TERASEN GAS (VANCOUVER ISLAND) INC. (“TGVI”)
                    PROJECT NO. 3698482 / ORDER NO. G-123-07
                      LONG TERM SERVICE AGREEMENTS


                                         October 29, 2007

1.     VIGJV is a joint venture created by various pulp and paper companies served by the high
pressure transmission pipeline owned and operated by TGVI. Transportation service by TGVI to
VIGJV is governed by a transportation service agreement dated December 14, 1995 (the “JV
TSA”). There were originally five companies participating in VIGJV, but with changes and
discontinued operations there are now only three companies remaining namely; Catalyst Paper
Corporation, Howe Sound Pulp and Paper Limited Partnership and Pope & Talbot Ltd. – Harmac
Pulp Operations. These companies operate a total of six mills served by the TGVI transmission

2.       To the best of its knowledge, VIGJV is one of four shippers currently on the TGVI high
pressure transmission system (the “HPTS”); the other three being Terasen Gas Squamish, BC
Hydro and the TGVI Distribution System. Each shipper in the same way supplies gas to TGVI
to transport across the HPTS to one or more designated delivery points. If the proposed Mt.
Hayes LNG storage facility is approved and constructed, Terasen Gas Inc. (“TGI”) will also
become a shipper on the HPTS, supplying its gas to TGVI to transport to and from the Mt. Hayes

3.     VIGJV submits that TGVI is obligated to offer service to each shipper upon substantially
the same terms and conditions. Section 59(2) of the Utilities Commission Act (the “Act”) states:

       “A public utility TGVI must not

              (a) as to rate or service, subject any person or locality, or a particular description
              of traffic, to an undue prejudice or disadvantage, or

              (b) extend to any person a form of agreement, a rule or a facility or privilege,
              unless the agreement, rule, facility or privilege is regularly and uniformly
              extended to all persons under substantially similar circumstances and conditions
              for service of the same description.”

4.     VIGJV submits that the proposed transportation service agreements for BC Hydro do not
comply with the requirements of section 59(a) of the Act. In particular, VIGJV cites the
dramatic differences in the tolls, conditions and terms of service proposed by TGVI to TGI and
BC Hydro. TGVI will likely argue that the obligations under section 59(2) do not apply because
TGI and BC Hydro are not “under substantially similar circumstances”. In anticipation of such a

submission, VIGJV submits firstly, that TGVI should not be permitted to point to the substantial
differences in the terms and conditions of service offered to TGI and BC Hydro as a basis to say
that they are not in similar circumstances. That would be a classic example of completely
circular reasoning. The terms and conditions of service are different because TGVI has either
not made the TGI terms and conditions available to BC Hydro or chose not to impose the BC
Hydro terms and conditions on TGI.

Second, VIGJV submits that in reality both TGI and BC Hydro are shippers in substantially
identical circumstances. Both parties ask TGVI to move gas from a receipt point to a delivery
point on the HPTS. Both have, or should have, a firm contract demand for the firm capacity
reserved for their requirements on the HPTS. Regardless, of whatever artificial labels TGVI
might wish to apply to characterize the services as different, the fact is that the HPTS provides a
very basic transmission function to both parties. A shipper is a shipper. Accordingly, TGVI
should be obligated to extend service regularly and uniformly under substantially similar terms
and conditions for transportation service.

5.     In addition to the fundamental statutory obligations on TGVI under the Act to treat
shippers fairly and equally, TGVI has specific contractual obligations to VIGJV to treat all
shippers fairly and equally.

Section 11.01(b) of the JV TSA requires that TGVI

       “shall, in respect of the tolls to be charged to any new Third Party Shipper of gas through
       the Pacific Coast System [i.e. the TGVI HPTS], apply to the BCUC for approval of tolls
       which are determined in accordance with the full fixed-variable cost of service
       methodology and which, in the case of the mainline sections of the Pacific Coast system,
       are determined on a rolled-in basis as opposed to an incremental basis”.

Section 11.01(c) of the JV TSA provides that TGVI

       “will operate the Pacific Coast System so as to provide Firm Transportation Service and
       Interruptible Transportation Service under the General Terms and Conditions for Gas
       Transportation Service on a non-discriminatory basis in respect of gas to be trans ported
       and delivered to Shipper [i.e. VIGJV], Third Party Shippers [e.g. BC Hydro and TGI]
       and to the Centra Distribution System [i.e. the TGIV Distribution System]”.

The JV TSA defines a “Third Party Shipper” to mean “any party other than a Shipper, Pacific
Coast, Centra Gas British Columbia Inc., or their respective successors” [i.e. together, now
TGVI]. Under this definition TGI is a “Third Party Shipper” in the same way as is BC Hydro.

