Audit of Nova Scotia Power, Inc.’s Fuel Adjustment Mechanism for 2010-2011

Audit of Nova Scotia Power, Inc.’s Fuel Adjustment Mechanism

for 2010-2011

Confidential Version for NSPI

Gray Shaded Portions are Confidential &

Red Shaded Portions Redact Information that May Not Be Viewed by NSPI

Presented to: Presented by: Nova Scotia Utility and Review Board The Liberty Consulting Group

July 9, 2012

65 Main Street, P.O. Box 1237 Quentin, Pennsylvania 17083

[email protected]

717-270-4500 (voice) 717-270-0555 (facsimile)

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) Table of Contents

July 9, 2012 Page ii The Liberty Consulting Group

Table of Contents I. Organization, Staffing and Controls .......................................................................................... I-1

A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 1

1. Organization .................................................................................................................... 1 2. Staffing ............................................................................................................................ 7 3. Procedures and Models ................................................................................................... 8 4. Risk Management ......................................................................................................... 12 5. Auditing ........................................................................................................................ 15

C. Conclusions .......................................................................................................................... 16 D. Recommendations ................................................................................................................ 19

II. Forecasting and Supply Planning ........................................................................................... II-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 2

1. Audit Period Production Sources .................................................................................... 2 2. Load Forecasting ............................................................................................................. 4 3. Fuel Requirements Forecasting....................................................................................... 5 4. Fuel Supply Planning .................................................................................................... 10 5. Hedging ......................................................................................................................... 13


III. Gas Supply Planning ............................................................................................................ III-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 2

1. Overall Supply Planning Framework.............................................................................. 2 2. The 2002 NEB Decision ................................................................................................. 4 3. Other Aspects of NEB Decisions .................................................................................... 5 4. NSPI Actions ................................................................................................................ 16 5. Patterns in Gas Pricing During 2010 and 2011 ............................................................. 18 6. Gas Requirements Forecasting ..................................................................................... 22


IV. Solid Fuel Procurement and Contracts ................................................................................ IV-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 1

1. Solid Fuel Forecasted Versus Actual Burns ................................................................... 1 2. Solid Fuel Sources .......................................................................................................... 2 3. Solid Fuel Prices ............................................................................................................. 5 4. Audit Period Contract Purchases .................................................................................... 7 5. Solid Fuel Contract Summary ....................................................................................... 13 6. Procurement Consultation ............................................................................................. 16


July 9, 2012 Page iii The Liberty Consulting Group

7. Procurement Documentation ........................................................................................ 17 8. Contract Actions ........................................................................................................... 17 9. Environmental ............................................................................................................... 19 10. Transportation ........................................................................................................... 22


V. Gas & Oil Procurement and Contracts ................................................................................... V-1 A. Background ............................................................................................................................ 1

1. Natural Gas ..................................................................................................................... 1 2. Heavy Fuel Oil ................................................................................................................ 3 3. Light Fuel Oils ................................................................................................................ 3 4. Hedging ........................................................................................................................... 4

B. Findings .................................................................................................................................. 5 1. Natural Gas ..................................................................................................................... 5 2. Heavy Fuel Oil .............................................................................................................. 10 3. Light Fuel Oils .............................................................................................................. 11 4. Hedging ......................................................................................................................... 11


VI. Solid Fuel Supply Management........................................................................................... VI-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 1

1. Receipt Information ........................................................................................................ 1 2. Weighing, Sampling, and Analysis ................................................................................. 3 3. Contract Administration.................................................................................................. 7 4. Contract Compliance ...................................................................................................... 8 5. Coal Inventory .............................................................................................................. 13 6. Physical Inventory Measurements ................................................................................ 18


VII. Natural Gas and Fuel Oil Supply Management................................................................ VII-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 1

1. Natural Gas ..................................................................................................................... 1 2. Heavy Fuel Oil ................................................................................................................ 4 3. Light Fuel Oils ................................................................................................................ 7 4. Hedging ........................................................................................................................... 9


VIII. Power Plant Performance ............................................................................................... VIII-1 A. Background ............................................................................................................................ 1

1. A New Model .................................................................................................................. 1 2. The Impact for Coal-Heavy Utilities .............................................................................. 2 3. Study Scope .................................................................................................................... 4 4. NSPI’s Thermal Fleet ..................................................................................................... 4

B. Findings .................................................................................................................................. 5


July 9, 2012 Page iv The Liberty Consulting Group

1. Analysis of Unit Performance ......................................................................................... 5 2. Outage Management ..................................................................................................... 21 3. OM&G Costs ................................................................................................................ 24 4. Capital Investment ........................................................................................................ 28 5. Tufts Cove 6 Project Management ............................................................................... 29


IX. Economic Dispatch .............................................................................................................. IX-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 3

1. Determining Coal’s Replacement for Dispatch Purposes ............................................... 3 2. Cycling Cost.................................................................................................................... 4 3. Variable O&M Costs ...................................................................................................... 4 4. Wind Integration ............................................................................................................. 4

C. Conclusions ............................................................................................................................ 4 D. Recommendations .................................................................................................................. 5

X. Power Purchases and Sales .................................................................................................... X-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 2

1. Independent and Renewable Power ................................................................................ 3 2. Term Imports .................................................................................................................. 7 3. Short-Term Purchases and Sales ................................................................................... 12 4. Transmission Limitations.............................................................................................. 13 5. Power Imports, Peak and Off-Peak ............................................................................... 14


XI. FAM Accounting ................................................................................................................. XI-1 A. Background ............................................................................................................................ 1

1. FAM Description ............................................................................................................ 1 2. FAM Accounting - Fuel and Purchased Power Cost ...................................................... 2

B. Findings .................................................................................................................................. 2 1. Accounting Policies and Procedures ............................................................................... 2 2. FAM Cost Element Issues .............................................................................................. 3 3. Verification and Testing of FAM Accounting Policies and Procedures......................... 4 4. Dead Storage Fuel Handling Costs ................................................................................. 6 5. Energy Transaction Pricing and Volume Verification.................................................... 7

