MR. MIKE HALLAS AND I & J GAS CO-OP LTD. APPLICATION FOR AN ORDER TO PROVIDE SERVICE. Ms. Jeneane Grundberg Brownlee Fryett Ms. Janet Osadczuk Manager

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1 ALBERTA ENERGY AND UTILITIES BOARD Edmonton, Alberta MR. MIKE HALLAS AND I & J GAS CO-OP LTD. APPLICATION FOR AN ORDER TO PROVIDE SERVICE Decision U96117 File 8057-I INTRODUCTION By letter dated 5 September 1996, Mr. Mike Hallas filed an application (the Application) with the Alberta Energy and Utilities Board (the Board) requesting that the Board order I & J Gas Coop Ltd. (the Co-op) to provide natural gas service to his home and farm. The Board proceeded with due haste to schedule a public hearing. Notice of the Hearing was personally served on all interested parties. The hearing of the Application was held in the Medicine Hat Courthouse on 21 October 1996 and no objections were received with respect to notice which was deemed adequate by the Board. The Board Members assigned to hear the Application were A. Calista Barfett and Gordon J. Miller and Acting Board Member, H. Jainarine. THOSE WHO APPEARED AT THE HEARING Principals and Representatives Mr. and Mrs. Mike Hallas I & J Gas Co-op Ltd. Ms. Jeneane Grundberg Brownlee Fryett Witnesses Mr. and Mrs. Mike Hallas Mr. Murray Knutson Chairman Ms. Janet Osadczuk Manager Mr. Jim Osadczuk Serviceman Alberta Energy and Utilities Board Staff Ms. J. Didier

2 2 Decision U96117 A similar complaint filed by Mr. Dennis Bjelland was heard the same day. While separate records were maintained for the two proceedings, it was agreed that relevant material from the Bjelland proceeding could be incorporated into the record for the Hallas application. At the time of the hearing, Mr. Hallas had no supply of natural gas or natural gas service. Given the weather and temperature constraints and the urgency of the application, the Board proceeded to issue Order U96091 on 30 October 1996, with full written reasons to follow. Order U96091 directed the Co-op to proceed forthwith to provide natural gas service to Mr. Hallas in accordance with the terms and conditions set out by the Board. This Decision sets out the Board=s reasons respecting its decision on Mr. Hallas= application. 2. BACKGROUND Mr. Hallas received gas service from Murphy Oil Company Ltd. (Murphy Oil) through a 25 year contract entered into in This service was by means of a Αfarm tap arrangement, whereby Mr. Hallas was provided with untreated pipeline natural gas for his domestic use. This agreement expired on 18 May By letter dated 10 November 1994, Murphy Oil advised Mr. Hallas it would not be supplying any gas beyond the expiration of the contract. Murphy Oil further advised that I & J Gas Co-op Ltd. was the local gas supplier in the area and would be able to meet Mr. Hallas= natural gas needs. Five other customers in the area being served by Murphy Oil also had contracts for provision of natural gas which expired on 18 May The Co-op's serviceman contacted Mr. Hallas in April of The Hallas' were advised that they would be charged the Co-op's standard connection charge of $4,500. They were also advised that the Co-op would not be using any of the existing lines that had been installed to serve the farm tap customers. In late April the Board of directors called an informational meeting for the farm tap customers. The Hallas' were not able to attend this meeting. The Hallas' later became aware that the Co-op was considering allowing one of the farm tap customers (the Liboiron family) to purchase only one contract, although there would be two connections to serve two separate residences. This would be accomplished by making use of an existing gas line between the two homes. When the Hallas' asked if they could also share a line with a neighbor, this request was refused by the Co-op. On 21 June 1996 the Co-op contacted Mr. Hallas to discuss the placement of the line and to obtain his signature on the Co-op's standard contract and easements. Mr. Hallas objected to being required to sign the Co-op's standard blanket easement. Although Mr. Hallas was willing to sign an open easement for his leased land, he objected to being required to sign an open