Section 12.1 of the JV TSA states as follows:

       “Pacific Coast agrees that, if the Centra Distribution System [i.e. the TGVI Distribution
       System] is transferred to Pacific Coast [now TGVI], then, following such transfer and for
       all purposes of this Agreement, the provisions of the General Terms and Conditions for
       Gas Transportation Service, other than Sections 5.03(b), 5.05, 5.06, 6.01 and 6.02,
       Article 7, Article 8, Article 9, Section 12.04, Article 13, Article 14, Article 16 and Article

       17, shall apply to the transportation of gas through the Pacific Coast System [i.e. TGVI’s
       HPTS] to the Centra Distribution System as if the Centra Distribution System was a
       Third Party Shipper which had entered into a Service Agreement with Pacific Coast and,
       for that purpose, Pacific Coast shall be deemed to be entitled to Firm Transportation
       Service through the Pacific Coast System in respect of a Contract Demand equal to the
       total firm capacity of the Pacific Coast System, in gigajoules per Day, less the aggregate
       of the Contract Demands in effect from time to time under this Agreement and any
       Service Agreements with Third Party Shippers.”

VIGJV submits that the clear intent of the JV TSA was to treat VIGJV, BC Hydro, TGI, the
TGVI Distribution System and any other party who became a shipper on the HPTS in a fair,
equitable and non-discriminatory way. What TGVI is proposing in this Application is not
consistent with this contractual obligation.

5.      VIGJV points out that the Special Direction to the Commission issued under the
Vancouver Island Natural Gas Pipeline Act by the Lieutenant Governor in Council through
Order in Council 1510/95 (the “Special Direction”) directed the Commission to approve the
terms of the JV TSA. Accordingly, VIGJV submits that the Commission is bound to ensure that
TGVI abide by the terms of the JV TSA when considering TGVI’s application to approve the
long term service agreements for BC Hydro.

6.     It is clear that in this Application TGVI is continuing the fiction of characterizing its
transportation service agreement with BC Hydro as “firm” at 45, 000GJ/d. The fact is that TGVI
does not have sufficient capacity to provide that amount of firm service to BC Hydro.

When asked in BCUC IR No. 3.1 to explain why the Firm Capacity for BC Hydro is limited to
19,000 GJ/d for January through March, 2008 and to 27,000 GJ/d for the winter starting
November 1, 2008, TGVI admits that “the Capacity Right to the Firm Capacity represents the
shortfall of the available TGVI system capacity to meet the transportation requirements to the
core market customers of TGVI, TGW and TGI’s Squamish service area, the firm transportation
service to the VIGJV member mills and to BC Hydro for the ICP.”

7.      In truth, the Capacity Right represents only a portion of the capacity shortfall. That
explains why TGVI has also reserved the right, which it calls the “intra-day” right to curtail
service to BC Hydro even further. This right represents a further and significant erosion of the
quality of service available to BC Hydro.

8.      It is significant to note that the Capacity Right can be exercised to curtail service to BC
Hydro while continuing to provide firm transportation service to TGI, TGW and TGI’s Squamish
service area. While TGVI has for some years now been happy to characterize service to BC
Hydro for the ICP as “firm” now that it wishes to provide transportation service to its affiliate,
TGI to move gas to and from storage at the proposed Mt. Hayes LNG storage facility, service to
BC Hydro has been bumped down the chain of priority.

VIGJV submits this treatment of BC Hydro is unduly prejudicial to the interests of BC Hydro
and its customers and is unduly preferential to TGVI’s affiliates.

9.       The discrimination is exacerbated by the disparity in tolls charged to TGI and BC Hydro.
TGI receives a high quality firm service at a toll far less than BC Hydro (and indirectly its
customers including VIGJV) must pay for a service that is “firm” in name only as it is mostly in
fact, interruptible.

While TGVI and its affiliates receive preferential service and tolls, all other shippers such as BC
Hydro in this case are charged premium tolls and receive a lower quality service. In addition,
other shippers are at risk of increasingly subsidizing the TGVI core market through higher tolls
justified by unique cost allocations and high revenue-cost ratios.

10.    VIGJV submits that one result of TGVI artificial characterization of its service to BC
Hydro as a firm contract demand of 45,000 GJ/d is to improperly allocate system costs away
from TGVI’s Distribution System and other customers TGVI deems as core. As TGVI admits, it
does not have the capacity to provide firm service of 45,000 GJ/d – it has not incurred the costs
or made the investment in facilities required to provide that service. In its Response to BCUC IR
No. 3.3, TGVI states:

       “In the absence of the Capacity Right TGVI would require additional facilities in order to
       continue to meet the firm requirements under the TSA and the firm requirements of
       remaining TGVI customers. The cost of the additional facilities would be recovered
       through the rates of all TGVI customers. Therefore, the access to the Capacity Right
       benefits all TGVI customers by reducing the facilities required to meet peak load

11.     VIGJV submits that this result is inappropriate and unfair to third party shippers. By
imposing the Capacity Right on BC Hydro, TGVI has avoided investment in facilities required to
meet the expanding peak demands of its core customers and to provide preferential firm service
to the TGVI Distribution System and to TGVI’s affiliates.

To top