37-1
37th Parliament,
1st Session
(January 29, 2001 - September 16, 2002)
Select a different session
Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 7 - Evidence, May 3, 2001 (morning meeting)
MONTREAL, Thursday, May 3, 2001 The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 9:30 a.m. to examine such issues as may arise from time to time relating to energy, the environment and natural resources. Senator Nicholas W. Taylor (Chairman) in the Chair. [English] The Chairman: Ladies and gentlemen, this Energy Committee has held hearings in Vancouver, Calgary, Edmonton, Toronto and is now in Montreal. Later on, we will travel to Nova Scotia and Newfoundland. Evidence can be given in either language. The result from the hearings will be published sometime in the next year. Energy investigations are the flavour of the day. There have been several, including committees in the U.S. looking into energy matters. The U.S. even has a senate committee that we will try to meet with. Without further ado, Mr. Bertrand, we would ask you to please proceed. [Translation] Mr. Stéphane Bertrand, Vice-President, Communications, Governmental and Public Affairs, Gaz Métropolitain: Mr. Chairman, thank you for giving us this opportunity to meet you today. With me I have two colleagues: Ms Sophie Brochu our Vice-President, Business Development and Gas Supply at Gaz Métropolitain and Mr. André Boulanger, our Vice-President, Sales and Marketing. During the last few days you have had the opportunity to meet many groups all across this country as well as some of our colleagues in Canada in the gas business. If you do not mind, we will use this opportunity today to make you more aware of the Quebec gas context, more specifically, which is different in many respects from that of Gaz Métropolitain's peers across Canada. Senators, if I may say so, your visit here is most timely. We will be presenting a project dear to our hearts, the Cartier gas pipeline whose purpose is to link up the Ontario and Quebec markets to the Atlantic coast gas reserves. You will be able to see for yourselves why this gas transportation system has become a real economic imperative for gas consumers in northern Ontario, central Canada, Quebec and the Maritimes. You will be able to see how this project has come to be at the very heart, today, of the matters raised by the North American energy question. You will also see that the Cartier gas pipeline is an eloquent illustration of how important it is for Canada to come up with an energy vision so that Canadians ready to invest their money and pay the continental market price are not cut off from their own resources. As an introduction, we would submit most respectfully that in all cases, no energy vision could be limited to the simple "Let the market decide" slogan. We have prepared a presentation that we hope to be as brief as possible - you have a copy in French and in English on your desks - to leave time for questions and a fruitful exchange with you. So I will now give the floor to André Boulanger who will give you the first part of the presentation. As for Sophie, she will address the Cartier project more specifically. Mr. André Boulanger, Vice-President, Sales and Marketing, Gaz Métropolitain: I also thank you for the opportunity you have given us to present our position as concerns our markets and business context as well as the Cartier project impact. We will not spend much time on the Quebec gas market and consumer needs but it is important for us to give you an overview of this situation for better understanding of the stakes and the context here, in Quebec. Gas Métro is a private regulated entity traded on the stock exchange. It has approximately 160,000 clients spread out in 260 municipalities. It has annual revenues of $1.6 billion per year with assets of $2.3 billion and $144 million in profits. It is a major business. It is the third largest natural gas distributor in Canada, in volume, not in number of customers. With 160,000 clients, it is not the biggest gas distributor. I will explain a bit further on what the difference between Gaz Métropolitain and the other Canadian gas distributors is. In the document, there is a map of the current Gaz Métropolitain network serving the vast majority of Quebec's industries. The only industrial zones not served by the gas network are essentially the Lower St. Lawrence and the Lower North Shore. For the Lower St. Lawrence, we are talking about Rivière-du-Loup, Rimouski, Montmagny and for the Lower North Shore it is Sept-Îles, Baie-Comeau, Port-Cartier. So that accounts for some 9,000 kilometres of pipeline in Quebec. On the next page we have a comparison between Quebec and Ontario's natural gas situation. Of course, there is a fundamental difference between the two provinces. I will give you a broad outline of the reasons for these differences. In Quebec, the figure for natural gas is about 16.7 per cent, and in Ontario, about 38 per cent. There is a predominance of electricity in Quebec and in Ontario it is natural gas that dominates if, in both cases, we set oil aside. [English] The Chairman: Is the electricity generated by gas or by hydro? [Translation] Mr. Boulanger: In Quebec's case, electricity is produced mainly by hydro. We have "hydro power." About 99 per cent of Hydro's Quebec electricity is produced with hydro. One of the reasons electricity is consumed in Quebec is because of this production method. That has also attracted an industrial base that relies on the availability of the resource. In the province's energy make-up, you can see the considerable importance electricity has as compared to Ontario. In Quebec, for example, the aluminum industry is very much present and consumes enormous amounts of energy. The same goes for magnesium. These are industrial processes that use a tremendous volume of electrical energy. Electricity also dominates in residential heating in Quebec. For the last 25 years, most Quebec residential properties have been heated with electricity. That explains the difference between the two provincial energy profiles. On the next page, you have the market served by Gaz Métropolitain. It is easy to see that in the profile of these 160,000 clients, the concentration of volumes is really found in the industrial and commercial sectors. Those are the markets Gaz Métro supplies energy for and delivers to. These are markets where price changes have considerable impact. Those businesses are often in competition with the domestic market and the outside market at the same time. Sectors such as pulp and paper, aluminum and wood are competing on the domestic market at the same time as they are competing outside our borders. So there is a lot of exports in many industrial markets. On the next page, you have a graph showing the evolution of natural gas prices in Alberta from 1990 to the year 2001. You can see prices remaining stable for almost ten years with a very major increase the last year. You have probably seen it in the papers or maybe you have even seen your own gas bill increase substantially. This increase sent a very strong price signal to the market. There are two elements at play when you get that kind of price signal: supply and demand. On the next page, you can see the price increases from one year to the next. First, I would like to remind you that the price set for the customer is made up of three elements: the price of the gas itself, the transportation cost and the distribution cost. Those three elements make up the total bill for the client. Gaz Métropolitain is paid only for the distribution portion. In other words, the gas volumes that we supply and transport from the Canadian West into the province are included in the bill, but there is no benefit devolving to Gaz Métropolitain for that. That is what is called a "pass on" in English. It goes directly to the rate. So Gaz Métro is paid only for the volume it transports. Our interest is to ensure that the volumes of gas transported inside our business franchise are transported at the best possible cost. It is fundamental for our business that our clients have access to a competitive energy source under the best possible conditions because the success of these businesses depends, of course, on dependable, safe supply at competitive prices. If the businesses inside our territory perform properly, they will use natural gas. Our fundamental objective is to use all means to provide reliable and competitive supplies. From May 2000 to May 2001, the price of gas went up by 92 per cent; transmission by 12.5 per cent and distribution by about 1.8 per cent. Distribution has remained stable. However, the price of gas has increased in price considerably. What is the impact on consumers? In the deck you will find four kinds of consumers: industrial stable, industrial interruptible, commercial, and institutional and residential. On next page, you have the competitive situation for our three major markets. The blue line is for natural gas, the green line for electricity and the yellow line is for number 2 fuel oil or light oil. You can see that the position of natural gas as compared to the other energy alternatives has deteriorated considerably. When you look at the industrial market, you can see that electricity is not really a competitive factor in that market where competition is actually number 6 fuel oil. You also have a deterioration in the competitive position of natural gas as compared to oil. For a business paid on the basis of the volume transported, it is not interesting to have this kind of competitive situation today. There are consequences for the industry. If you look at the residential and commercial sectors, you can forecast decreases in delivery year after year of some 4 to 5 per cent. As for commercial volumes, you can forecast decreases of some 15 per cent. That is a challenge for the business and for its customer base. Why are the prices so high? A lot of consumers have been wondering about that. The western Canadian supply is being called on more and more and, in a way, it is slowing down. It has produced a lot in the past and is still producing major gas volumes. It is more and more difficult to increase production in a major way there. That is why, these days, we are thinking of going a bit further away to find bigger supplies and more gas volume. As you mentioned, Mr. Chairman, the American market is thirsty. Presently, there is a rather definite energy context in North America. The market is ready to pay the price for the resource. Energy is an essential factor for any industrial society. We do not want to run out of energy. There is a price to pay and people are ready to pay it. Recently, the transmission systems have increasingly integrated the Canadian and American markets, if you think of the gas pipelines that were extended over the last few years, whether the Northern Border or the Alliance projects. On the next page, you have the evolution in the demand for natural gas in Canada. During the years 1996-97 demand was higher than in 1998-99. The explanation for the decrease in demand is because of warmer winters, some 10 to 15 per cent fewer degrees per heating days. The impact led to today's price increase. For two or three consecutive years, the market didn't see that demand was building up. Prices remained relatively low and there was no adequate price signal to respond to a normal winter together with a sustained and major increase on the economic side. Another major element is the increase in demand for gas to generate electricity. When you look at demand by sector - the graph at the bottom of the page - you can see the forecast increase in electrical production for 2000 to 2005. We are talking about a 5.4 per cent increase. If your base is total demand in Canada, you can see that demand for 2000 to 2005 should reach 3 per cent per year. It is also important to look at demand in the USA at the same time because both markets are very strongly integrated. On these two tables, you can see the increase in American demand. You have the same phenomenon I was explaining for the Canadian market, in other words a maximum need in 1996-97 that decreased in 1998-99 because of milder winters. After that, there was a strong increase due mainly to an increase in demand to generate electricity using natural gas. We are talking about an increase in the order of 6.6 per cent. If you look at the case of the Gulf of Mexico, on the first table up in the left corner, you will see a gradual decrease, over the years, of the production capacity of that gas field both for the "onshore" as well as the "offshore" reserves. As for the Canadian West, you can see a weak increase year after year. So it is just about stable for the American market if you exclude the Gulf of Mexico. For North America, you have a weak increase if you make an exception for the year 1997 where you had colder weather and gas fields produced more to meet demand. Today, we are producing at a rate lower than in 1997. The following table shows a major increase in drilling activity in Canada and the USA. The table covers 20 years of exploration and development in gas fields both in Canada as well as the USA. Totally to the right of the table, you can see that the increase in the number of