C. Conclusions ............................................................................................................................ 9 D. Recommendations ................................................................................................................ 13

XII. NSPI/EEI Gas and Power Transactions ........................................................................... XII-1 A. Background ............................................................................................................................ 1 B. Findings .................................................................................................................................. 1

1. Gas Transactions ............................................................................................................. 1 2. Power Transactions ......................................................................................................... 4

C. Conclusions ............................................................................................................................ 6 D. Recommendations .................................................................................................................. 7

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) I. Organization, Staffing and Controls

July 9, 2012 Page I-1 The Liberty Consulting Group

I. Organization, Staffing and Controls

A. Background This chapter of Liberty’s report addresses the following topics in NSPI’s organization, staffing and controls areas:

Organization Staffing Procedures Risk Management Auditing

B. Findings

1. Organization

a. Structure and Related Key Personnel Changes The organization responsible for fuel and energy management at NSPI experienced very major and disruptive changes in personnel during the Audit Period. Every key position and one more within Fuels Energy and Risk Management (FERM) experienced a personnel change during the Audit Period. The only one unplanned by NSPI came with the departure of the Solid Fuel Manager. This report will later describe the negative consequences for fuel and energy costs that we attribute, at least in significant part, to the extraordinary level of personnel shifting that NSPI has permitted, and that, in key respects, Emera has instigated, in FERM. The changes are so substantial as to call into question the parent’s commitment to assuring that NSPI retains a cohesive, senior, seasoned team in an area of operations that no longer presents for NSPI the same “bottom-line” risk that existed before FAM introduction. The Director, Fuels, Energy & Risk Management (FERM) has responsibility for fuel procurement and management and for power-trading activities affecting costs collected through NSPI’s FAM. The chart illustrates the organization of the Director, FERM. His responsibilities include scheduling and dispatch of 2,400 MW of installed generating capacity, development of fuel strategy, fuel budgeting, and risk management of the fuel portfolio (including derivatives, hedge management, and counter-party-risk management). The current incumbent transferred (within NSPI) to the Director’s position fairly recently. He took the position in September 2010, following the promotion of the former incumbent who performed these responsibilities. That former Director became NSPI’s Vice President, Power Generation and Delivery. Emera moved the officer formerly leading power generation and delivery (he also served as NSPI’s COO) to another subsidiary (Emera Newfoundland and Labrador), where he serves as President. Emera established this subsidiary following a November 2010 announcement of Emera’s agreement (among other things) to design and construct the 500 MW Maritime Link Transmission Project to transmit power from Newfoundland to Nova Scotia. The current Director began in this position on a part-time basis in September 2010; i.e., he continued to spend time performing and training a replacement for his prior duties. He began to devote full time to the Director’s responsibilities in January 2011. FERM reports directly to the NSPI Vice President, Power Generation and Delivery. This vice president position has responsibility for managing operations and fuel purchases for all NSPI



generating stations. Further responsibilities include control center operations, system maintenance, and transmission and distribution field operations. The VP Power Generation and Delivery reports directly to NSPI’s President & Chief Executive Officer (CEO). Comparing the next two charts shows the changes in organization over the two years covered by the Audit Period. The first shows the organization in effect at the beginning of the Audit Period; the second shows the organization at the end of the Audit Period.

Fuels, Energy and Risk Management (January 1, 2010)



Fuels, Energy and Risk Management (December 31, 2011)

The next paragraphs discuss the key FERM positions. The Solid Fuels Manager (now Senior Manager Fuels Strategy & Performance) has responsibility for all solid fuel (coal and Petcoke) management functions. Her solid fuel related responsibilities include:

• Procuring fuel as necessary to fill and maintain the fuel portfolio • Procuring and managing fuel transportation • Hedging financial exposure related to fuel positions • Managing fuel inventory levels • Forecasting fuel usage, emissions and budgets • Administering fuel contracts.

The individual previously holding this position left NSPI in April 2010. The current incumbent began working in this role part time in August 2010. As with the new Director, FERM, the new Solid Fuels Manager continued to have responsibility for performing and training a replacement



for her prior duties. She did not begin full time on solid fuel management until November 30, 2010. Her position title changed at that time to Senior Manager Fuels Strategy and Performance. The basic responsibilities of this position have not changed over the Audit Period, despite the title change. The Manager, Oils, Gas & Energy has responsibility for the procurement, management and transportation of fuel oil and natural gas and for the import and export of electricity. These functions for these fuel and energy sources include:

• Fuel procurement • Contract administration • Procurement and management of transportation • Direction of oil and gas hedging strategies • Management of the 24-hour desks responsible for trading energy, gas and oil.

The former incumbent in this position moved to an Emera non-utility affiliate (Emera Energy Services) during October 2011. The current incumbent, already an NSPI employee, took over the position in November 2011. The Manager, Fuel Testing & Optimization has responsibility for:

• The commercial testing and qualification of various fuels • Emission reduction technology • Slagging/fouling reduction techniques used currently by NSPI • Evaluation of technologies and associated costs to produce future emissions and

slagging/fouling reductions. Repeating the extraordinary level of movement out of FERM, the prior incumbent took another NSPI position in January 2011. The current incumbent started in the position in February 2011. This Manager’s reporting relationship also changed. The new incumbent no longer reports to the Director, FERM, but to the Senior Manager Fuels Strategy and Performance. NSPI made this change to consolidate solid fuel operational functions under a single person. The Senior Manager, Fuels Planning & Performance has responsibility for:

• The financial aspects of fuel and purchased power • Variance analysis and quality of financial information • Monthly reporting (including FAM reporting) • Verification of FAM data • Financial forecasting, as coordinated with fuel, and related analysis • Ensuring accurate fuel expense recording • Compliance with GAAP, internal accounting, and regulatory policies.