3 Decision U easement for his deeded land. The Hallas' also voiced an objection to the Co-op's decision at that time to allow the Liboiron family to purchase only one contract for the two services. The last objection raised by Mr. Hallas at this time related to the $4,500 charge for service. This charge had been increased in 1994 from $2,600 to $4,500. The Hallas' were concerned that the Co-op had increased this charge in anticipation of the new hook-ups which would occur upon the expiration of the farm tap customers= contracts with Murphy Oil. The Hallas' stated that they would not join the Co-op unless these concerns were addressed by the Co-op. At this point the proposed routes of the service lines for the farm tap customers were surveyed and staked but the Co-op could not proceed on the basis of the proposed routes without the signed easements for the lands in which the service lines would be installed, including the easement for Mr. Hallas' deeded land. Therefore the Chairman and Office Manager of the Co-op delivered a letter to Mr. Hallas on 24 June 1996 advising him that he would have to provide a signed contract and easements to the Co-op by 28 June 1996 in order to be included in the Coop's 1996 construction program. The Hallas' again questioned whether the Liboiron family would be required to pay for a contract for each residence which would be serviced by the Co-op as the other customers were being required to do. The Chairman said he would discuss this with the other Directors but did not address this matter further with the Hallas= until August Since the Hallas' did not receive a response to their concerns they did not return the signed contract and easements by the deadline of 28 June The Co-op decided to change the route of the lines in order to serve the other farm tap customers since it did not have an easement from Mr. Hallas. On 5 August 1996, Mr. Hallas contacted the Co-op and requested gas service. Later that day the Chairman of the Co-op advised Mr. Hallas that the Liboiron family was being required to sign two contracts. The Hallas' now wished to join the Co-op and accordingly Mr. Hallas signed the contract and the easement, relating only to his leased land. On 6 August 1996, Mr. Hallas returned these documents to the Chairman. The Hallas' were then advised that the equipment used to install service was no longer in the area so the Co-op would not be able to provide service. The Hallas' did have further discussions with the Co-op's Chairman and a meeting was held with the Co-op's Directors. However, the Co-op was not willing to provide service in The Hallas' then asked if the Co-op could provide service on a temporary basis so that they would have service over the winter, by installing a 200 foot line from the Co-op's line to one of

4 4 Decision U96117 their existing lines. The Hallas' were willing to pay the costs for this line. The Co-op was not willing to do this. Mr. Hallas subsequently submitted his application to the Board by letter dated 5 September The Applicant's Position The Hallas' asserted that they have not been treated in the same manner as all other customers. The Hallas' pointed out that the Co-op was considering allowing the Liboiron family to buy only one contract for two separate homes, but was not willing to consider allowing them to have the same arrangement with their neighbor. The Hallas' also stated that they had heard that the Co-op bought the Liboiron existing line, even though the Co-op had advised that it would not be using any of the existing lines. However the Co-op has not been willing to purchase any of the Hallas' existing lines. We then asked if they would buy our existing line, he said they would not be buying any existing lines, everyone would be treated equally, we would all have to pay $ The board of directors called a meeting with the potential customers, (which we were unable to attend,) and changed their minds. At the meeting they decided they would allow the Liborion familys to purchase only one contract between the two of them, even though their farms are 2 mile apart,and on separate quarters. When we heard this we asked if we could do the samewith Brian Wick, we=re only 2 mile apart, and we have a line going right down to his house. Jim Osadczuk said no. Obviously, not everyone was being treated equal,. We had a discussion with Murray Knutson, Chairman, he said he wasn=t in favour of this, and that he hadn=t voted for it. He said he would talk to the rest of the board members and see if it could be changed. When he and Janet Osadczuk delivered the contract and easement to us on June 24,1996 we asked again if everyone would be treated equal, Murray said he didn=t know yet. When Murray didn=t return our calls to him by the 27th, we didn=t meet their deadline by 4:30 June 28. Murray Knutson finally called us back on August 5th, and said the Liboirons would have to buy 2 contracts. He said he had all the board behind him except one that was on holidays. We signed the contract that night, and delivered it to his farm before 10:00 am the next morning, while the contractor was still in the area, (Exhibit 3, pp.1-2)