drilled wells was quite considerable between 1999 and 2000 without necessarily causing a proportional increase in production. That explains the preceding comment that the field is slowing down. You can drill, but the level of production is not as high as in the past and there are more wells drilled for development rather than for exploration. On the graph, the green line shows the exploration wells that will allow us to forecast what can be produced in future years. As for the development wells, they are used to put the reserve into production immediately. So you can see that we are trying to find production volumes rapidly but that there is not much long-term exploration. The following table shows how important Canadian exports are towards the American market. Of course, this is an opportunity for Canadian gas production. There is a very significant increase. Canada exports over 50 per cent of its gas production since 1996-97. The percentage of Canadian production for exports is something like 56 per cent right now and we can expect this percentage to increase over the years. On the next table you can see how the Canadian price has been evolving, the price at Empress - at the Alberta border - as compared to the Nymex price, the American one. This table covers the period from 1993 to 2001. Historically, we have always had a difference in price between the Canadian and American markets. The fact that the interconnections between Canada and the USA have increased and that gas pipelines were built mean that both markets have integrated to such an extent that now, the Canadian price and the American price are, to all practical intents and purposes, the same. They converged rapidly during the last few months. Today, you have prices around $7 and $8 per gigajoule. These prices reflect an imbalance between the needs of the market and the producers' capacity to offer what the market is trying to get. In the top part of the table on the next page, you can see that there is also an imbalance between the fundamental analysis forecasts. Here you have five businesses or organizations doing fundamental analysis forecasts compared to financial market forecasts. There is a gap between the two. If you take the average of fundamental forecasts, you can see that for 2002 we are talking about a price of $5.78. That is the price in a bit less than a year. If you take the financial market, you are talking about $6.50. This gap gets even bigger if you look a bit further, say in 2005. The fundamental analysis forecasts $4.39 while the financial market forecast is $5.82 per gigajoule. That concludes my presentation. Basically, I would say Gaz Métropolitain's market is a very commercial and industrial one. It is a market where competition is very important and impacts very rapidly on Gaz Métropolitain's consumers and client base. Essentially, our challenge is to access the resource at the best price possible, in other words at market prices. That is what is important for the Quebec consumer. I will now give the floor to my colleague, Sophie Brochu. Ms Sophie Brochu, Vice-President, Business Development and Gas Supply, Gaz Métropolitain: Seeing the context is always very interesting. André's presentations are always a little dry, but they are so essential to understand what comes after. The graph you have in front of you is an illustration of the main gas transmission lines that influence what is going on today in the Quebec gas market. In blue, you have the TransCanada system which, for many years, has been supplying the Canadian market with natural gas. There are two arms to TransCanada: one going through the north of Ontario and one going down to Ontario's south. For the purposes of our discussion, the southern Ontario region will be called Dawn. In yellow, you have the Northern Border pipeline that has been there for a few years now and that has increased its export capacity in recent years. In red, you have the Alliance pipeline that came into service in November 2000. In one fell swoop, it totally changed the whole dynamic of the economics of gas transmission in America. Let me explain. The Alliance pipeline added a transmission capacity of 1.3 Bcf per day of natural gas compared to the 7 Bcf that, until that point, had been transported by TCPL. This project was undertaken by the western Canadian producers and it was extremely valued, of course. And justly so because the producers wanted to get their natural gas to the American market to get a better price. They managed it. Canadian natural gas is now going through the Alliance pipeline at maximum capacity. For example, people living in the southern part of Ontario, Dawn, now have two options to get the natural gas from the Canadian West to their market: buy it out West and carry it through TCPL (the blue system) or buy it out West and use Alliance (the red system). They can also buy it on the Chicago market because at the same time Alliance was put on stream, the Vector pipeline, in green, came into service. It is the Alliance's corollary and it makes it possible to buy natural gas in the Chicago region and bring it back to southern Ontario. The south of Ontario is now the meeting point of several transmission systems. So the Chicago market was literally drowning in natural gas because it did not increase its capacity by 1.3 Bcf per day. Until then, it was fed partly by Canadian gas, on Northern Border, but it was also getting gas from the Gulf of Mexico. So there was a major drop in prices in the Chicago area. That means that today, in southern Ontario, people are getting their gas more from Chicago than from the Canadian West. Those who are paying for this drop in price are the people who paid for the firm transmission capacity on the Alliance system. Consequently, you have "decontracting" on TCPL. As contracts come to term on TCPL, the people in southern Ontario are dropping TCPL to reposition themselves with a more competitive alternative. Now, let us talk about Quebec. Quebec is still supplied by TCPL. Now, TCPL is regulated in the conventional way. For example, if TCPL costs $100 a year to operate and if we are ten users with equivalent capacities, each user is going to pay $10 a year for using the TCPL system. The day people in southern Ontario terminate their contract with TCPL, there are going to be five users on the TCPL system and each one is then going to have to pay $20 rather than $10. The Quebec gas market is a "price taker" not only for the cost of supplying its molecule, but also for the cost of transmission delivered at a fixed cost. Gaz Métropolitain is thus a captive market. The next page eloquently expresses how this death spiral is at work for our clients. You can see that the TCPL system is losing some clients. For the firm service part, it is the only one that can feed Gaz Métropolitain. Of course, the price is increasing because there are fewer system users. If you pushed this to the limit, one day there would only be one factory left in Quebec paying for all of TCPL's costs. This is a good illustration of what is going on here. You can see how the TCPL delivery rate in Quebec has changed over the last years. You can see that the tangent, the dotted red line, is not stabilizing very much over the short term. You can see that $0.89 per unit carried by TCPL in 1998 has gone up to $1.13 today for our client base. And this is continuing. In Quebec, compared to other gas markets in Canada, not only must we support an absolute increase in prices, like the rest of Canada, but on top of that we have to face an increase in transmission costs. You will agree that if you operate a transmission system like TCPL, and if you look on your map to see where your guaranteed income and your captive client base are, you can see two. You can see Gaz Métropolitain and certain industrial clients in Northern Ontario. The Northern Ontario people do not have access, either, to resources accessible in Chicago in any economic way because the cost of transmission to go up to the north of Ontario is the same. Northern Ontario and Quebec are in a bit of a difficult situation; we're trying to change that. That said, the next table illustrates the impact of this very well. I will explain how it works. Let's go at it systematically. The American price is the Nymex price. At the bottom, you have the Chicago, southern Ontario and Boston markets. The red graphs show the relative decrease, not the absolute decrease, of the price on these three markets since 1996. The Nymex price has increased, but the relative price in Chicago, Boston and Dawn has decreased over time. In Montreal, however, if you go to the right, you will see that the relative price delivered in Montreal as compared to the Nymex base of 1996 has not stopped increasing and has risen. In fact, that illustrates how Quebec's competitive and economic position has deteriorated in general. What, then, is the analysis? Well, in Alberta the producers wanted to diversify their market. That is quite normal and it was the thing to do. They increased their export capacity to more lucrative markets. That market has now set the continental price. So in Boston, Chicago and southern Ontario, there is diversity in the supply sources, diversity in transmission sources and competition and decrease in marginal costs. In Quebec, you have no alternative. It is a captive market and so there is an increase in costs and a loss of competitivity compared to Ontario and the USA. For example, if you have a pulp and paper mill in Quebec using natural gas and competing with someone outside Quebec, the competitor is doing better than the mill set up in Quebec. So you can be sure that if the gas input is a factor in locating, then the next investment won't be built in Quebec. It's a bitter pill. For many years, now, we've been working positively to diversify our supply. I would now like to talk about the Cartier pipeline. I am at the graph illustrating this project. The goal is to link up the Quebec, Ontario, Northern Ontario and northwestern New Brunswick gas markets to the field coming on-stream on the Atlantic coast. In white you have the Maritimes and North East Pipeline system that is now transporting the East Coast production, going through Nova Scotia and New Brunswick, but it is shipping the greatest volume of this gas to the Boston market. The hook-up project that we want to talk to you about today involves, first of all, an expansion of the Maritimes and North East system which must take place in New Brunswick. The Cartier project, which is a pipeline project completely independent from the other pipeline systems, would hook up the Maritimes and North East system to the TQM system in the Quebec region. The existing gas distribution system ends in the Quebec region. We want to hook up to a basin on the East Coast. We therefore have to build two sections of pipeline: a Maritimes and North East section in New Brunswick and a Cartier section in Quebec. Enbridge and Gas Métropolitain are joint shareholders of Cartier on a 50/50 basis. As we explained, our strategy is obviously to diversify our portfolio. Increasing competition in terms of gas resources and transportation is vital. The Atlantic basin is 1,500 kilometres from Montreal. The Western basin is 3,500 kilometres - and I have not yet calculated the distance to get to Alaska, but it is certainly farther than the East Coast. There is no doubt that the closer the market is to its production source, the more competitive it is. That is a basic rule. This project also enables us to bring natural gas to regions that otherwise would never have access to it. Here I refer to the Lower Saint Lawrence and Northwestern New Brunswick. Transportation infrastructures are expensive. Northwestern New Brunswick could not afford such infrastructure. Because we will be delivering large volumes to Quebec, we will also be able to serve northwestern New Brunswick. The Cartier project means a 270 million dollar investment in Quebec, financed entirely by the private sector. Our annual transportation capacity would be 67 Bcf the first year, and 125 Bcf once everything is completed. In comparison, the current market in Quebec produces 250 Bcf and the Ontario markets produce 860 Bcf. To put these figures into perspective, the Cartier project, once completed, would supply half of the volume consumed in Quebec. Gas Métropolitain and Enbridge Consumers - the distributor for the Greater Toronto Area - have each committed to purchase more or less 50 per cent of initial capacity. That means 30 Bcf for Gas Métropolitain and 30 Bcf for Enbridge Consumers in the Toronto region. You are going to ask me what is the problem. The problem lies in the fact that the East Coast basin is very promising and every analyst, producer and individual who wants to get in on it knows this. This is a basin that will produce far more than what the official projections have suggested to date. The first phase of the project, which we refer to as SOEI, which stands for Sable Offshore Exploration, is a contingent of producers, three of whom are dominant. And this is important to understand. We are not saying that this is a bad thing. It is simply a reality that must be understood. There are 120 producers in the Canadian West. Currently, on