The reporting relationships of this senior manager have changed. The incumbent now reports for both functional and administrative purposes to NSPI’s Controller. The organization chart applicable at the beginning of the Audit Period showed dotted line reporting to the Director, FERM. NSPI reported that the dotted line indicated only a regular and robust channel for information flow, rather than direction from the Director, FERM. We found this explanation



anomalous. There are very many such channels in a company like NSPI; organization charts cannot and do not seek to capture them in such a fashion. In any event, NSPI eliminated the dotted line relationship in 2010, reflecting a reporting relationship solely with the NSPI Controller. The Scheduling and Logistics Coordinator provides yet another example of FERM personnel outflow during the audit period. The former incumbent transferred to another NSPI job in December 2011. The replacement began performing the coordinator role in March 2012.

b. Performance Management The FERM organization applies a performance management process having three major components. One of those components, the Balanced Score Card (BSC) system, has general applicability across NSPI. FERM uniquely uses a second component, termed the Commercial Incentive program. NSPI explains this FERM-only component as existing because of the perceived importance of the activities of FERM to overall corporate profitability and the need to attract and retain capable individuals within the FERM organization. The Personal Development Plan (PDP) forms the third component. FERM management develops an annual incentive structure that forms the basis for evaluation of the performance of individuals within the organization for the coming year. This structure establishes the foundation for the BSC and Commercial Incentive components. NSPI begins with the annual business planning cycle, in particular the fuel forecast produced as part of that cycle. NSPI develops a business plan, from which flows a set of annual targets for FERM team members. NSPI then develops the components of the Balanced Score Card (BSC) system for the FERM team. This scorecard focuses on accomplishment of overall NSPI Business Plan targets and on FAM targets for the current year. Robert Kaplan (Harvard Business School) and David Norton originated the BSC construct. It seeks to align the activities of particular business functions with overall corporate visions and strategies. It provides a performance measurement framework that complements traditional financial metrics with strategic, non-financial measures. Proponents consider this approach to provide a more “balanced” view of performance. The concept enjoys widespread use in business and industry and in government and nonprofit organizations. Financial rewards driven by BSC metrics receive funding from the corporate incentive pool. Each individual within FERM undergoes yearly evaluation under a number of factors from both the BSC and Commercial Incentive programs. These factors include accomplishment of BSC objectives and personal measures based on the nature of the responsibilities of specific positions. The expression of the applicable measures typically takes the form of graduated sets of performance targets for the year (commercial targets). Meeting BSC targets can result in an up to '''''' percent (of pensionable base pay) incentive payment. The Commercial Incentive program can add up to an additional '''''' percent. The amount of incentive has been structured on the basis of percentages which are proportional to which positions have the potential to make the most significant impact on achieving fuel and power budgets, or savings compared to budget targets.



Liberty’s examination of the components of the Commercial Incentive program found some anomalies. For example, the ''''''''''''''''''''''' ''''''''''''''' ' ''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''' operates under broadly stated targets related to delivered ''''''' '''''''''''''. A large component of such targets relates to actual prices in the ''''''' ''''''''''''''''', rather than to excellence in individual performance. Compensation-driving metrics should address performance aspects over which individuals have direct ability to control. Examples include minimizing '''''''''''''''''' ''''''''''''''''''''' and ''''''''''''''''''''''' ''''''''''''''''', or a target based on use of '''''''''' ''''' '''''''''''''''' ''''''''''''''''''''''. The targets we examined were not all well-tuned to the key elements of the position involved. Another example arises from the '''''''''''''''' ''''''''''''''''''''' '''''''''''' '''''''''''''''''' ' '''''''''''''''''''''''''' target related to the number of '''''''' '''''''''''''' conducted. Conducting ''''''' '''''''''''''' has significance to FERM work; it helps to determine future '''''''''' '''''''''''''''''''''''''''''''''''. This performance factor, however, appears unusual in a short list of compensation incentives for this position; it seems unusual to have isolated this activity as one of the few measures of outstanding personnel performance. Without intending to suggest intentional “running up the score” of '''''''' '''''''''''''', it nevertheless remains unclear how simple numbers of ''''''' '''''''''''''' relate to performance excellence. Certainly, that metric has less consequence than, for examples, (a) success in structuring the various levels of diversity specified for the fuel ''''''''''''''''''''', or (b) maintaining ''''''''''' '''''''''' ''''''''''''''''''''''''''' within target levels. These do not, however, form compensation drivers. Each FERM team member operates under a Personal Development Plan (PDP) tailored to an individual’s specific needs and growth requirements. As the year progresses, management tracks the development of each individual with respect to the individual plan. Each individual’s end-of-year annual performance evaluation addresses growth with respect to the Personal Development Plan.

c. Development and Training The PDP comprises a core element in identifying employee-improvement needs and opportunities. On-the-job training forms an important part of NSPI’s training program. Persons new to a position move through a series of increasing responsibilities as guided by the experience of the individual currently holding that position. NSPI also supports formal business and technical training for employees in order to promote development of skills for both current and future positions. Examples of such training include workshops on such topics as hedge accounting, risk management, and fuel markets. The FERM team also engages in peer-to-peer training. A team member will introduce his or her work specialty to other work groups. For example, a member of the gas desk team may make a presentation to the accounting team on the ways that gas markets function in order to create a broader and deeper understanding of FERM’s differing but ultimately related and to some degree co-dependent activities.

d. Job Descriptions Liberty reviewed FERM job descriptions. This review found them generally to be complete and in a format typically encountered. Job descriptions have improved since the last audit. No descriptions existed then for 12 FERM positions. NSPI has since developed new and appropriate job descriptions across the group.