5 Decision U Mr. Hallas stated at the hearing that he did not want to sign the blanket easement for his deeded land because that land is the most promising for the possibility of a gas well. Mr. Hallas noted that gas wells are quite common in the area. A pipeline running through the land would prohibit such future development. Mr. Hallas' noted that he was always willing to sign the easement for his leased land.... but I would prefer them to go on the leased land because there will never be any construction there, as far as I am concerned. I wouldn=t construct anything on the leased land. But where they are going through, the land is level; it could be some construction there at some point in time, that=s one of the reasons. And the oil companies being able to drill a well in that location. Because there is no gas well on that quarter, it=s likely that they will. (Transcript p.32) Further, the Hallas= pointed out that lines have previously been installed on leased land to provide service to other Co-op customers. It doesn=t make any difference to them if they put it on the leased land or the deeded land. They put a mile and-a-half on leased land already. They said that there would be unnecessary paperwork dealing with a third party. But they have already done that with Don Osadczuk to run the line on his land. (Transcript p.33) The Hallas= also raised questions about the procedures followed by the Co-op in installing the line in the road allowance. No adequate replies were received from the Co-op on this issue. We lease this road allowance, and without contacting us, they proceeded to put it down the road allowance. We saw the survey stakes on the road allowance and phoned Murray Knutson. He said he would find out what was going on. He never called us back. We were informed they were given a permit after the fact to go down that road allowance, but if the M.D of Cypress ever had to do construction the I & J Co-op would have to remove it at their own expense. When we questioned Jim Osadczuk about why he went down the road allowance without first getting a permit, he said. he could pretty well do anything he wanted to, the board couldn=t fire him because no one else would want the job. (Exhibit 3, p.2) With respect to the Co-op's claim that the Hallas' did not deliver their contract on 6 August 1996 with any offer for payment of the contract price, the Hallas' have stated this was because there

6 6 Decision U96117 was no discussion or request for payment at that time. In fact it was indicated at the hearing that the Co-op has been willing to accept payment of the contract price at terms which are the most convenient to the customer. There was no discussion or request for payment. Would it have made any difference if we had paid the price in full? Would they have given us gas? We think not. This was all a ruse. We phoned Brian Wick on Oct 19th, he said he hasn=t been asked for any money yet, there had been no discussion at all about payment. (Exhibit 5, p.2) The Hallas' stated that they did not sign the necessary documents before the Co-op's deadline because the Co-op had not addressed any of their concerns. The Hallas' also considered the four days between the time the contract was delivered and the deadline for signature not to be sufficient nor reasonable. We had certain concerns that were never addressed and handled before -- that we felt comfortable with signing the contract. Our desires weren't met in the short time they gave us to sign the contract. They should have kept our gas on until August the 31st if everyone else was being -- if everybody was being treated equally. (Transcript p.139) The Hallas' stated that they were being arbitrarily denied service by the Co-op. We have been refused gas for no apparent reason, and we haven=t been told yet that we are undesirable. (Transcript p.138) Mr. Hallas pointed out that he was without a supply of natural gas at this time. Accordingly, he requested the Board to order the Co-op to provide service immediately so that he would have natural gas over the winter. The Co-op's Position The Co-op indicated that it has been more than fair in dealing with the Hallas' and their request for gas supply.