the West Coast, there are three, four producers. Let me explain. There is SOEI, with very marginal ownership and three producers: Mobil, Imperial, Shell. Imperial and Mobil merged. So you are left with Imperial, which is, in fact, Imperial Oil, managed from Houston. So then you have Shell and Exxon Mobil. So you have these two guys in SOEI that in fact control SOEI production. You also have Pan Canadian, which develop production and which will be coming on stream in 2004-05. The first block of producers was 100 per cent dedicated to Maritimes and North East, a system that brings natural gas to the Boston region. The producers made a commitment to take Maritimes and North East transportation capacity or to backstop, in fact, Maritimes and North East transportation capacity to Boston. To gain access to natural gas on the East Coast, you have to either reach an agreement with Pan Canadian for the gas that it will start producing in 2004 or 2005 or reach an agreement with SOEI for Phase II. But we do not know when Phase II will take place. We know that it will happen, but we do not know exactly when. Moreover, everybody is saying that there is a lot of gas and that the gas is going to get developed. This brings me to the next page. The northeastern United States has therefore been getting its gas from the East Coast since 2000. Since 2000, the northeastern United States - and here I'm talking about the Boston region - has also been served by PMGTS, which brings natural gas from the Canadian West to the Boston market. Boston is, therefore, lucky because it has access to competing Canadian gas from two sources, from two bases, in addition to having competing gas from the Gulf Coast. We like to see this happening in Boston because we would like to be in the same situation as well. Of course, everyone, every Tom, Dick, and Harry, wants Canada's natural gas to generate electricity in the northeastern United States, which you no doubt realize. Right now, the situation is relatively uncomplicated - we are fighting with President Bush, which is no small thing. The map is quite important here. It is worthwhile spending some time on it. Here again we have the Maritimes and North East system which we mentioned, which brings natural gas to the Boston region. The Maritimes and North East system is owned by a number of players, including one called Duke Pipeline. Duke Pipeline is also the promoter of a project referred to as Hubline. Hubline will bring natural gas to the Boston region and, to some extent, to the area south of Boston. However, Duke also owns another project that is designed to bring natural gas to the New York region. However, Duke also owns Maritimes and North East Canada. And people are developing pipelines in the United States because they want gas in order to make their US pipelines profitable. We have to do business with these people because we want them to agree to build an extension on their system which will enable us to hook up to the markets in Quebec, Ontario and northwestern New Brunswick. The resource is rare, however, explaining the Gordian knot in which we find ourselves. Because, in fact, and this goes back to what Stéphane said in his introductory remarks: "Let the market decide." We are in complete agreement with that. We fully agree with that, providing there is a market. In order for there to be a market, there has to be liquidity, there have to be buyers, and there have to be a whole bunch of sellers. We are not saying that this is a bad thing, but we have to realize one thing. Here we have an oligopoly in terms of production and transportation. This is an extremely powerful oligopoly and we have no option but to come to an agreement with it. And if we do not agree, there is no market to arbitrate who will get the natural gas. Enbridge Consumers is prepared, we are prepared to pay the continental market price, the American price. We are prepared to invest our money. The problem lies in the fact that we are forced to reach an agreement with this oligopoly. And if we can't reach an agreement, the natural gas will go to the United States. The following page summarizes the situation. Ontario and Quebec are currently competing with the United States to attract a small share. You must understand that we are talking about less than 200 MMpcs per day, whereas proven production will easily attain 1,000 MMpcs per day, nearly 1 Bcf. Indeed, the forecasts are calling for 2 Bcf. So we are talking about 2,000 Bcf. We are trying to have access to nearly 15 or 20 per cent of Sable Island's total production. We are prepared to pay the price. We are prepared to invest our money. We do not need government money. We want to play baseball. We are at the plate, we want to hit the ball. We are facing the person who has the ball, the umpire, the field, the bats, and the guys who cut the lawn. Do you understand what I am saying? We are trying to make you realize that we are prepared to let the market call the shots. Unfortunately the market, in this specific case, does not work. We have solid support for this project. This is not a project initiated by one province. This is not a project put forward by one gas distributer. This is a project that involves central Canada, Northern Ontario, the Greater Toronto area, Quebec and New Brunswick. New Brunswick and the Government of Quebec recognize the importance of this project for the reasons we explained earlier. They have both signed an agreement to say: Okay, how can we promote and harmonize our environmental assessment process to ensure that it is as uncomplicated as possible? Quebec is performing very well in this area. The Association of Industrial Gas Consumers supports the project. The Government of Nova Scotia supports the project. In conclusion, and I repeat myself, the private sector is prepared to invest. The markets are willing to contract for the transportation of natural gas. We are prepared to pay market price. The gas is there. The question is whether or not Quebec, Ontario and New Brunswick will have a fair opportunity to access this resource. And, to conclude, the question we are asking ourselves and which we, with all due respect, ask you, is as follows: What is the energetic vision of the federal government in terms of developing this resource? Once again, we are not challenging free trade. That has nothing to do with it. You must understand that the credo of "Let the market decide," a credo which it is very easy to hide behind, is great providing that there is a market. However, in this case, there is not. Indeed, there is only one market. [English] The Chairman: Your problems are, of course, different from the West. There, electricity and gas are very closely allied because natural gas generates most of the electricity. Your price of electrical energy is flat all the way across, with the exception of the residential customer, where it seems to be up. It is underpriced in the BTU, the million BTUs, as far as natural gas is concerned. Is the notion in Quebec that over the long term the price of power will stay regulated, that it will never float with energy prices? [Translation] Mr. Boulanger: Mr. Chairman, I do not think that the price of electricity in Quebec will float, as you said, nor do I think that there will be a short-term market. A recent decision was made to establish what we refer to as a heritage block where the price of electricity will be frozen. When you plot the price of electricity on a graph, however, for both residential and commercial markets, you can, of course, note that we compete with electricity in both the residential and commercial sectors. But what's at stake here is not our ability to compete with electricity. The question may revolve around having access to a resource that is competitive to be able to produce goods that are competitive with both the domestic and foreign market. When you are in the corporate market, or in the big industry market, or in the small industry or commercial market, electricity is not a competitive issue for the company. For companies that produce goods, it is important to be competitive in the sectors where they operate, where they have to compete either with Ontarians or Americans and to ultimately arrive at a cost price or a production cost that is competitive. [English] The Chairman: A number of senators have difficulty understanding why you separate a BTU from electricity from a BTU from natural gas. In other words, we think the two markets are tied together. I am sure the hydro exports to the New England States are priced on a BTU basis competitively with gas. They do not put it in cheaply. [Translation] Mr. Boulanger: You are quite right. When you talk about the outside market of the export market, the export market follows the price of electricity sold, follows the market price, when it comes to exporting. But the Quebec domestic market has a fixed price. Senator Hervieux-Payette: Ms Brochu, I think that the ball is in our court. They may have the field, the umpires and the baseball bat, but I think that we are the ones who have the ball. And I think we need to figure out what to do with the ball. First of all, regarding the Nymex 1996 graph, I would like to ask you a little question. Do the figures that you indicate include the cost of transportation, the price of gas and the three components that comprise the price of gas? Ms Brochu: The answer is yes. The figure that you see there is not the delivered price. The figure that you see, that is the difference with respect to 1996 and the Nymex 1996 price. If the Nymex price increases, what you see here, is the gap... Nymex, for instance, was stable between 1996 and 2000. The delivered price in Quebec increased by the amounts that you see there, year after year. Now, the Nymex price obviously increases as well. Consequently, the delivered price in Quebec is increasing, as it is everywhere in America. But what is important to note is that, for the other markets, where there is competition between the transportation systems and the production basins, the relative price with respect to the 1996 reference year has decreased. So you can see that this is not a delivered price. This is a differential with respect to an American price, based on the 1996 reference year. Senator Hervieux-Payette: My other question is a basic one. Hydro-Québec is an important shareholder in Gaz Métropolitain, but who are the other significant shareholders versus the general public market? Mr. Boulanger: Gaz Métropolitain is held by a company called Noverco. Hydro-Québec represents 32 per cent of Noverco. No, I will start over. You have Hydro-Québec, Gaz de France and Enbridge, who are the main shareholders in Noverco. And these companies have shares in Gaz Métropolitain Inc., which is a publicly-traded company, and which becomes Société de Gaz Métropolitain, a limited partnership company on the stock exchange with 23 per cent public ownership. When you take a look at this, Hydro-Québec has 32 per cent ownership of Gaz Métropolitain, the public has 23 per cent ownership, Enbridge accounts for 24 per cent, and if my memory is correct, Gaz de France has about 16 per cent. This is who owns Gaz Métropolitain. Senator Hervieux-Payette: And Enbridge is a Canadian company? Mr. Boulanger: Yes. Senator Hervieux-Payette: This enables us to see who are the players and who are our competitors. When you talk about those companies that are the owners or the developers, with the exception of those involved in exploration or in building the other part of the pipeline in the East, is MNE American property also? Ms Brochu: In fact, Maritimes and North East is composed of two branches: there is a Canadian branch, in Nova Scotia and New Brunswick; and there is a branch in the United States, between the New Brunswick and Maine border, which extends to the Boston region. The battery of shareholders for the two branches is the same. There is West Coast, a Vancouver-based company, which is part of the West Coast Energy family. There is Duke Pipeline. Duke Pipeline is part of a large energy group which, moreover, produces about 35,000 megawatts of electricity today, primarily from natural gas in the United States. And you also have Mobil, which represents 12.5 per cent. And there are also some other players, with smaller holdings. The big players are West Coast and Duke Pipeline. West Coast is the Canadian operator and Duke Pipeline is the American operator. But the two vote the same way. Senator Hervieux-Payette: Perhaps you could explain the transportation costs. When TCPL was built - [Translation] Senator Hervieux-Payette: The cost of transportation fluctuates as new pipelines are built. An equalization formula between the old and new pipelines enables people who travel more to pay reasonable transportation costs. As far as transportation is concerned, do Réseau Alliance, TransCanada PipeLines or MNE operate in accordance with a similar formula? The costs of the Canadian portion are authorized by the National Energy Board. Are the costs for the consumer subject to the same rules as those governing the old and new pipelines? Ms Brochu: There are basic principles. I am no expert in regulations, but I will answer you on the basis of my own experience as a businesswoman. In