2. Staffing

a. Personnel The FERM organization exhibits many specialties and typically has been staffed with many capable individuals, who had been in their positions for reasonably long periods of time. However, the Audit Period witnessed what can without exaggeration be described as massive turnover in key positions. The Director FERM gained promotion to another position within the Company; he had held that position since 2005 and had been with NSPI 23 years. His replacement was a long-time employee of NSPI who had most recently been manager of a power plant. The Solid Fuels Manager, who had been in this position since 2005, left the Company, and was replaced by a long time employee of NSPI who had also most recently been manager of a power plant. In the process, position title changed to Senior Manager Fuels Strategy & Performance. The Manager, Oil, Gas & Energy moved to a position outside NSPI but still within Emera; she was replaced by another employee of NSPI. The Manager, Fuel Testing & Optimization transferred to another position with the Company; the position was filled by another NSPI individual, but eventually this position was eliminated. The Scheduling & Logistics Coordinator, Solid Fuels transferred to another position with NSPI; she was replaced by another employee of NSPI. Three different persons held the Team Lead Scheduling & Plant Dispatch position during the Audit Period. We did not find the replacements to be fundamentally lacking in qualifications. That test however, comprises neither the sole, nor even the primary standard for judging the quality of such an important organization. First, the changes had the clear result of producing a sudden and significant drop in cumulative experience. Second, even had such experience levels not fallen, transitional difficulties, such as part-time job performance diminished the time spent focusing on FERM responsibilities. Third, groups like FERM must operate in highly integrated and, organized ways that require process, procedures, and controls knowledge that it takes time to learn. Fourth, team cohesiveness suffers when so many persons must interact together on issues, in circumstances, and with people in new and challenging ways. It takes time for any new single individual, operating in an environment where leadership is stable, to become fully effective, while learning the intricacies of the job. These difficulties become much magnified when there are both many changes and those changes include the most critical leadership of the group. An organization like FERM holds responsibility for a very large portion of the costs that a utility asks customers to pay for electricity. It is fair and, we believe, necessary to expect the utility to act zealously to sustain the group’s capabilities at very high levels. A utility’s toleration of too great a degree of change should be viewed as a failure to exercise due care. When it comes in significant part to serve non-utility interests and when it occurs in an environment where costs comprise in large measure a “pass through,” such a failure is even less excusable. In view of the critical nature of FERM, and the positions within it, NSPI should make concentrated effort to achieve stability of personnel in positions within the organization. This did not occur during the Audit Period, and Liberty believes such major transitions played a part in specific performance failures.



b. Succession Planning NSPI’s succession planning program considers internal skills within the group or accessible from the overall organization. The program seeks to determine the capability to withstand the loss of a key employee without materially affecting the performance of the team. The succession planning program seeks to identify growth and progression needs and opportunities to support performance continuity. NSPI cannot expect to have a second person fully capable of moving into each FERM position. The Company uses cross training and structured documents, such as the Fuel Manual and Process Documents, to promote the ability to make unexpected transitions and to support end-of-career transitions. FERM seeks the capabilities to permit roles to be performed by multiple members of the team. Rotating FERM personnel, to the extent possible, through multiple roles serves as a primary method for building skill sets, and creating the ability to minimize succession disruptions. A person may also build skills outside the team, and be identified through the broader company succession planning as a good fit for a role on the FERM team.

3. Procedures and Models FERM team members operate under a set of policies and procedures and models that guide the organization’s activities. The NSPI Fuel Manual operates as the primary document to guide FERM activities. Other documents supplement this role.

a. NSPI Fuel Manual NSPI has developed a Fuel Manual for all operations related to procurement and management of fuel required for power generation. The Manual remained in full effect during the Audit Period. The manual sets a number of overall goals:

NSPI will seek to procure and manage a reliable and competitively priced fuel supply with a diversified portfolio of fuel types, suppliers, contract terms and pricing structures that seeks to produce reliable energy for our customers, and that is consistent with regulatory and environmental requirements. NSPI’s fuel procurement and hedging activities will comply with NSPI’s Code of Conduct. Hedging will be used to help stabilize fuel costs, recognizing that market forces determine ultimate pricing.

The comprehensive Fuel Manual covers the fuel procurement process from many perspectives, combining in one document, what Liberty has often seen in the industry as a series of distinct procedures documents. The Fuel Manual structure follows:

1.0 NSPI Fuels Policy 2.0 Risk Management, Credit Policy and Code of Conduct 3.0 Governance 4.0 Approval Authority and Reporting 5.0 Determination of Fuel Requirements 6.0 Fuel and Transportation Procurement Procedures 7.0 Allowed Fuel Procurement Transactions, Freight Procurement Transactions, Financial Derivatives 8.0 Fuel Procurement Strategy and Objectives 9.0 Determination of Financial Hedging Requirements



10.0 Fuel Hedging Strategy and Objectives 11.0 Quality Control of Fuel Suppliers 12.0 Procurement Administration 13.0 Plant Inventory Policy 14.0 Purchased Power and Export Power Sales

The Fuels Manual also contains appendices, which include additional detailed procedures, forms and templates. These Appendices include:

A. NSPI’s Fuels, Energy and Risk Management Group Organizational Chart B. Allowed Fuel Procurement Transactions, Freight Procurement Transactions, Financial Instruments C. Fuel Procurement Strategy and Objectives D. Fuel Hedging Strategy and Objectives E. Employee Acknowledgement F. RFP Cover Letter Template G. RFP (Coal and Pet Coke) Template H. Supply Agreement (Coal) Template I. Supply Agreement (Pet Coke) Template J. RFP (HFO) Template K. Supply Agreement (HFO) Template L. Supply Agreement (Freight) Template M. Supplier Performance Template

NSPI’s established procedure for controlling changes to the Fuel Manual includes a mechanism for personnel within FERM to submit recommendations for change to the Manual. This mechanism includes a form for submission of changes that includes the following categories:

Change Number Fuel Manual Section Number Fuel Manual Page Number Current Wording Proposed Change Reason for Change

Updated Wording The current version of the Fuel Manual bears the date of October 2010. It resulted from a collaborative effort facilitated by the Small Working Group (SWG). This version of the Manual tracks revisions using the process collaboratively developed following Liberty’s prior FAM audit. The revision process sought to facilitate ease of Manual review, and to promote the tracking of revisions as Manual versions followed. NSPI’s Sharepoint Website provides all FERM employees access to a current version of the Fuel Manual. Liberty confirmed (through interviews with FERM employees) employee familiarity with availability of the Manual and with its requirements applicable to individual position responsibilities. NSPI also maintains a Quarterly Fuel Manual Compliance system, designed to provide for employee familiarity with the Manual and for sign-off by Fuel team members, confirming that they understand and comply with the Manual. Liberty’s review of details of this compliance system showed significant inattention to detail:

• The summary sheets for the First Quarter of 2010 show all items complete; however, they are not. For example, for the Director of FERM, the task of “Appendix E – Ensure all FERM employees with responsibility for fuel procurement, sales and hedging have reviewed and signed Appendix E,” is not actually completed. The form says that this action has been delayed to Q2, but the summary sheet implies it has been completed. The



Q2 form still says “Delayed to Q2.” The third quarter status has no notation indicating completion of the delayed item.

