Via Email
gas.regulatory.affairs@fortisbc.com September 26, 2011
Ms. Diane Roy
Director, Regulatory Strategy and Business Analysis
FortisBC Energy Inc.
16705 Fraser Highway
Surrey, BC V3S2X7
Dear Ms. Roy:
Re: FortisBC Energy Inc.
Kootenay River Crossing (Shoreacres) Upgrade Project
Order C-9-10 Certificate of Public Convenience Necessity
Revised Cost Estimate for the Project
This is in response to your September 13, 2011 letter, which filed a Compliance Report for the Kootenay River Crossing (Shoreacres) Upgrade Project (Project) in response to Order C-9-10 and requests Commission confirmation that the revised P50 cost estimate is acceptable for use as the control budget for the Project.
Commission Order C-9-10 granted a Certificate of Public Convenience Necessity (CPCN) for the Project, and directed that FortisBC Energy Inc. (FEI) file a Report regarding the program, cost and schedule for the completion of the Project. FEI filed an Interim Compliance Report on May 6, 2011, the Compliance Report on September 13, 2011 and provided additional information on September 22, 2011. The Commission confirms that the two Reports plus the September 22nd filing fulfill the requirements of Directive 2 of Order C-9-10.
FEI was unable to retain a prime contractor for the Project on a lump sum bid basis through its tendering process. It has negotiated a Guaranteed Completion contract with Michels, one of the original bidders on the Project. However the cost estimate of $8.3 million in the CPCN Application has increased to $9.7 million for the P50 estimate and $10.8 million for the P90 estimate, including Direct Capital costs, AFUDC and Contingency. The cost increase is primarily due to the horizontal directional drill (HDD) installation and pipeline construction costs. FEI submits that the contract with Michels represents the best value and lowest risk for FEI and its ratepayers.
In the September 13th Compliance Report, FEI reviewed the higher cost estimate for the HDD Project, relative to the next lowest cost alternative, the TP Re-route, which was estimated to cost $11.1 million. Also, the engineering, permitting, procurement and funding for the HDD option is substantially complete, and the non-economic analysis of the options preferred the HDD approach.
In this circumstance, and considering the need for the Project, the Commission confirms that the $9.701 million P50 cost estimate as submitted on September 13, 2011 is acceptable for use as the control budget for the Project. For progress reporting and analysis of actual cost variances relative to estimate, FEI is to use the breakout of the P50 estimate shown on page seven of the CSC Management Services 2011 Inc. Risk Analysis Report (CSC Report), using the direct capital cost in the “Base” column for each project component and total AFUDC and Contingency numbers for the Project.
In the Progress Reports for the Project, FEI is requested to identify steps taken to reduce the risk and mitigate the potential impact of the major risk factors identified in the CSC Report.
The Commission also notes the information in the CSC Report on the large potential impact of Organization Performance on the actual cost of the Project. In its Final Report on the Project, FEI is expected to include an assessment of Organization Performance on the Project that addresses the factors identified in Figure 8 of the CSC Report, an evaluation of the impact of Organization Performance on the actual cost of the Project and what FEI learned that can be applied to future major capital projects.
For the reasons set out in the September 22, 2011 letter, the Commission will hold FEI’s May 6, September 13 and September 22, 2011 filings confidential.
Yours Truly,
Alanna Gillis
JBW/yl