7 Decision U The Co-op originally expected that it would be installing all new lines to serve the farm tap customers. It had been the Co-ops understanding that the Murphy lines did not meet Code requirements. The Co-op only considered using the Liboiron line after 28 June 1996 when construction was taking place. At that time the Co-op determined that the Liboiron line was a newer line that did in fact meet Code requirements. Furthermore the serviceman stated at the hearing that due to the extra costs incurred in rerouting the line, the Co-op was attempting to save money elsewhere in the project. Consequently the Co-op bought the line from the Liboiron=s at a price of $4,545, which was computed by the Co-op=s serviceman based on the distance involved, the cost to put the line in and the kind of pipe involved. This amount of $4,545 was then applied as a credit toward their contract costs of $9,000. The Co-op noted that when Mr. Hallas returned his contract and easement on 6 August 1996, the contract was signed but not witnessed. The Co-op also pointed out that Mr. Hallas did not make any offer for payment of the contract price. In addition, the easement was changed so that he was only providing an easement for his leased land rather than the deeded land as required by the Co-op. The Co-op maintains that Mr. Hallas should provide a standard easement for service so that if the line is required to be moved from the road allowance at some point in the future, the Co-op will have the necessary easements in place. Furthermore the Co-op researched the availability of contractors and found that there were none available in It was, therefore, the Co-op's position that it could not provide service before the spring of The Co-op indicated that it is willing to provide service to Mr. Hallas in 1997 provided that it is able to obtain the services of a suitable contractor, that Mr. Hallas is willing to execute the service contract and standard easements for his deeded land, that Mr. Hallas is willing to pay the contract price of $4,500, that no damages are paid and that the Co-op will receive grants equal to or better than if the construction had taken place in The Co-op further advised that it considers that should there be any additional costs due to a change in the grant structure or if the contractor charges a lump sum to bring their equipment into the area, the Hallas' should be responsible for these additional costs. The Co-op asserted that these expectations are reasonable. While the Co-op contended that it would be fair to have Mr. Hallas pay the incremental costs of the rerouting of the line, as the other members of the Co-op should not be responsible for these costs, the Co-op stated that it was not taking this position. It was further argued that in all fairness the Co-op could refuse to provide service to Mr. Hallas since he did not meet the Co-op's deadline. The Co-op pointed out that the Board's decision will have an impact on all Co-ops and potential customers. Therefore the Co-op requested that the Board support the Co-op in the following four matters:

8 8 Decision U The Co-op can set deadlines that must be met by potential customers. 2. The Co-op can continue its standard practice of requiring easements on private land so that the Co-op does not have to pursue easements through third parties. 3. The Co-op can continue to pay damages in the manner outlined in the standard Co-op agreement. 4. The Co-op has the jurisdiction to set its own construction price without the Board altering that price. 3. BOARD FINDINGS AND CONCLUSIONS The Board's jurisdiction respecting natural gas co-ops is contained in section 33 of the Rural Gas Act, S.A c. R This section provides, in part, as follows: (3) Where a person (a) (b) is not being provided with gas service by a rural gas co-operative association or municipal gas utility operating a rural gas utility, and wishes to receive gas service from that rural gas co-operative association or municipal gas utility, that person may make a complaint to the Public Utilities Board respecting the lack of gas service. (4) On hearing a complaint made under subsection (3), the Public Utilities Board may, by order, require a rural gas cooperative association or municipal gas utility to supply and deliver gas to the person, for the purpose, at the rate, prices and charges, and on the terms and conditions that the Board from time to time directs, fixes and imposes. (5) An application or complaint made under this section must (a) be in writing,

9 Decision U (b) (c) be sent by registered mail to the chairman of the Public Utilities Board and the chief officer, and set out the grounds for the appeal. (6) In conducting a hearing of an application or a complaint made under this section, the Public Utilities Board (a) (b) shall give prior notice of the hearing to the persons who are the interested parties to the matter, and shall give the interested parties an opportunity to be heard at the hearing. The Board considers that Mr. Hallas= application satisfies section 33(3), as he has formally requested that the Co-op provide him with natural gas service. Furthermore, the complaint filed by Mr. Hallas met all the conditions specified in section 33(5). The Board must then determine whether there was a reasonable basis for the Co-op to deny service. The Board notes that the Co-op has received a franchise area approval from the Chief Officer of the Department of Transportation and Utilities. Mr. Hallas= property is located within this franchise area. Section 17 of the Rural Gas Act delineates the rights and obligations conferred upon a distributor holding a franchise area approval. This section provides in part as follows: (1) A distributor holding a franchise area approval has both the exclusive right and the duty to offer and provide gas service to all potential consumers within the distributor=s franchise area. (2) Notwithstanding subsection (1), a distributor does not have the exclusive right to provide gas service to the following consumers: (a) a consumer using gas as a feedstock;