• Another of the Director of FERM tasks reads, “Ensure the progress of the Post Audit Action Plan is monitored by Internal Audit.” A report comment says “No Action Yet.” The summary sheet therefore should not indicate that FERM has completed all items, including this one.

• For all four quarters, notes regarding the temporary Solid Fuels Manager state, “File Incomplete” for the task of “Determine if press release regarding the Solid Fuel RFP is required, if so, prepare, issue and file press release.” There is no explanation of why the file remains incomplete, what action is taken, and why for three quarters, it would appear that FERM made no progress.

• We also found what appears to be an inconsistent task statement for the Gas/Oil Marketer (now the Financial Trader & Physical Optimization Specialist) when performing a similar activity. We observed a comment noting that no RFP-related press release is required. Finally the Q3 information for Solid Fuel contains no comments. If FERM has completed outstanding actions, comments should address them.

• The signature page date does not correspond to the current quarter, for many individuals. For example, for the VP Power Production, and for the Senior Manager, Fuels Planning and Performance, the Q3 report includes a signature date of December 2010. For the temporary Solid Fuel Manager, the signature date is November 2010. For the Director of FERM, the Q1 2011 sheet was signed in August 2011. For the Q1 2011 sheets, for the GM Power Production, the sheet has Q2 action checked, but the date of signature of the Q1 sheet is September 2011. For the Sr. Manager, Fuels Strategy and Performance, the Q1 sheet was signed July 26, 2011. For the Sr. Manager, Fuels Planning and Performance, the Q2 sheet was signed October 26, 2011. For the Q2, Q3 and Q4 2011 Summary Page, it was signed off on April 2012. All of these reviews should be more current.

• The sheets being used for many of the positions for 2011 still show 2010 at the top of the form.

• For the Sr. Manager, Fuels Strategy and Performance, the quarterly status sheets provided for Q2 and Q3 2011 were the status sheets for year end. It therefore was not possible to determine what happened during these two quarters.

b. Standards of Conduct Policies NSPI has corrected deficiencies in the following three policies related to standards of business conduct following Liberty’s prior audit:

• Emera Standards of Business Conduct • Emera Credit Policy • Open Access Transmission Tariff (OATT) Standards of Conduct.

The Owner (or their designate) of the above three policies provides annual training on each of these policies to the Fuels Team. The training reviews the policy, and explicitly identifies: the location of the policy, examples of how the policy is applied within the Fuels Group, and who Fuels employees are to contact should they have any questions regarding the interpretation or application of the policy. Tracking sheets will document provision of the training. Finally, each



employee must sign a statement confirming understanding of and adherence to the provisions of the policy.

c. Models FERM uses three specific models in support of its operations. They comprise the primary tools for allocating and controlling fuel commitments among NSPI generating units. FERM assigns a specific employee the responsibility to act as the “owner” of each of these models. The owner’s responsibilities include ensuring that the model is properly maintained, including communication with the vendor on model updates, answering questions related to the proper use of the model, and training as necessary on model features. Liberty used the output of each of these models and we found that output consistent and able to provide the necessary information. Liberty believes that each model adequately serves its intended purpose. Strategist comprises the first model. The FERM Director, Planning and Performance serves as its NSPI owner. NSPI licenses Strategist from Ventyx. Strategist comprises an industry standard tool for integrated resource planning. Its use extends back many decades. Its modules include modeling forecasted load, production cost calculations and dispatch, conservation and marketing programs, and future resource optimization, among other capabilities. FERM uses Strategist for long-term resource optimization, for year-ahead fuel and purchased power studies, and for optimizing dispatch, which determines fuel requirements across the generation fleet. The internally developed, Excel-workbook-based Coal Model serves as the second FERM model. The Solid Fuel Manager (now the Senior Manager, Fuels Strategy & Performance) serves as its owner. FERM uses this model to allocate contracted and open solid fuel among its coal-burning thermal units. FERM updates the Coal Model after each month-end, in order to supply inputs to Strategist forecasting operations. Fuelworx serves as the third model. It provides an accounting and inventory management system to allocate actual fuel deliveries and consumption to each of the generating units on its system. The Senior Manager, Fuels Planning & Performance owns this model.

d. Goals and Objectives The FERM organization operated during the Audit Period under specific goals and objectives developed by senior management and embodied in the NSPI Business Plan for the year. Employees receive these goals and objectives electronically and internal meetings discuss them. The NSPI Business Plan for each of the years of the Audit Period, 2010 and 2011, consisted primarily of financial plans related to Budgets, Net Earnings, Free Cash Flow, and the Capital Program. Each year’s plan presented comparisons of forecast data with actual data for the previous year, as well as the plan for the present year. An Executive Summary introduced the Business Plan. The summary highlighted the primary factors influencing plans and expected results. FERM develops specific commercial targets and specific plans that align with the NSPI Business Plan. These targets range from personal development plans to fuel cost targets.



4. Risk Management The following chart depicts the relationships and functions of the various NSPI and Emera risk management entities.

a. NSPI Credit Risk Oversight Committee (CROC) Each Business Unit within Emera has established committees or teams to oversee certain of the risk related to or specific to that Business Unit. A Credit Risk Oversight Committee (CROC) fills this role at NSPI. The CROC includes appropriate members of NSPI’s leadership team; i.e., the VP Finance, NSPI chairs the committee, which meets at least quarterly. The CROC oversees the NSPI risk management program related to financial market and credit risks associated with Fuels Group responsibilities. It also has responsibility for foreign-exchange positions.