Canada, TransCanada PipeLines is regulated by the National Energy Board. Its rates are approved by the National Energy Board. When TransCanada PipeLines develops its system, the National Energy Board will ensure that there are equivalent and logical rate mechanisms that apply from one generation to the next. As for Maritimes and North East, which manages a Canadian and American branch, the Canadian branch is regulated by the National Energy Board and the American branch by the FIRQ. In 1997, the National Energy Board received a bid from two different groups: one was a producer and the other a transporter. These two groups presented different projects but they went hand in hand with each other. Furthermore, these two groups shared a common objective, namely, to go to the United States. After studying each proposal, the National Energy Board concluded that the application for production was justified and that the market was there. The NEB approved the project on the basis of its own rules and established fair and reasonable rates. Senator Nolin: My question is intended primarily for Hydro-Quebec. I am surprised that there is no representative here to answer. Mr. Bertrand, Hydro-Quebec has 23 per cent of the shares in Gaz Métropolitain. Mr. Bertrand: Thirty per cent. Senator Nolin: If you include the public shares. Mr. Bertrand: Then it would be 40 per cent. Senator Nolin: Hydro-Quebec is a substantial shareholder. At first glance, it would seem contradictory to have Hydro-Quebec as your shareholder since you compete with each other on the Quebec energy markets. What interest does Hydro-Quebec have in being such a significant shareholder of Gaz Métropolitain? Mr. Boulanger: Energy resources, if you want to talk in terms of competition, are complementary. Our company does not participate in any markets where there is no reason for us to be there. That is the case with our residential market. That explains why in Quebec we have a client base of 160,000 subscribers instead of 3,500,000, as is the case in Ontario. Gaz Métropolitain does not participate in areas where there is another energy resource that is preferred. Essentially, Gaz Métropolitain delivers volumes of energy to large and small industries, in both the commercial and institutional sectors. Natural gas is strong and solid in this niche market. Gaz Métropolitain is a good financial investment for Hydro-Quebec. Hydro-Quebec is thereby able to have an overall view of the comprehensive energy market throughout the province. This is all that it gets. There is no agreement whatsoever about market division. Gaz Métropolitain is a company with shares that are traded on the stock market. The company has its own board of directors and rules. Gaz Métropolitain is going after different markets. In Canada, we compete with other types of energy, which is healthy for the consumer as well. For certain industrial procedures, we evaluate whether or not it is better to use electricity or natural gas. We consider not only the cost of energy but also the total cost of producing a good. Senator Nolin: Is the price of gas that travels through the transportation network fixed, regardless of who buys it? Mr. Boulanger: Not really. The price of natural gas has been deregulated since 1985. Consumers can therefore opt for the supplier of their choice or deal with a broker working within the Gaz Métropolitain franchise. The price of the gas molecule can therefore vary from one consumer to the next. Senator Nolin: I mean from the point of production. In the first part of your chart, you describe a 92 per cent increase in the price of gas over one year. Transportation, however, increased by 12.5 per cent. Does Gaz Métropolitain have no influence on these prices? Mr. Boulanger: That is correct. Senator Nolin: Gaz Métropolitain is only responsible for a 1.8 per cent increase? Mr. Boulanger: That is correct. Senator Nolin: For all of the gas that it buys, Gaz Métropolitain pays the 92 per cent increase that occurred in one year? Mr. Boulanger: Yes, but it is not so simple. A variety of distinct components determine the market price. Gaz Métropolitain supplies approximately 40 per cent of its clients with network gas. The price of this gas is tied to the market. This year, the price of network gas was about $7 to $8 per gigajoule. Industrial clients may have signed a yearly contract in May, July, September of last year. Either clients may have signed a contract with a supplier for a given price, but with a monthly indicator that varies from one month to the next. The market price is determined by taking the average of these variants, which represent the 92 per cent increase. The increase in market price in the industrial sector is much higher than 92 per cent, because most big industries sign monthly and not yearly contracts. Last winter, the price of the gigajoule reached a maximum of $14. Clients had to pay for gas at a cost of 12, 13 and even $14 per gigajoule. Senator Nolin: I couldn't understand why, with an increase of only 1.8 per cent, there was such a gap, ranging from a single digit to a double digit, between your domestic clients and your industrial clients. You have more or less answered this question. Mr. Boulanger: For the typical consumer, we will balance the various components, whether this be the gas molecule or the gas itself, the transportation and the distribution. For residential clients, the distribution costs shown on the invoice is greater, however, the 1.8 per cent increase reduces the effect of the increase in gas prices on the total bill. Senator Nolin: Ms Brochu, at the end of your presentation you said that you did not want to challenge NAFTA and that, under NAFTA, Canada, as far as energy supply was considered, is able to negotiate effectively with the United States. Yesterday the Americans announced a long-term plan for energy supply, as did the Canadians. You also said that you have an answer, you have a role to play in supply and in this plan. You also asked about the federal government's policy and how this policy may have an impact on your project, the Cartier project. If you could talk to the Minister of Energy, what message would you want him to send to his Cabinet? Ms Brochu: First of all, I would like things to be put in proper context. Having Canada and the United States trade respective energies is certainly very healthy. This also holds true for the producers on both the West and East coasts. This is not only healthy but fundamental. It is also just as important that Canadians be able to bid fairly for gas contracts. Canadians are prepared to invest and to pay the same price as the Americans. Infrastructure is the cornerstone for transportation. You can have the nicest train station there is, but if the track doesn't go in front of it, the train will never arrive. We are trying to set up this infrastructure. If the government of Canada could only come up with a policy on infrastructure and say: Listen, Sable Island production was set up first of all to serve the Boston market. That enabled us to serve the gas market in Nova Scotia and in part of New Brunswick. This was a very good undertaking. However, having access to only 8 per cent of this basin is, in our opinion, too little. We are not asking the government for money. Two scenarios are possible: the investment would come either from the private sector or from the government. Although I have not been in my career that long, I have noticed that the government does not necessarily want to invest in infrastructure. Today, in order to build an infrastructure that costs 300, 400 or $500 million, we have to go to the bank. The bank will give us financing if we have a contract. In order to get a contract, the guy who owns the infrastructure on the other side has to agree to build on our side, otherwise, we build a merchant pipeline at our own risk. When investors say: "No investment, no return," we know what to do. Nothing is mentioned anywhere about the fact that Canadians who are prepared to put forward these amounts can have access to a small portion of the resource. [English] Senator Kenny: I do not understand your version of merchant pipelines. There are merchant pipelines in Western Canada to California. It is not an impossibility to have a merchant pipeline. I would like to come back to your graph on natural gas versus alternatives. It seems to me, looking at it from the perspective of a consumer, that you do not have to have gas-to-gas competition for a consumer to be well-served. Consumers can go to electricity and have all their needs met. When I look at the pricing here, if I were a consumer, I would not go near your product. I would stick to electricity. You are pricing it at $22, and one can get electricity at $17. Why would anybody want to go to gas? Ms Brochu: It is easy to build a merchant pipeline when dealing with many producers and when there is a market. If we have a market, a merchant pipeline makes sense. If you put in an infrastructure and you do not know whether you will access the gas, there is no means to do it. This pipeline situation here is totally different than what is happening out West, because of the numbers of players. There is an oligopoly on the East Coast, and that is not the case out West. [Translation] Mr. Boulanger: In the case of electricity, it is not simply a matter of having access to a source of energy. That is not the problem. The source of energy must be competitive on the various markets. That is essential. Wind energy could supplement electricity, but at an exorbitant, uncompetitive price. It is a commercial matter. It is essential to provide energy at competitive prices in order to obtain a market share. [English] Senator Kenny: With respect, whoever saw a totally flat, straight line for one commodity? You have energy, you have electricity, and it is a straight line across here. You cannot go anywhere else in the world and find that electricity prices are not going to change. This situation is very unusual, is it not? [Translation] Mr. Boulanger: As I said earlier, Gaz Métropolitain is not in places where it cannot be competitive. That is why it has 160,000 customers in the residential sector, for example, rather than the millions that can be found throughout North America. The situation is different in Quebec. We see that in the market we serve. In the first part of our presentation we explained that we accounted for 16 or a 17 per cent of the energy used in the Quebec market. One of the reasons for this is that the aluminum and magnesium sectors, which use procedures requiring significant amounts of electricity, offset the energy situation in Quebec compared to that in Ontario. Gaz Métropolitain is not present in those sectors where it feels it is not competitive. It is present in industrial and commercial sectors, where it delivers 90 per cent of its volume. [English] Senator Kenny: With respect, Mr. Boulanger, you seem to be able to match the price in your commercial markets precisely, and it is the consumer who is on the short end of the stick, if I read this chart correctly. We heard your partners from Enbridge last week, and they were telling us that they find they get their best markets from residential customers. If someone were to ask me whether I want $22-a-unit energy or $17-a-unit energy, I know what my answer would be. Here in Montreal, you have both gas and electricity available. Do you match electricity's price here in Montreal or not? [Translation] Mr. Boulanger: Absolutely. The charts illustrating the residential market show that electricity is in fact cheaper than natural gas. That is why we are not in this market. We target the top of the market, where we serve customers who want natural gas for reasons of comfort or otherwise, or who want gas stoves or gas fireplaces. However, it is a small market compared to the company's total market. In the commercial sector, gas is competitive compared to electricity. We are not threatened in the medium term in this market, particularly since it is not easily accessible for electricity. Consumers are not happy to see that their gas bills have gone up, but that is not enough to make them switch to electricity. [English] Senator Kenny: I have heard much talk about stations and fair playing fields. You are telling me that your major shareholder, who has a third of your company, can have a flat price for electricity, a fuel that competes directly with natural gas, and you are wondering why you are not doing well while this entity that owns a third of your company can undercut your price by $5. I am not surprised that you are undercut. It does not surprise me that you do not have much of a market. [Translation] Mr. Boulanger: We are not saying that Hydro-Québec is causing us trouble. We are very well aware of the competitive situation of our market. We position ourselves in markets in which we know that consumers can get an advantage. A sector such as the residential sector is not such that we can consider all-out development. However, the commercial and industrial sectors need natural gas to produce their products, and they want access to this resource at the best possible price. The resource is essential to these industries. That is apparent in all the industrial parks throughout