10 10 Decision U96117 (b) (c) (d) (e) a consumer who holds the royalty rights to gas and who uses that gas to serve the consumer=s own requirements, notwithstanding that the consumer may already have obtained natural gas service from the distributor; a consumer who obtained natural gas service from another person prior to the date that the distributor obtained its franchise area approval; a consumer who will use natural gas service on an intermittent or standby basis, other than for grain drying or irrigation purposes; a consumer whose estimated annual energy use from natural gas service for purposes other than farming operations is greater than gigajoules. (3) Nothing in subsection (2) shall be construed so as to prohibit a distributor from offering and, if the offer is accepted, from providing service to any of the consumers referred to in subsection (2) who are located within the distributor=s franchise area. The Board notes that although subsections (2) and (3) set out certain conditions which limit a distributor=s exclusive right to provide natural gas service, these subsections do not in any way limit the right of the consumer to obtain service from the franchised distributor, should that be his/her wish, nor do they constitute grounds for the franchised distributor to refuse service. It appears to the Board that the only time when a distributor is statutorily removed from the duty to provide service if requested, is when the Chief Officer is satisfied that it would not be economically feasible for the distributor to provide service to a particular consumer. Section 17(4) provides as follows: (4) Notwithstanding subsection (1), the chief officer may waive a distributor=s duty to provide gas service to a consumer who is located within the distributor=s franchise area if the chief officer is satisfied that it is not economically feasible for the distributor to provide service to that consumer. The Co-op did not present the Board with any evidence to suggest that it would not be economically feasible to provide Mr. Hallas with natural gas service, nor did it contend this was the case. To the contrary, the Co-op=s evidence indicated that the cost to provide Mr. Hallas with natural gas service would be less than $4, The Board notes that the Co-op increased

11 Decision U its standard installation charge prior to the commencement of its 1996 construction project. Mrs. Osadczuk testified that she had recommended the increased construction charge to the Board of the Co-op in The minutes of the Board meeting of 2 June 1994, contained at Tab 4 of Exhibit 9, confirm that the Co-op=s Board of Directors adopted this recommendation. Generally, franchise areas are established in recognition of the large capital investment required to provide utility service. Legislators have adopted this concept, as it clearly does not make sense economically to have more than one distribution system installed in a given area. A distributor is therefore granted the exclusive right to provide service within that area. This exclusive franchise provides the distributor with the assurance of a reliable customer base, and therefore justifies the expenditure of capital to provide service. Notwithstanding the above, there are a few exceptions to the exclusivity granted to natural gas co-ops. Mr. Hallas, as a consumer who obtained natural gas service from another person prior to the date the Co-op obtained its franchise approval, could legally obtain service from another supplier. But while the Act gives Mr. Hallas the option to seek an alternative source of supply, if this was practical and feasible, it does not give the Co-op the option of refusing service. Just as a franchise area approval provides a distributor with rights, it also imposes certain obligations, most notably the obligation to provide service. The legislation clearly provides that the customer is to receive service and that the franchised distributor is obligated to provide natural gas service, so long as it is economically feasible to do so. Utility service, therefore, cannot be withheld arbitrarily. Consequently, the Co-op has an obligation to provide service to all potential customers, unless there are compelling economic reasons to the contrary. The Board notes that a number of the Co-op=s members filed letters with the Board indicating their support of the Co-op=s decision to deny service to Mr. Hallas. However, none of these letters addressed the statutory obligation of the Co-op to provide service to all potential customers, where this is economically feasible. Nor did these letters recognize the lack of viable alternative sources of supply. On the stand, the Co-op=s Chairman stated that Co-op membership could be denied to an Αundesirable person. This position was maintained by Counsel for the Co-op, who provided the Board with excerpts from the Rural Utilities Act, Standard By-laws and Regulation 253/86, to indicate that membership in a Co-op is at the discretion of the Board of the Co-op, and is not a right. The Board, however, considers the Rural Gas Act more germane to the issue of service. Additionally, the Board notes that the Rural Gas Act is more specific legislation pertaining to natural gas co-ops, and does not consider the above referenced sources to in any way abrogate the Co-op=s duty to provide service to all potential consumers, as clearly set out in section 17 of the Act. To deny utility service to a potential customer on the basis of personality or other subjective criteria would go against the entire legislative scheme which provides a co-op with both rights and responsibilities.