Information Reporting Reporting

Transactional Responsibilities

Fuel Strategy Table

Back Office

Front Office Support

Risk Oversight

Middle Office

Risk Oversight

NSPI Board of Directors

Board Audit Committee

Parent Company ERMC Credit Risk Oversight Committee

Information Reporting

Reporting

Support

Monitoring, Risk Oversight, Support

Corporate Controller



The CROC operates under a Mandate dated August 18, 2011. The August 18th Mandate, which takes a form much like an organizational charter, addressed the following subjects:

Mandate Responsibilities Membership Operation Reporting Mandate Update Relationship with Risk Management Resources

The next chart lists the members of the CROC. Several other employees have invitations to attend meetings: the Director, FERM; the Director, Enterprise Risk Management; the Director Internal Audit; the Director, Retail Operations; and the Senior Manager, Fuels, Planning and Performance are invited to attend all EOC meetings.

GM, Finance, NSPI (CHAIR) President & CEO, NSPI VP Integrated Customer Service Exec. VP Sustainability

Assistant General Counsel VP Power Generation and Delivery

b. Emera Enterprise Risk Management Committee (ERMC) The Emera ERMC oversees the risk management program within the Emera group of companies. It sets the applicable policies (subject to Board approval), and updates, through the Chief Risk Officer, the parent company Board of Directors and Audit Committee. The ERMC members (shown below) consist of parent-company business leaders, including the NSPI CEO. The Chief Financial Officer, who serves also as Chief Risk Officer, chairs the ERMC. The ERMC meets at least quarterly and is governed by a Mandate dated April 1, 2011. Prior to this date, the ERMC operated under a mandate dated December 17, 2009.

EVP CFO Emera & NSPI* President & CEO, NSPI EVP of HR Emera President & CEO, ICD Utilities COO Emera Energy Services Pres & COO EUS

Chief Legal Officer, Emera GM Brunswick Pipeline COO Bangor Hydro EVP Business Development and Planning

*Chair

c. Front, Middle and Back Office Each of the three offices (front, middle and back) has distinct reporting structures. The NSPI Front Office operates as part of the Fuels Group, and reports directly to the Director, FERM. The Middle Office, operating as part of Enterprise Risk Management, reports to the Treasurer and in turn to the Chief Risk Officer, who chairs the ERMC. The NSPI Back Office operates as part of NSPI Corporate Finance, and reports to the NSPI Controller.

d. Policies and Procedures A number of policies and procedures address to risk management. An NSPI Risk Policy applies specifically to the utility. This policy deals with risk management processes related to fuels activity. This policy is dated December 8, 2010. The Credit Policy sets out the credit practices and limits and, where applicable, applies them across the Emera group of companies on a consolidated basis. The Foreign Exchange and Interest Rate Policies govern the activities of the Treasury group in managing foreign exchange and interest rate risk respectively. Emera Energy also has its own Risk Policy.



e. Tracking Reports The Enterprise Risk Management group tracks positions, including posted collateral, credit exposures, mark-to-market (MTM) positions and value-at-risk (VaR). Tracking includes NSPI’s ''''''''''''' '''''''''''''''''''''''. MTM reporting covers all fuels in the solid fuel portfolio. Collateral posted includes the amount of cash and letters of credit posted to a counter-party. The Middle Office generates this data on a monthly basis, and provides it to parent-level ERMC and to NSPI’s EOC for their quarterly and any other meetings. A generally daily (business days) counter-party credit report tracks two principal sets of data for trading and financial counter-parties. Second is current credit exposure (including MTM) and remaining credit available for each counter-party. NSPI has access to several MTM reports. The Middle Office calculates month-end MTM on NSPI’s solid fuel contracts, including both physical contracts and financial hedging contracts. NSPI does not use the MTM data on these transactions in isolation as a key risk measure. However, Canadian Generally Accepted Accounting Principles require this particular MTM estimate. Knowledge of the magnitude of the MTM on risk management positions can assist internal and external stakeholders with understanding of the exposure generated by management activity. Value-at-risk (“VaR”) serves as another critical risk measurement parameter. The Middle Office calculates the short-term VaR on a daily basis for certain of Emera Energy’s “marketing-related” transactions and financial hedges. The VaR measures the estimated potential change in the MTM of targeted transactions as a function of movements in overall market prices. The Middle Office uses the portfolio of underlying exposures and risk management instruments warehoused within the Nucleus risk management system to generate VaR calculations. Pricing under the ''''''''''' ''''''' ''''''''''''''' contract (which ended ''''''''' '''' ''''''''''''') provided (based on an ''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''' '''''''''''' '''''''''''' ''''''''' '''''' '''''''''''''''''''' ''''''''''' '''' ''''''''''''. These payments fluctuate according to a number of specified parameters. Measurement of the value of the '''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''' '''''''' ''''' '''' '''''''' '''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''' comprises an important element of NSPI’s tracking processes. The Back Office makes monthly calculations of the '''''''''' '''''''''''''''''''''''''. The calculation uses required actual and forward prices as provided by the Middle Office. The monthly calculations update the cumulative '''''''''''''''''''''''' '''''''''' owes to NSPI, on the basis of updated prices. The Back Office also books the adjustments into the accounting system each month.

f. Provisions for Financial Security in Solid Fuel Agreements NSPI has incorporated into its solid fuel supply agreements a provision requiring the posting of security in specified conditions. Section 9.2 of NSPI’s standard agreement allows NSPI to demand security (e.g., a letter of credit or a guarantee) upon “reasonable grounds for insecurity about the financial standing or creditworthiness” of the counter-party. Section 9.3 adds the further protection of allowing (irrespective of grounds for insecurity under Section 9.2) NSPI to require security in cases where the difference between market and contract price (applied to remaining delivery volumes under the agreement) exceeds the greater ''''' '''''' '''''''''''''''' ''''' '''''' ''''''''''''''''' ''''' ''''''''''''''''' '''''''''''''



g. Violation of Risk Management Policies and Procedures No violations of risk management policies and procedures occurred during the Audit Period, other than the violation previously reported in Liberty’s Audit Report dated July 2, 2010 in Chapter I, Organization, Staffing and Controls, Section 4, Risk Management. This violation occurred on January 21, 2010. We discussed it in detail in the prior audit report. NSPI’s entry of financial coal hedges '''''''''' '''''''''''''''''''''', a suspended counter-party, comprised the transaction involved. The Trader mistakenly thought ''''''''' ''''''''''''''''''''' had been re-opened. Our prior audit report observed that NSPI has taken appropriate responsive action.