Quebec. When an industrial park does not have access to natural gas, it is at a disadvantage to those that have natural gas on site. It is an important factor when companies are deciding where to locate. Ms Brochu: I would like to mention that the graph shows the years starting in 1999, whereas it could have started much earlier. For years, natural gas has always been competitive with electricity in the commercial and institutional sectors. The schools and hospitals of Quebec are heated with natural gas, and have been since gas has been available to them. Today we are describing our situation in the most recent months. We do not want to send the hospitals packing. We want to keep our customers, to continue serving them. They appreciate natural gas. We are going through a competitive slump. Our objective is to do everything we can to reduce the price of natural gas delivered duty free. For years, gas has always been more competitive than electricity in the institutional and governmental sectors. [English] Senator Buchanan: This is not the first time I have been in Quebec talking about pipelines. For 13 years, as the premier of the greatest province in this country, Nova Scotia, I met here and in Quebec City with the Levesque government, the Bourassa government, Gaz Métropolitain, Hydro Quebec, and the federal government in Ottawa. I was a great promoter, as was the government of Nova Scotia, of the TQM pipeline. It failed because there was no federal support for a line from Nova Scotia to Quebec. Also, the market was there but the price was not, either in the U.S. or here. First of all, I want to correct something that I think you said about some smaller players in the Maritimes and the Northeast. Nova Scotia Power has an equal partnership with Mobil, 12.5 per cent. I want to make that clear. Going back to when we first planned the Sable Island fields, there is no question that the Quebec and Ontario markets are the closest, distance-wise, to Sable Island. For many reasons over the last years, the TQM pipeline did not work out, even in its last competitive aspects of the Maritime and Northeast versus TQM. Having said that, I think you are well aware that the next phases of Sable will probably be as large, if not larger, than the present. In addition, as much if not more natural gas is off Cape Breton Island than in even the Sable systems. The range of estimates is phenomenal. The range is from 10 Tcf to 24 Tcf, which is a huge amount of natural gas. That phase will get underway as soon as the dispute between Newfoundland and Nova Scotia is over. The other phase will begin as soon as the Government of Nova Scotia can make some new arrangements with Mobil, et cetera. No doubt there will be new pipelines from Nova Scotia to the Boston market. After speaking to the Premier and others in Nova Scotia, there is no question that there will be support for the Maritime northeast pipeline and the Cartier pipeline extending to Quebec and to Ontario. It is interesting to note that for the first time in the history of this country Nova Scotia could be the economic saviour of Quebec and Ontario. It is incredible, but it is going to be true. Are you saying that a new pipeline delivering Sable Island gas or Cape Breton gas to Quebec and Ontario would be competitive as far as Nova Scotia gas going to the Boston market? There is no doubt, in speaking to John Hamm last week, that Nova Scotia supports the position of a new pipeline, the Cartier pipeline in the Maritime northeast, but not at the expense of Nova Scotia not getting as much royalty as we get from the Boston market and will get with a new deal on the new gas. Many, including myself, do not believe that we have the best deal from a government a few years ago who made a deal with the present system. If Quebec is competitive with that Boston market, there will be support from Nova Scotia for a Cartier pipeline. Ms Brochu: This is great and we agree. Senator Banks: I know this subject is not easy or simple, but I want to get down to some bare bones, and I return to Senator Nolin's question. It seems to me, taking a giant step back, that it is unproductive for Albertans to demand they be able to look out the window and see the Atlantic Ocean, and for New Brunswickers to demand easy access to the Rocky Mountains. Those things do not exist and are not real. The free, unobstructed movement of natural gas across the borders has been in place long before FTA, let alone NAFTA, 1985 I think it was. You are suggesting, and this relates to Senator Nolin's question, that the federal government ought to do something about your capacity to have greater access to a wider number of suppliers so that you can negotiate and be more competitive. I need you to tell me exactly what you believe the federal government ought to do to bring about that. Should it begin to intervene and say, "This slice of the pie is going to Boston, and this slice is going to Quebec?" Should it start actually controlling the flow of gas? What should the federal government, in your view, do? [Translation] Ms Brochu: The federal government must first ensure that it has a good understanding of the impact of its decisions and those of its regulatory organizations. I have some examples to illustrate what I mean. Natural gas exports go back long before NAFTA. Until three or four years ago, a Canadian producer wishing to export to the United States had to apply for an export licence from the National Energy Board. The Board granted the licence after determining that the request was in keeping with the criteria of fairness, supply and demand, and so on. If necessary, the Board held public hearings. Since that time, the Board, despite a very legitimate interest in becoming up-to-date and more proactive, adopted stricter procedures. Maritimes and North East and Alliance paid the price of these changes. A blanket order, which is not an export licence, was issued formally in 48 hours, with no requirement to indicate the departure or arrival points of the goods to be exported. Everything has to go through the National Energy Board. We no longer have a forum in which to debate issues such as equity between Canadians and Americans, the basis thereof, and so on, or a forum in which to make our demands known. Gaz Métropolitain does not want to complain about the way in which exports take place between Canada and the United States. That is not the type of business it wants to do. However, it is important that you understand that there is no longer a safety net today. You rightly mentioned the very important development of gas pipelines and the gas market in the Sable Bay and Cape Breton areas. It is easy to imagine that in future, gas will be transported to Boston without ever being on the mainland. Should there be a great deal of gas, there is no problem, but today, we realize that Maritimes and North East is planning a connection for its system so as to be able to transport up to 2 Bcf of natural gas. In 1997, we tried to make the connection, however, we were unable to do so for the reasons you know about. Today, we are trying to make the connection once again. The longer we wait, the more difficult it will be, because the transportation systems already in place will take advantage of this to take over the random production. Obtaining a licence to build a gas pipeline of the type we are trying to build takes between two and three years of representations before the National Energy Board. We will never be ready in time to pick up the random production unless an arbitrator makes a decision to shorten this time period. Does the very title of NAFTA not imply that both Canadians and Americans should be free to present bids? [English] The Chairman: You are in danger of giving your presentation again. Senator Banks: The short answer to my question is that you would want us to return to a system in which there is control? [Translation] Ms Brochu: It is not a question of being in control. Mr. Bertrand: The market dynamics have changed and so have the regulations. The outlook for the future is no longer the same. [English] Senator Banks: But I do not understand what you want the federal government to do by way of guaranteeing what it is that you are after. By what means will it do that? [Translation] Ms Brochu: We would like our Prime Minister to say that energy is important to Canadians as well. This is something the President of the United States repeats frequently. Next, we want the federal government to acknowledge that the Cartier project is a logical part of Canada's energy priorities. We are not asking for money, just for the right words. When we sit down at the bargaining table with Maritimes and North East, we're involved in a game of one-upmanship: my president is stronger than your prime minister... That's how it plays out. We therefore are under the impression that whatever happens, the gas will go to the United States, because the Americans need it. The pressure they apply is tremendous. We will never get any support from the federal government to tell us that Cartier is a very good deal! [English] Senator Buchanan: You are saying that you want a level playing field. Ms Brochu: Yes. Senator Buchanan: Not at the expense of the producing province, Nova Scotia. Senator Eyton: The difficulties we are all facing, particularly you, is at this moment in time gas prices have gone crazy. I am sensitive to that because I am involved with a group of companies who, until about a year and a half ago, owned Canadian Hunter, a major Canadian natural gas producer, and we had the good foresight and judgment to sell all of our stake at $26.50 per share. It is trading today at $45. We left a lot of money on the table because we did not understand nor anticipate the increase in the price of gas. In the analysis today, you are looking at that bubble and you can make observations about being competitive or not, and the price is too high. We all know it is really a moment in time. As I understood the remarks I heard in the presentation and what I thumbed through - and it was clear and excellent - the trouble is that you do not get competition without infrastructure. You have to have infrastructure before you have competition. The first point is whether we are prepared to pay market price to support that infrastructure; the second is that the infrastructure must be in place or there can never be competition. Infrastructure has to be there, or else you are not in a position to do anything. It is a pre-condition. Your main point is that you are and can be competitive in the right environment, and you are not asking anybody to subsidize that. In particular, gas can be competitive with anything - and I take some comfort in looking at the projections of natural gas pricing for five years. Today, the forecast is $7.77, coming down dramatically over five years to $4.30 and some odd cents. It is a combination of we'll pay market, we'll support an infrastructure and we can be competitive. Indeed, we believe market forces will become increasingly competitive, and natural gas prices will revert from the very high levels we have today. Do I understand your presentation? Is that representation fairly accurate for my purposes? I am looking at it from a market point of view. [Translation] Mr. Boulanger: Yes, exactly. Gas prices today reflect an imbalance between supply and demand, but this situation should be corrected in the relatively near future. It is important to have fair access to this resource at the lowest possible cost. The proximity of the gas deposit also has an impact on the market price. The establishment of a network of interrelations is crucial if we want to remain competitive. [English] Senator Eyton: It is a compelling case and somehow premised on being prepared to pay the market price. It is a very compelling case. The Chairman: I might mention that I was in St. John's, Newfoundland, the day before yesterday. They are prepared to sell you gas from over there, too. There are other sources of gas out there in the Atlantic. [Translation] Senator Hervieux-Payette: The difference in the price of gas for the residential and commercial sectors is surprising. My hypothesis is that the difference between the commercial price of electricity compared to the commercial price of gas explains the fact that the commercial price of electricity is not the same as it is for the residential sector. Is this the difference that allows Gaz Métropolitain to be on the commercial market? Mr. Boulanger: You are right in part. The electricity rate in the residential sector is subsidized by the various rate categories which change depending on the type of client. People do not pay the real cost. That is one of the reasons why the cost of electricity is so advantageous for residential consumers in Quebec. Senator Nolin: To summarize your point, Ms Brochu, you would say, to begin with, that you want the government of Canada to say loud and clear, in response to Vice-President Cheney, who came to Canada to tell us: "Here is our long-term plan," that it agrees to take part in carrying out this program for the Americans. We do have to offer them something after all. We cannot start off by saying no. Second, you would like Canada to affirm how important it is that