12 12 Decision U96117 The Co-op has stated that it was willing to provide Mr. Hallas with natural gas service in 1996, but that Mr. Hallas missed the Co-op=s application deadline and therefore lost his right to service in Mr. Hallas, on the other hand, has advised the Board that he would have been willing to sign the documentation to apply for service had his concerns been adequately addressed by the Co-op. While the Board recognizes the Co-op=s authority to establish terms and conditions for the provision of service, including the use of appropriate deadlines, such terms and conditions must be fair and reasonable and must apply equally to all customers. It appears to the Board that there was a breakdown in communications between the parties, given the numerous allegations as to what was actually said and done and by whom. While the record as to some events appears unclear, it is clear from the Hallas= testimony that they received inadequate and sometimes conflicting information from the Co-op. Mr. Hallas raised numerous issues which he wanted the Co-op to address. On the basis of the evidence before it, the Board considers that the Co-op did not take adequate steps to address Mr. Hallas= concerns. For example, the Board considers that Mr. Hallas raised certain valid questions concerning the conditions of service, and the perceived differences in treatment of the various potential customers. It appears to the Board that a responsible customer is entitled to ask reasonable questions and receive civil and informative answers. The Board considers Mr. Hallas received inadequate and sometimes conflicting information, particularly respecting the requirements for the Liboirons. The Board notes that actual construction did not commence until 25 July Given the time lapse from 28 June 1996 of almost a month, the Board considers the Co-op=s rigid adherence to the 28 June deadline to have been inflexible and unreasonable. The Board considers that the denial of service in 1996 for failure of the Hallas= to meet the 28 June 1996 deadline, without addressing the concerns of the Hallas=, is unreasonable. The Board acknowledges that Co-ops have been given statutory discretion to set terms and conditions of service, including the use of deadlines. However, the Board has been charged with the statutory responsibility to review the terms and conditions of service when it is alleged that these are discriminatory, or have been improperly imposed. Certainly the Board considers that all terms and conditions of service must be reasonable. In this case, the deadline provided to Mr. Hallas was not reasonable.

13 Decision U With respect to the easement issue, the Board acknowledges that the Co-op has the authority to determine practices to be followed to obtain easements. With respect to this case, the Hallas= raised valid concerns about providing easements for their deeded land, as this could interfere with future oil and gas development. This is a particularly relevant concern given that the Co-op requires blanket easements, rather than surveyed easements. Additionally, evidence provided to the Board indicated that the Co-op had entered into easements on leased land from other customers. The Board considers that the Co-op should have applied its policy with respect to easements on a fair and consistent basis. Therefore, the Board considers it appropriate that the Co-op enter into a standard Co-op easement with Mr. Hallas for his leased land. With respect to the Co-op=s request that the Board support its policy that no damages be payable for grass land, the Board recognizes the Co-op=s authority to determine payments for damages in general. However, the Board does not have evidence before it as to the reasonableness of not paying damages specifically for grass land and this issue was not raised in the application. Additionally, the Co-op has asked the Board to support the Co-op=s jurisdiction in setting its own construction price. The Board recognizes the Co-op=s authority to determine its construction price, provided that there is a reasonable basis for the charge, and provided that it is not arbitrarily or inconsistently applied. The Board considers that utilities, whether investor owned, publicly owned or co-operatively owned, have certain common basic characteristics such as a franchise or permit to provide utility service. Such a franchise normally sets out a number of obligations or duties expected from that utility as well as certain rights accorded to it. For example, the utility is normally expected to provide service to all who are ready to pay for it. The utility is obligated to provide service at reasonable rates without undue discrimination or unjust preferential treatment. The Board recognizes that the degree of regulation varies depending on the type of ownership. In the case of a co-operative, legislation generally gives the co-op a great deal of autonomy in running its affairs since it is owned and controlled by the people it serves who join together for a common benefit. However, as indicated earlier in the Decision, the legislation has provided that persons who consider themselves aggrieved as to certain conditions with respect to service have an avenue of appeal to the Board for relief.

14 14 Decision U96117 Dated in Edmonton, Alberta on. A. Calista Barfett Presiding Member Gordon J. Miller Member H. Jainarine Acting Member