5. Auditing Section 5.0 of the FAM Plan of Administration (titled “Audit and Oversight”) states that the UARB shall provide for FAM audits every second year. The Fuel Manual requires that Internal Audit conduct comprehensive fuel audits every five years and that it audit selected aspects of fuel management each year. Section 4.6 of the manual (“Internal Auditing and Controls”) states:

Internal Audit shall conduct an audit of the fuel procurement function at least every five years. Its scope shall include the fuel procurement function from solicitations and evaluations, through fuel receipt, to payment procedures. The audit shall also determine adherence to and adequacy of the policies and procedures in the Fuel Manual. In other years, Internal Audit shall identify the focus and conduct partial audits of the fuel procurement functions. Upon completion, internal audit shall prepare a report of the findings to be submitted to the FST and the NSPI Audit Committee. The VP, Operations and Director, FERM shall develop an action plan to address any problems identified. Internal Audit will monitor progress of these action plans.

This auditing procedure has caused internal duplication of audits during FAM audit years. Revisions proposed to the SWG as part of the current package of administrative changes seek to address this issue. NSPI anticipates approval of these changes approximately mid-year. The changes will bring clarity to audit processes, and avoid duplication of efforts. The fuel and energy cost-related examinations that NSPI has caused to be conducted during the Audit Period include:

• NSPI financial-statements audited by Grant Thornton. There were no specific findings related to fuel.

• In 2011, a Solid Fuel Inventory Audit conducted by Schumaker & Company. The report was released in May 2012.

• In 2010, NSPI’s internal audit conducted on Contract Compliance for Tufts Cove 6 Waste Heat Recovery Project. This audit was conducted in August 2010, much before completion of the Tufts Cove 6 project. In general, the audit found that ''''''''''''''''''' ''''''' '''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''' ''''''' '''''''' ''''''''''''''' '''''''''''''''''''''' '''''' '''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''' '''''''' '''''''' ''''''''''''' '''' '''''''''''' '''''''''''''' '''''''''''''''' ''''''' ''''''''''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''' '''''''' '''''''''''' '''''''''''''' '''''''''''''''''' ''''' ''''''' ''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''' '''''' '''''''''''''' ''''' '''''''' '''''''''''''''''''''' ''''''''' '''''''''''''

'''''''''''''''''''' '''''''' ''''''''''''''''''''''''''' '''''''''''''' '''''''' ''''''''''''''' '''''''''''''''''''''''''' ''''



''''''' ''''''''''''''''''''''' '''''' ''''''' '''''''''''''''''''''' ''''''''''''''''' '''''''''''''''' '''''

''''''''''''''''''''''''''' ''''''''''''''' ''''''' • In 2011, NSPI’s internal audit related to Air Emissions. The purpose of this audit was to

determine whether the necessary processes and procedures are in place to ensure that NSPI can meet the air emission targets as set out in the regulations enacted by government. This audit determined that no material risk of noncompliance with air emission limits exists, however there were a few areas where some minor improvement was possible.

• In 2011, NSPI’s internal audit related to Lingan Inventory Follow-up. The purpose of this audit was to provide assurance that management had addressed the areas identified for improvement in the original Lingan audit from September 2008, as related to supplies and consumables, but not including fuel. The audit concluded that management had addressed all of the outstanding items identified in the original audit.

Internal Audit identified Liberty’s FAM audit (which this report addresses) as the work that will comply with the annual fuel-manual audit responsibilities for 2010 and 2011. NSPI did not provide for any audit of fuel supply procurement process by any external parties during the Audit Period. The Company continues to rely on the services of external fuel procurement experts in its fuel procurement activities. During the Audit Period, NSPI states that it has used both Eckert Seamans from Washington, D.C., and its long-standing fuel consultant EVA for specific issues related to its standard Coal Master Agreement. Eckert Seamans has expertise in Coal Master Agreements, and in late 2011, at the request of NSPI, they proposed some language to include in its Coal Master Agreement with respect to shipping tolerance. The new language brings more specific definition to the concept of shipping tolerance. The Company has indicated that once such reviews are complete, it will bring any revisions to the standard contract to the Fuel Strategy Table and to the Small Working Group for further review and approval. The Internal Audit group, headed by a director, consists of a staff of six and a manager. The six-person staff roughly divides between compliance (2.5 full-time equivalent persons) and internal audit (3.5 full-time equivalent persons). CEO and CFO certifications of financial filings disclosures under National Instrument 52-109 typify the compliance work. The above listing shows Internal Audit work related to fuels during the Audit Period.

C. Conclusions

1. The FERM organization suffered major discontinuity in personnel during the Audit Period, reflecting a diminished Emera and NSPI focus on assuring the effectiveness of this critical utility function. (Recommendation #1)

The FERM organization has responsibilities that require a broad cross-section of skills and experience related to fuel supply procurement and management and energy trading. The Solid Fuel Manager departed unexpectedly in April 2010 and NSPI also experienced multiple, planned



changes in most key major positions over the balance of the Audit Period. Such changes led to inattention to detail in certain areas. Delayed procurement of the appropriate solid fuel for Lingan in order to avoid opacity issues comprises a major example, as discussed in Chapter IV of this report. The critical nature of FERM requires not only capable staff, but also continuity and cohesiveness. We found NSPI unable to achieve a suitable level of stability in key FERM roles. Key FERM managers changed during the Audit Period, at a rate that lies outside our experience and that raises significant concerns about commitment to this area of operations. The Audit Period changes include:

• Director, FERM o Initial Director promoted September 2010 o Replacement Director started part time in September 2010 and full time on

January 1, 2011. • Solid Fuel Manager (Senior Manager Fuels Strategy & Performance)

o Initial Manager left NSPI April 2010 o Replacement Manager started part time in August 2010, and full time on

November 30, 2010 • Manager Oil, Gas & Energy

o Initial Manager promoted October 2011 o Replacement Manager started full time November 2011

• Manager Fuel Testing & Optimization o Initial Manager promoted January 2011 o Replacement Manager started in February 2011

• Scheduling & Logistics Coordinator o Initial Coordinator promoted December 2011 o Replacement Coordinator started March 2012

• Team Lead Scheduling & Plant Dispatch o Multiple changes over the Audit Period.