all its components have access to a competitive natural gas market. Third, you would like the government of Canada to undertake to take all the necessary steps, in the area of regulation and bilateral negotiations with the United States, in order for the project to go forward. Ms Brochu: Yes. The fact is that energy is not a commodity. It is not traded as such. California, for example, will not go bankrupt if it does not have any coffee tomorrow morning, but energy is essential. So we are all in favour of a market, but we have to realize that there is no market on the East Coast at the moment. When the producer is both the transporter and the client, the market has very few players. If we support this approach, we are ruling out the possibility for Canadians who want to pay the market price to invest in this market. Senator Nolin: You have just demonstrated for us that all the Canadian components do not have access to a competitive natural gas market at the moment. Ms Brochu: At the moment, it is extremely difficult. Senator Maheu: Can ordinary residential consumers in Canada or Quebec expect to see Gaz Métropolitain showing an interest in their needs rather than in its competitive market, with a cost almost equal to the cost of electricity in industrial and commercial sectors? Mr. Boulanger: That is an excellent question. Thirteen or fourteen years ago, the company decided to get out of the residential market, because it could no longer compete there. As Gas Métropolitain connected its residential customers, the company's rate base increased, and the bill to consumers did so as well. In business, if you increase your prices all the time, you lose customers to your competitors. It was not economically desirable to do that. Now, the context has evolved. Three years ago, we adopted a new commercial direction and we are again targeting residential markets. Increasingly, we are finding that consumers want access to natural gas for home heating. During the ice storm, people in Quebec suffered greatly because of an electricity blackout that lasted up to 25 consecutive days in January alone. At that time, natural gas appeared to be a good energy choice, compared to electricity. We had already started to reposition ourselves in the market at that time using some very targeted commercial strategies. We realize that we cannot build a network that will serve the residential market throughout the province, but, up to a certain point, we want to offer consumers the option of having access to natural gas. Around Montreal at the moment, about 100 natural gas residential projects are being developed. Last year, we connected close to 3,000 new homes. That is very few compared to Ontario, but for Quebec, it is huge, in light of the fact that three years ago, we were connecting about 200 homes a year. Senator Maheu: Essentially, this is not really a priority for Gas Métropolitain. You have only a few little projects here and there. You speak about natural gas heating as an alternative when there are power failures. However, is electricity not required to make natural gas heating work? Mr. Boulanger: It depends on the equipment. A natural gas fireplace can meet most of the heating requirements of a house, and no electricity is required to operate it. The same is true of gas stoves. A number of domestic water heaters do not require electricity in order to operate. The basic needs can be met. As I said earlier, people are not looking for natural gas for this reason alone. [English] The Chairman: I would like to thank our witnesses from Gaz Métropolitain. As you can see, there were many questions. We probably could have gone on all day, but we have another panel coming on - and it is not Hydro-Québec. Thank you very much for coming out. Senator Nolin: It is appropriate to put on the record that Hydro-Québec was invited to appear before the committee, but refused. I do not want to question why they refused, but it needs to be noted that they were invited to appear and that obviously they could have provided answers to important questions that were asked, not to them, but to Gaz Métropolitain this morning; they could have been explained to us how it works in Quebec. The Chairman: Thank you, Senator Nolin. That is a statement, and I am sure it is on the record. Our second panel is about hydrogen as an alternative fuel. This subject came up at our hearings in Vancouver, the fuel cell, the Ballard people. Mr. Bose, you can go right into your presentation. Mr. Tapan K. Bose, President, Canadian Hydrogen Association: In addition to my involvement with the Canadian Hydrogen Association, I am also the Director of the Institut de recherche sur l'hydrogène at the Université du Québec à Trois-Rivières. The Canadian Hydrogen Association is a non-profit membership association composed of universities, research organizations, industry and small business. Our objective is to promote the use and development of hydrogen energy, hydrogen energy systems and technologies, and to develop the role of hydrogen energy for the purpose of improving the environment. Our chairman of the board is Dr. Geoffrey Ballard, founder of Ballard Energy Systems and currently president of General Hydrogen. Professor Ronald Venter, who is the vice-provost of the University of Toronto, is vice-president and treasurer. The board of directors is formed of representatives from industry and academia from all parts of Canada: Mr. Dominique Kluyskens, consultant; Professor Gerald McLean of the University of Victoria; Mr. Pierre Rivard, president and CEO of Hydrogenics Corporation; Dr. Barry Pruden, formerly from the University of Calgary; and Alexander K. Stuart, chairman of the board of Stuart Energy Systems. Our association is also involved in the organization of national and international conferences and topical seminars. We have recently held the first Canadian meeting on hydrogen storage using carbon nanostructures in Trois Rivières, and a meeting for investors in collaboration with TD Securities on fuel cells in Toronto. The investors meeting was attended by 220 people, 180 of which were investors. Perhaps it is a coincidence, but since that meeting the shares of some of the Canadian fuel cell companies have gone up by 50 per cent. If you have noticed the share market, the three companies that I am mentioning, Global Thermoelectric, Hydrogenics and Ballard, have all gone up by 50 per cent. I suppose we have something to do with that because we brought in people from different investors and industries. This is the kind of role that the Canadian Hydrogen Association could play and will play in the future. Our last annual meeting, which was held in Quebec City, was attended by over 300 participants from all over the world. Our next annual meeting will be at the Victoria Convention Centre in British Columbia from June 17 to 20. We are also involved in the organization of the next World Hydrogen Conference, which will be held in Montreal in June 2002 at the Queen Elizabeth Hotel. Energy is the very backbone of our standard of living. Our economy depends on reliable and competitively priced energy supplies. Energy is a major trading commodity, since Canada is a leading producer/exporter of hydrocarbon fuels, uranium, electricity and coal. Our present energy system is based on polluting and non-renewable resources. Assuming a modest growth of 2 per cent usage, there will be more petrol used in the next 20 years than ever before in the whole history of mankind. On the environmental side, the International Panel on Climate Change, the IPCC, has concluded that the earth's climate is changing due to a definite anthropogenic contribution to the CO2 level in the atmosphere. The atmospheric concentration of greenhouse gases is now 30 per cent higher than at the beginning of the Industrial Revolution. There has been a temperature rise of .3 to .6 Celsius this century. The last couple of decades are the warmest registered this century. Record temperatures have been observed year after year in recent times. We are witnessing sea level rise, retreating glaciers and a noticeable increase in extreme weather events. Most of the anthropogenic contribution to the greenhouse effect can be directly attributed to fossil fuel combustion and deforestation. Without a dramatic reduction in the harmful emissions, the IPCC projects a surface temperature rise of up to 6 degrees. The expected changes in climate have potentially disruptive effects on our economy and our quality of life by threatening our health, our supply of food and fresh water, biodiversity and our habitat. In this context, I wish to say, honourable senators, that perhaps the Canadian policy would be different from the American position, going all the way with fossil fuel. In addition to their global effects on climate, fossil fuels emit carbon monoxide, nitrogen oxides, volatile organic compounds and particulate matter. Carbon monoxide is toxic to human beings. Nitrogen oxides, which are emitted by all internal combustion engines, are the key ingredient in the formation of smog, which is detrimental to human health by causing lung damage and eye irritation. Particulate matter may also cause lung damage. Volatile hydrocarbons contribute to ozone formations and thus to smog. As concerns grow over the consequences of climate change and the depletion of hydrocarbon fuels, the use of clean and renewable energy carriers will become a centre-stage issue. The United States and Canada are among the worst per capita emitters of carbon dioxide, which most scientists agree is responsible for global warming. The Kyoto commitments, if they are carried out, require a 6 per cent reduction of the 1990 levels by 2012, representing a 25 per cent reduction from the levels predicted for Canada without the Kyoto protocol. This reduction would imply important changes in the way we produce and use energy, but also provides new opportunities for business, economic growth and jobs. In the last 150 years, the trend in energy use has been toward reducing the level of carbon content and increasing the content of hydrogen in our fuels. Accompanying this trend is the decline of solid fuels - such as wood and coal - and the rise of the use of gaseous fuels, natural gas and eventually hydrogen, which are expected to dominate eventually the energy market. Each predominant fuel from wood through coal, then oil, natural gas and, ultimately, perhaps, pure hydrogen has contained more hydrogen and less carbon than its predecessor, and each successive fuel has been cleaner and more powerful. As you can see, we started with wood and coal, which had more carbon atoms. As we go from natural gas, which is mostly methane, it is one carbon atom to four hydrogen atoms - CH4. Finally, with respect to hydrogen, which contains no carbon, it is infinite. The Chairman: You have to get hydrogen from something. Mr. Bose: You can get hydrogen, as I will explain here, from the wind and the sun, the electricity produced from the wind and the sun. The energy generated from the combustion of one kilogram of hydrogen is about five times larger than wood, four times larger than coal and 2.5 times larger than petrol, kerosene or natural gas. The combustion of hydrogen does not generate CO2, whereas the weight in kilograms of CO2 emitted per kilowatt hour of energy obtained is 0.4 for coal, 0.28 for oil and 0.2 for natural gas. Hydrogen is important to our economy because it is widely used in the process industry and because it is the energy carrier of choice in a clean and renewable energy system. An energy system relies on primary energy sources to produce electricity. Since electricity cannot be stored for long periods of time and is difficult to transport over large distances, it is not ideally suited for use in the transportation sector and for off-grid stationary power generation at some locations. An energy vector, which can be stored indefinitely and moved over large distances, is necessary. This role is played by fossil fuels in our current energy system. However, fossil fuels are harmful to the environment and will eventually be depleted. Although hydrogen is the most abundant element of the universe, it is almost always found, on earth, chemically bound to other atoms. Hydrogen can be produced from water by electrolysis and converted back to electricity with a high efficiency. Unlike fossil fuels, the only by-products of this cycle are water and some heat. A power storage and generation cycle based on hydrogen is clean and renewable. Our present carbon-based energy system has used the internal combustion engine as its main energy conversion device to transform chemical energy into work. Although hydrogen could be used with internal combustion engines, ICEs, the natural energy conversion device for hydrogen is a fuel cell. Unlike the ICE, which burns fuel at high temperatures, most fuel cells rely on much cooler electrochemical reactions, roughly the inverse process of electrolysis. Fuel cells are about two times more efficient than ICE engines, and the only by-products are electricity, water and a moderate amount of heat. Fuel cells have also fewer parts than an internal combustion engine and can run with minimum maintenance for a year or more. In addition, they have been