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Cohen Highley LLP

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Nova Scotia gas distribution system in jeopardy
June 2, 2001

Natural gas service may take longer to arrive for many Nova Scotians than previously anticipated. Sempra Atlantic Gas Co., a company which has the exclusive right to distribute natural gas throughout Nova Scotia, has encountered difficulties with pipeline right of way acquisition and steeply rising prices for the product. It has stated that if it cannot obtain approval for proposed revisions to its business plan, it will abandon the franchise.

Natural gas first became available to Nova Scotia in December 1999 when gas began to flow from the Sable Island gas field. Sable Island is located in the Atlantic Ocean, 190 km from shore. Gas transmission to mainland Nova Scotia and beyond is handled by Maritimes & Northeast Pipeline Company.

Sempra won the Nova Scotia gas distribution rights in 1999. Sempra's agreement with the province requires it to supply at least 62% of Nova Scotia households within 7 years. Initially, it appeared that Sempra's plans were on track. According to news releases issued by the company, construction of a distribution network began in Halifax on October 17, 2000. On February 8, 2001, it announced that a municipal franchise agreement had been signed with Amherst allowing Sempra to install gas pipelines within municipal streets. Sempra planned to begin construction of distribution networks in Amherst, Truro and New Glasgow during 2001.

Sempra's business plan anticipated placement of much of the necessary distribution network within provincially owned secondary road rights of way. However, according to Sempra, the Nova Scotia Department of Transportation and Public Works has rejected this plan.

On April 10, 2001, Sempra announced that it was reviewing its business plan in the face of this right of way acquisition problem and steeply rising gas prices which had squeezed its margin to the point where the project is uneconomic. In addition, it announced that it was cancelling its earlier plans to construct systems outside of the Halifax Regional Municipality.

Last Wednesday, May 30th, Sempra advised the provincial government that it intended to apply to the Nova Scotia Utility and Review Board for an amendment to the previously approved plan. Amongst other changes, the revised plan would significantly extend the construction schedule. However, Sempra also stated that it would not make the application until it had received approval for the amended plan from the provincial government. If that approval is not forthcoming, it will abandon the franchise. Sempra has expressed concern about the risk of investing substantial expenses in seeking further regulatory approval from the N.S.U.R.B. only to find that the amended plan will be "tinkered" with by the government following approval.

For its part, the provincial government denies that the refusal to permit pipelines in secondary road rights of way was the cause of Sempra's scaled back plans. In a news item published today in the Halifax Daily News, Premier John Hamm was reported to have said that it will be a setback if Sempra pulls out but another company will take its place by the time consumers start demanding gas. He attributed Sempra's reluctance to proceed to low demand for natural gas at current prices and cited the recent experience next door in New Brunswick where gas distribution is already available. Hamm also stated that the province was happy with the work completed to date by Sempra but it was not prepared to support Sempra's proposed application to the N.S.U.R.B.

Ironically, the Halifax Daily News also reported today that there has been a dramatic slump in natural gas prices, thereby raising hopes for Nova Scotians eager to start using natural gas.

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