MR. LEWIS: Again, there is two things I would like to say on this. 294 We heard a lot about the concerns of water table contamination occurring, and when the landowners raised this issue, and I believe it was in Mr. Dutot's words, the word "Walkerton" came up. Well, we all know how Walkerton occurred; that was pollution from above that was essentially, as I understand it, an agricultural mishap causing pollution of the water table from above. 295 There is no evidence, I would submit, on the record to suggest that this structure underneath could somehow be undermined and cause pollution to the water table. We have copious evidence to the contrary from all the technical experts of the applicant saying it will not occur, very, very firm assurances it will not occur. 296 So I would submit, before we even get to the question of water contamination and insurance and methods of protection, we have to assess here the risk of it occurring. And any insurance company or independent insurance evaluator would have to perform that assessment and, I would submit, couldn't perform that assessment without the type of technical evidence that we've had the benefit of hearing at this hearing. 297 And so I would say, on the issue of a problem occurring, if it's one in ten-thousand, then you have to ask yourself -- we have to ask ourselves, to what extent and to what expenses are we prepared to put the applicant to to protect against this highly, highly unlikely occurrence occurring? 298 I would submit that we've heard a lot of evidence where we've simply jumped beyond that initial question of "How likely is it to occur?" to "It could occur, so what are all the things we can do?" 299 In any event, there are still, obviously, concerns, and in terms of what would we do for alternate supplies if this one in ten-thousandth, or whatever the odds would be if this event occurred, I must say to you I haven't got into the details of this with my client. I can only contemplate, based on the evidence, that we'd have to be trucking in water from sources that can supply it, and it sounds like Goderich, from Mr. Chinneck's evidence, Goderich and another close municipality wouldn't be the sources. It may have to come from London's water supply. 300 Again, we're jumping to the conclusion that it could occur, and everyone has been dwelling on the issue of prevention through insurance and otherwise, and I would submit that the threshold issue is, based on the technical evidence, what is the likelihood of it occurring? We have seen storage facilities in Ontario operate for years. There's never been an environmental mishap contaminating a water table from any storage reservoir. And I would submit that there's no reason to believe that this will be any different. 301 MR. BETTS: And I guess I have to ask you to think of that again, after I make this point. If the risk is so minimal, the cost of the insurance should be negligible. If the cost of the insurance is more than negligible, then your insurer would have evaluated the risk to be higher than minimal. It's simply a matter of the risk and cost analysis that your insurer has to do. But, first of all, one must give the insurer direction that it is important to the applicant to protect the water resources in the area. Knowing that, your insurer, I am sure, will evaluate all of the points you've made about the relative risks; and if they agree with you that there is no risk, then there will be no premium. 302 So it's not a difficult answer to reach, assuming your insurers agree that there is no risk. 303 MR. LEWIS: And it's hoped, in the undertaking that Ms. Lowrie did give, that AON Reed Stenhouse, who, according to her evidence, do have storage operators as customers, are familiar with these types of issues and should be able to evaluate the risk and attach the appropriate premium for protection. 304 And as I answered Ms. Nowina's question, I would assume that the other storage operators do have environmental insurance. I would hazard to guess that the premiums should be relatively minor in the big scheme of things because of the evaluation of this risk, and frankly, I don't know how they will undertake to do it without seeing evidence similar to what the Board has seen here from geotechnical and geological experts who would be able to form certain opinions that would help them evaluate that risk. 305 MR. BETTS: Very well. Thank you very much. 306 That concludes the Panel's questions. Thank you very much for your submissions. 307 And we are on schedule for tomorrow morning, that we will begin with submissions from Board Staff counsel, followed by submissions from intervenors, and then we will try to allow Mr. Lewis a little bit of time after that to prepare his reply arguments. 308 So thank you, once again. We are scheduled to begin at 9:00 a.m. tomorrow morning in this room, so unless there is anything else, we will see you all again tomorrow morning at 9:00 a.m. 309 MR. LEWIS: Thank you, Mr. Chairman. 310 --- Whereupon the hearing adjourned at 11:13 a.m.