used in extreme environments, such as Antarctica, with great success. Over conventional batteries, fuel cells enjoy a great advantage because power and energy are decoupled. The problem with batteries is that in order to go long distances a larger battery is required. In the case of fuel cells, the only requirement is more hydrogen. If you want 10 fuel cells, it is decoupled. The quantity of energy needed and the system itself, like the battery, has to grow if you want to go higher. If you want to go far, the fuel cells could stay the same. You just increase the amount of hydrogen that you need. It is decoupled. A fuel cell engine will run as long as there is fuel available, with the same set power output. Fuel cells can be used for stationary power generation and automotive applications. The technological issues that must be addressed for hydrogen to enter the energy market are its production, its storage and its use. Although the cheapest way to produce hydrogen is from natural gas, renewable hydrogen should be obtained from water by electrolysis where electricity is generated by renewable sources such as wind or sun. The storage issue is perhaps the most important to address for hydrogen. Although hydrogen has one of the largest energy of combustion per unit of mass, because of its low density, it has one of the lowest per unit of volume: hydrogen is light but bulky. Other issues include the absence of a distribution infrastructure and the price of fuel cells, which is still very high compared to the internal combustion engine. Intense R&D activities have yielded promising storage technologies by compression, advanced liquefaction techniques, and sorption on solids. The absence of a distribution infrastructure can be addressed by introducing fuel cells in the public transit system. Transit buses are an ideal start-up market for fuel cell automotive applications, because they use a central fueling and maintenance infrastructure. On the other hand, the use of fuel cells for cars may be more difficult. Fuel cells makes sense for buses, however, because buses have a central maintenance system and they can fill up at the central station and go all over. Their long lifetime and low maintenance offset their capital cost, and mass production is less of an issue than for passenger cars. At present, Ballard fuel cell buses can hold 60 passengers. Pressurized hydrogen is stored on the roof. They also use a storage tank, which is made in Canada. Dynatech is selling this. The buses have a 400-kilometre range and a power rating of 275 horsepower. The fuel cell engine of the bus fits into the same size compartment of that of a diesel engine. Fuel cell bus demonstrations have been successfully conducted in Munich, Hamburg, Chicago, Vancouver and Los Angeles. Recently, 10 cities in Europe announced that they will purchase between them 30 Ballard fuel cell buses in what might be a first step to larger fleet purchases. Virtually all the major car companies are involved in the development of fuel cell cars. The immediate problem of fuel cells remains cost, which is expected to be offset by the development of mass production methods. Other concerns about hydrogen are the cost of hydrogen and the risks of using hydrogen as an alternative fuel. The cost of hydrogen produced by electrolysis depends on the cost of electricity and the capital cost of the equipment. Electricity, however, is not cheap, and neither is the infrastructure required for electrolysis. If the cost of electricity is five cents per kilowatt hour, the price of hydrogen would be about $10 per thousand standard cubic feet, or $5 per gasoline gallon equivalent. However, if one uses surplus electricity where the marginal cost of power is low, the cost of hydrogen production would be substantially lower. Thus, off-peak electricity may offer a way to produce cheaper hydrogen. Industrial hydrogen is produced to a large extent by steam reforming of natural gas, usually on a large scale at 800 degrees Celsius. It is used for ammonia or methanol production, or for hydrogen supply for petroleum upgrading and refining. Because methane is not a renewable source of hydrogen, steam reforming does not, in the long term, constitute a sound basis to build a new hydrogen energy system. The perception of risk of using hydrogen as an alternative energy is best embodied in the Hindenburg incident. The Hindenburg, the largest aircraft ever to fly, was destroyed on its 63rd flight by fire on May 6, 1937, in Lakehurst, New Jersey. Officially, 35 of the 97 passengers and one of the 231 ground crew died. The public and the press blamed hydrogen and this perception has remained with the general public ever since. A detailed investigation by Addison Bain of NASA has shown that on that day atmospheric and the airship conditions were conducive to the formation of significant static electricity. The fabric of the envelope of the airship was sensitive to arc ignition and susceptible to promote flame propagation. Hydrogen was but one of the combustibles on board: the envelope was by itself sufficiently combustible and reactive to the cause the accident. His conclusion was that the Hindenburg would have burned even if it had been filled with helium. This fact was known to the German engineers investigating the incident. Otto Beyersdorff, an electrical engineer, wrote on June 28, 1937 about the Hindenburg disaster that the actual cause of the fire was the extremely easy flammability of the covering material brought about by discharges of electrostatic nature. The large flammability limit range of hydrogen, combined with a low value of the ignition minimum energy of hydrogen, is also cited as a particular concern. However, the low ignition energy of hydrogen is for premixed stochiometric mixtures of hydrogen and air. If proper venting measures are taken and good detectors are installed, achieving such concentrations in significant volume is unlikely. At room temperature, hydrogen dissipates quickly in air. It is buoyant and diffuses rapidly in air. Below a concentration of hydrogen of 9 per cent in air, the ignition energy required to initiate the combustion process is very similar to that of common hydrocarbon fuels such as methane. Ignition at the low end of the flammability range is difficult to achieve, even under favourable experimental conditions. Another concern is the wide detonability range of hydrogen, especially when compared to fuels such as methane. Hydrogen detonations, however, are very difficult to achieve in open spaces and a large ignition source is required to initiate them. Hydrogen flames have a low emissivity compared to hydrocarbons. Despite a large combustion energy, the thermal flux radiated is usually comparable or smaller than hydrocarbon flames. The thermal flux is not the major hazard from hydrogen flames, although the fact that the flames are hard to see is a concern. The major threat stems from the detonation properties of hydrogen. Overall, hydrogen is not more dangerous than our current fuels if handled properly. Through regulations, legislators have had a major impact on hydrogen technologies. The most recent California emission standards for vehicles are available in the "California Exhaust Emission Standards and Test Procedures for 2003 and Subsequent Model Zero-Emission Vehicles, and 2001 and Subsequent Model Hybrid Electric Vehicles, in the Passenger Car, Light-Duty Truck and Medium-duty Vehicle Classes." The regulations stipulate that new 2003 and subsequent model passenger cars, light-duty trucks and medium-duty vehicles will be certified zero-emission vehicles if the vehicles produce zero exhaust emissions of any criteria pollutant under any and all possible operation modes and conditions. They specify that a minimum percentage, increasing from 10 per cent to 16 per cent, from 2003 to 2018, of the vehicles produced by manufacturers and delivered for sale in California must be zero-emission vehicles. These percentages are subject to certain conditions, which differ according to the size of the manufacturer. The minimum percentage may be satisfied in part or in whole by low-emission vehicles, depending on the size of the manufacturer as specified in the emission standard. Hydrogen and fuel cell technologies are maturing rapidly. We are witnessing the birth of an entire new industry, committed to providing cleaner and renewable transportation and stationary power systems. Canadian technology and research centres are at the forefront of this remarkable evolution. Major university research centres are located the University of Victoria (Institute for Integrated Energy Systems), University of Toronto (Centre for Electrochemical Studies) and the Université de Québec at Trois-Rivières (Institut de recherche sur l'hydrogène). Hydrogen research and development activities in Canada cover all aspects of the use of hydrogen as an energy vector, including fuel cell applications, hydrogen storage, safety and standards. The National Research Council has recently started a Fuel Cell Research Centre in Vancouver, British Columbia. Governments, both federal and provincial, have played a key role in assisting industry to develop the leading-edge hydrogen technologies through long-term financial and expert support. I must take this opportunity to mention the outstanding role that Natural Resources Canada and National Defence have played in the development of Ballard Power Systems, a world class Canadian company. As you probably know, the first few years Ballard started in Vancouver, the research funds were held largely by Natural Resources Canada and by National Defence. I would like to take this opportunity to make the following recommendations. Canada has all the necessary infrastructure to develop world-class hydrogen and fuel cell industries. It would be helpful if the Canadian government would take the initiative to start a fuel cell bus demonstration project for the major cities of Canada. Doing so would give tremendous impetus to the Canadian fuel cell industry as well as to the companies involved in hydrogen refueling stations. The second recommendation is increased funding for R&D activities of the hydrogen and fuel cell program in Natural Resources Canada. Their program has been successful and was instrumental in establishing the emerging hydrogen and fuel cell industry in Canada. Third, the federal government should try to provide incentives for the increased use of hydrogen and fuel cells in the market place. This could take the form of financial incentives or stricter emission regulation. The Chairman: On page one of your brief, you mentioned carbon nanostructures in Trois-Rivières. I am not sure what that is. Mr. Bose: It is nanotechnology. Alberta is trying to develop a natural research council on nanotechnology. A nanotube is an extension of carbon-60. Carbon-60 has a dome structure, and a nanotube is just elongated and having a two-nanometre diameter. There have been successful experiments to store about 5 per cent or 6 per cent hydrogen at room temperature in those tubes. They are difficult to produce and they cost a lot of money. The Chairman: This is not going to be set underground. Mr. Bose: They are produced from electrical discharge, plasma discharge, and there are soots produced in the bottom. The nanotubes are produced along with other carbon-60. Techniques to separate them have to be developed. This is on fundamental level, but it has great potential for hydrogen storage. Right now there is high pressure. Ballard buses have a pressurized cylinder on top. It would be great it one day there were 5 per cent or 6 per cent storage in a nanotube, because you could store much hydrogen and thus have a large autonomy in the car or buses. This is a breakthrough for the storage system. [Translation] Senator Nolin: Mr. Bose, your opening remarks clearly show that Canada has not been outdone on research on the noble element hydrogen, which is number 1, if I remember Mendeleïev's periodic table correctly from my chemistry classes. One of the problems, and you referred to it in answering the chair's question, is the issue of the safe transportation of this element. What research has been done and what discoveries have been developed here in Canada, or in partnership with other countries, on transporting hydrogen? Mr. Bose: We are still developing standards for the transportation of hydrogen. As you know, the secretary of the ISO here in Canada is at the Standards Office. Sylvie Gingras is the secretary, and I chair the committee. So all the standards for hydrogen are developed in Canada. Of course, there are 15 countries that are "P" members, which means participating members. There are 15 countries that are "O" members. At the moment, we have developed two international standards. And we are developing six or seven more at the moment, because the standards are new. However, we wrote a book, that is we got funding from Natural Resources Canada, with the Department of Energy, and our institute at Trois-Rivières and EnRel in the United States, we co-ordinated an effort to write a book entitled Source Book for Hydrogen Applications. The book was produced by a Montreal company, Tisec, and it involved four Canadians and four Americans, including a representative from NASA, Mr. Addison Bain, whom I mentioned. There were four Americans and four Canadians. I was one of the four Canadians involved in writing the book. So we do have a book on safety. We are preparing another book with Bob Hay from Tisec, Pierre Ménard from our group, and myself. We are preparing a book for the public. This is something called "Source Book Lite," if you like, a simpler version of the publication prepared for the industry. As I had already told you, from a safety standpoint, hydrogen is no more dangerous than any hydrocarbon fuel if proper precautions are taken. Senator Nolin: With respect to use, you explained the supply problem for cars. But the supply problem is a lot easier to handle for, say, a fleet of buses or a public transit system. Mr. Bose: Exactly. Senator Nolin: Has there been any research, or any cases examining the use of hydrogen in railways? Mr. Bose: I believe that CN was interested at one point; they invited Martin Hammerly of Natural Resources to give them an overview of hydrogen. That is all I know. We are just at the beginning, I think. There has been nothing else. But you are quite right, there are a lot of possibilities where railways are concerned. Senator Nolin: I have a last question on the issue of energy problems in developing countries, and the assistance which Canada and its partners in the hydrogen industry can provide. Do you know about any ongoing projects in this area? Mr. Bose: At present, we are establishing ties with Argentina. Our institute has set up a project on wind turbines. What are we doing? We are generating electricity using wind turbines. If we do not need the electricity, it can be used to generate hydrogen. So, as I said, we cannot store electricity. If you store electricity through a battery, it leaks out. So we use hydrogen. Talks are now going on with Argentina; as you know, wind efficiency in the Patagonia region is almost 45 per cent. I have involved SNC-Lavalin. The fellow from Argentina came to Montreal recently for Americana week. There was a preliminary discussion between the man from Argentina, SNC-Lavalin, and myself. I also brought the vice-president of SNC-Lavalin to meet Sandy Stuart, President of Stuart Energy Systems, which manufactures the electrolyzer. The idea was to establish a consortium with an electrolyzer manufacturer and an engineering company like SNC-Lavalin. The potential is enormous if we take the first step with Canadian companies and set up a system in Argentina, where wind efficiency is excellent. You also mentioned developing countries. The possibilities might be greatest there, perhaps, because they have no infrastructure. If we could start with this, the results would be incredible. And Canada could take a giant step forward. So, as I said, we are at the discussion stage. SNC-Lavalin believes that funds could be provided by the World Bank and Canada's Export Development Corporation. [English] Senator Spivak: By 2003, it will have to be 10 per cent. Mr. Bose: Ten per cent. Senator Spivak: Those cars will not be hydrogen fuel cell cars. Mr. Bose: No, they will be electric cars too. Senator Spivak: Or hybrid. Mr. Bose: Hybrid also. Senator Spivak: What is your time frame for when we will have automobiles running on fuel cells? Mr. Bose: The first step should be with the fleet. We have a tremendous opportunity here because in Vancouver the refuelling station was done by Stuart Energy Systems, and we have probably one of most important companies for hydrogen production. Stuart has sold its system to 90 different countries. We have Stuart, we have Ballard and we also have small companies, such as H Power Corp. in Montreal, Hydrogenics, Pierre Rivard, in Toronto, and Global Thermoelectric Systems in Calgary. We have in Canada the technological possibilities, and the government could play an important role. It has participated in the development, R&D. It should continue with that, but it should also do a demonstration. Pierre Rivard spent some time in our institute, and another gentleman, the vice-president of engineering, spent seven years in our institute. The existence of hydrogen institutes in different parts of the country is important. Of the people working our institute, two or three are working at Hydro-Québec, at Hydrogenics and H Power. It is important to support education and laboratories all over the country to form the engineers and scientists that we need in this domain. Senator Spivak: Your opinion is that it will be hydrogen that will run fuel cells, not something else. Mr. Bose: For automobiles it will hydrogen, but for distributed power systems it could be natural gas. Senator Spivak: I am asking about the distributive generation that we heard about. If we do not use hydrogen, we will not see much reduction in the whole system of carbon emissions. It will not be what it could be. What about this distributive generation? We hear about how people will have something in their house to plug their car into, or in their factory. Is this just dreaming? Mr. Bose: No, not at all. Senator Spivak: What is the time frame there? Mr. Bose: That is probably sooner than for the car. They have calculated the cost for the distributive for stationary generations. They could support about $1,000 per kilowatt hour, whereas for cars it has to come down to $100. To reach paying $100 will take much longer than to reach $1,000 kilowatt hours for a solid oxide fuel cell. Senator Spivak: If you have distributive generations, you do not need an infrastructure. Is it the solid oxide fuel cell rather than the Ballard fuel cell? Mr. Bose: Ballard also has a PEM system for 250 kilowatts. They are distributing high power stationary. Eventually, it will be easier with natural gas. Hydrogen infrastructure could be a problem unless we go farther in that. Senator Spivak: If you start with natural gas, can you then convert those distributive generators for hydrogen; correct? We are talking huge amounts of money. Mr. Bose: Solid oxide uses hydrogen. The only difference is the high temperature. You use 1,000 degrees, or 600 or 800 degrees. Natural gas is converted to hydrogen within the system. You do not have to do it before. Senator Spivak: Is that feasible for home generator use? Mr. Bose: Absolutely. H Power Corp. in Montreal is trying to develop systems for residential use. H Power is specializing in residential use. Senator Spivak: That is stunning. What is the time frame? Mr. Bose: The year 2010. Senator Spivak: I might still be here. Senator Christensen: For my own edification, and following up on Senator Spivak's question about distribution, on the refuelling stations, which appear to be a problem for cars, would the hydrogen be produced on site at these stations, or does it have to come through a distribution system to get to these stations? Mr. Bose: If you are in Vancouver, you should visit the refuelling station that has been built - you were there. Senator Adams: We were there. Mr. Bose: This refuelling station is based on electrolysis. In Vancouver, B.C. Hydro gets it electricity from hydro power, and it is clean. That electricity is used to split water and that produces hydrogen. That is the system. These stations have to be built. They are expensive. They are not cheap, but they are clean. One of my recommendations referred to demonstration projects, if the federal government would take, for example, buses in Montreal, buses in Toronto, all over the country, and then the refuelling stations could be built at the central stations, even if they are expensive, because the smog will be gone. People might be ready to pay. I know three Ballard buses are running in Chicago. It appears that if the people who are waiting for the bus know that the next bus is the Ballard bus, they wait for that bus. Senator Christensen: Although these stations generate hydrogen on site, they still need another source of energy in which to do that; correct? Mr. Bose: Hydrogen is not a primary source like electricity. Senator Christensen: Coming from the North, my interests are in remote areas and using the cell in remote areas for energy generation. Mr. Bose: For example, in the North, in the Inuit regions, the wind is very good. I think we should set up. In Gaspésie, they are producing 100 megawatt. If the wind quality is good, efficiency is 30, 35 per cent, you can produce electricity for five cents a kilowatt hour. Senator Christensen: What about photovoltaics? Mr. Bose: That is still far off because the cost of producing electricity from sand is still more expensive than from wind. Wind turbines have come down in price. When you have 35 per cent efficiency, you can produce electricity for four or five cents a kilowatt hour. Senator Christensen: Then you have long-term storage. Mr. Bose: You can use electricity directly, but you can store the electrical energy with hydrogen. [Translation] Senator Nolin: If I understand correctly, Ballard is working in partnership with a research institute in Germany? Mr. Bose: Yes. It is a private company. Senator Nolin: The basic research centre in Germany... Mr. Bose: Yes, that is right. Senator Nolin: Now, if this is information that you have but cannot... Mr. Bose: No, no. I visited Ballard's. They work with DaimlerChrysler. So they have a company in Germany, right near Stuttgart. They are actually right next to DaimlerChrysler there. They work very closely together. Because DaimlerChrysler and Ford are Ballard shareholders. [English] Senator Spivak: You say it is expensive. However, are you doing a comparative cost benefit analysis as against the external costs for fossil fuels and other sources of energy? Mr. Bose: Absolutely. There should be a study, and it is something the federal government can do. Take account of the externalities such as how many people get sick, how many asthma patients are dying. If you take that into account, maybe the petrol cost is too high. Senator Spivak: There are other external costs, not just health costs. Mr. Bose: It is difficult to take that into account, but I think there should be a series of studies with externalities. The real cost of petrol is not what it takes to produce it. There are health effects, and if you take that into account, hydrogen is much cheaper. Senator Spivak: And the environmental costs. Mr. Bose: Yes. Senator Buchanan: As you mentioned, you can produce hydrogen from natural gas. Mr. Bose: Yes. Senator Buchanan: We have literally trillions of cubic feet of natural gas offshore Nova Scotia. There is a project that has been looked at since the mid-1980s called Synfuels. That group project is led by Alistair Gillespie. It involves a coal liquefaction process for oil from coal. We produce a great deal of coal in Cape Breton. A plant was to be built in Port Hawkesbury, which is very close to the natural gas pipeline, and the idea was to process hydrogen from natural gas and then inject the hydrogen into the coal liquefaction process. Are you aware of that project or that kind of a process? Mr. Bose: I am not aware of that project, no. Senator Buchanan: What about the process of injecting hydrogen? Mr. Bose: Hydrogen is used for the heavy oil, to lighten it. Canada is one of the largest producers of hydrogen, the largest in the world per capita. Hydrogen is used mostly in the petrochemical industries. It also has agricultural applications as well as applications in the process industry. We are thinking of it more in terms as an energy vector. Senator Buchanan: That is what this would be, because we have looked at the injection of hydrogen from natural gas in a coal liquefaction process, and it works. It worked in other parts of the world. I want to ask you if you are aware of the Synfuels project. Mr. Bose: I have heard about the project. The Chairman: We might mention that we are hoping to have Alistair Gillespie make a presentation to us, and we hope Senator Buchanan will be there. Senator Buchanan: Not only will I be there, I will get him there. The Chairman: Before we close, I have one question. When we were talking to Ballard in Vancouver, they suggested that the fuel for the cell may well just be ordinary straight gasoline for awhile. Mr. Bose: With methanol. The Chairman: In other words, they can make a 20 per cent methanol gasoline mix and keep the farmers happy, too. They did not seem to have any figures as to how much that would reduce the pollution from an ordinary hydrocarbon. Mr. Bose: It would reduce it, certainly. The Chairman: I could not get anything more than that. Mr. Bose: I cannot give you any particular figure. Eventually, I think it could be an intermediate stage, methanol. The Chairman: Would it be too much to ask you to drop our committee a line vis-à-vis the amount of reduction if they use gasoline? You must remember that the government makes a great deal of money selling gasoline. It makes more than the producer. To yank that away suddenly is akin to taking a bottle from a baby. Mr. Bose: We are not talking about completely going over. We want the government to make a start. The Chairman: Can you drop us a line? Mr. Bose: I can drop you a line as to what extent it will reduce. The Chairman: Thank you very much. The discussion this morning was most enlightening and interesting. The committee adjourned.