Additional personnel changes occurred during the Audit Period, as follows:

• 2010 o Renewable Contract Coordinator

• 2011 o Contract Administrator, Point Tupper Marine Terminal o Mentor, Team Lead Scheduling & Plant Dispatch.

We saw evidence of improving performance as resources stabilized, and gained greater cohesiveness. For example, we observed as the Audit Period progressed a significant decrease in solid fuel inventory (beginning in 2011). We also observed improvement in the correlation between solid fuel inventory forecasts and actual results. Actual levels of solid fuel inventory fell below forecasts by increasing amounts in the last two quarters of the Audit Period.

2. The FERM organization uses a generally satisfactory set of performance measurement, training, and job description methods and tools for guiding and incenting its employees, but the Commercial Incentives program is not optimally targeted. (Recommendation #2)



The programs used by the FERM organization for performance measurement of employees, for training of employees, and for maintaining job descriptions are satisfactory. Liberty found them to be typical of similar programs found in the electric utility industry. The performance measurement system used by FERM follows typical programs involving use of a key performance indicator (“KPI”) system. Employee performance regularly undergoes measurement against established standards. NSPI employs multiple training programs on an ongoing basis to ensure that employees remain adequately trained for their current positions, and to develop sufficient backup within the organization to provide for continuity when vacancies may occur. Job descriptions are used and are satisfactory. However, certain of the personal objectives in the Commercial Incentive program are too general and too much related to conditions that employees cannot actually control or influence. The use of fuel cost targets that depend on the market prices of fuels provide an example of circumstances outside the control of FERM employees. FERM management should focus on creating additional incentives which can be measured, which are important to overall department success, and that personnel can actually influence.

3. The Fuel Manual provides the FERM organization with an effective set of procedures covering the important areas of fuel and energy procurement and management.

The Fuel Manual encompasses a broad and appropriate base of subjects, and provides sufficient detail in the important areas of fuel and energy procurement and management. This manual compares favorably with traditional electric utility policies and procedures covering these areas of operations. We found its combination of multiple procedures into one document a strength. Formalized procedures, such as those embodied in the Fuel Manual, have importance for a number of reasons. They serve as the framework for guidance of day-to-day activities and they serve the important purpose of formalizing institutional memory. Formalized procedures provide a standardized basis and point of reference for performance evaluations. Procedures essentially provide the handbook and guide to operations that is important for training of individuals new to the organization, for guidance in operations when individuals are suddenly unable to perform their responsibilities because of illness, or other reasons, or when they leave the organization unexpectedly. Liberty found employees in FERM well aware of the contents of the Fuel Manual. FERM employees regularly use and refer to the Fuel Manual, ensuring that the performance of their individual responsibilities is consistent with the requirements found in the manual. The process currently underway for Fuel Manual revisions is based on review, discussion and approval of proposed changes with the Small Working Group (SWG). The current version of the Fuel Manual is dated October 2010. Certain proposed changes have been formulated since then. In this change process, NSPI divided these proposed changes into two categories, the first being more straightforward administrative changes, and the second those more substantive changes requiring more discussion and analysis. It is anticipated that the proposed administrative changes will be presented to the SWG in the very near future. Thereafter, NSPI plans approve and submit them for NSUARB review. The second group of more substantive changes will then be



discussed in the SWG over the balance of the year 2012 with anticipation that formal and final approval of this category of changes can be approved before year-end. Liberty recognizes that discussions among NSPI and stakeholders about specific, limited changes to the Fuel Manual are underway through the SWG. This conclusion is not intended to imply that those changes are unwarranted. Rather, this conclusion relates to overall scope, breadth, detail, and propriety of NSPI’s policies and procedures.

4. FERM administers the Quarterly Fuel Manual Compliance program without sufficient attention to detail. (Recommendation #3)

Liberty found that the NSPI program for administering the Quarterly Fuel Manual Compliance program to be poorly managed. The system seeks to provide employee familiarity with the Manual, as well as sign-off by members of the Fuel team that they understand and are complying with the Manual. Liberty reviewed the details of this compliance system and had a number of issues. Liberty’s interviews with personnel within FERM confirmed that employees do understand the Fuel Manual, and do use it regularly, as noted in the previous conclusion. This conclusion relates only to the poor administration of the compliance monitoring system. Liberty believes that the problems with administration of this system provide an example of inattention occurring as a result of the very large number of personnel shifts during the Audit Period.

5. FERM now has a consistent and adequate process for confirming employee understanding of and compliance with the important corporate policies for Emera Standards of Business Conduct, the Emera Credit Policy, and the Open Access Transmission Tariff Standards of Conduct.

FERM has corrected certain deficiencies relating to employee confirmation that they understand and are complying with the following standards of business conduct:

• Emera Standards of Business Conduct • Emera Credit Policy • Open Access Transmission Tariff (OATT) Standards of Conduct

On an annual basis, the Owner (or their designate) of the above three policies will provide training on each of these policies to the Fuels Team within FERM. In addition to reviewing the policy, the training will explicitly identify: the location of the policy, examples of how the policy is applied within the Fuels Group, and who Fuels employees are to contact should they have any questions regarding the interpretation or application of the policy. The training will be documented through tracking sheets. Finally, each employee must sign a statement on an annual basis confirming understanding of, and adherence with the provisions of the policy.

D. Recommendations

1. Place a very much increased priority on achieving stability of FERM personnel; avoid destabilizing levels of resource shifts. (Conclusion #1)



Filling the Solid Fuels Manager position a few years ago proved an extraordinarily difficult challenge for NSPI. Among the apparent challenges in doing so was a Company pay scale that made it difficult to find strong candidates at compensation levels NSPI was able to offer. The person found operated under a development plan that Liberty viewed as succeeding in assisting him to develop needed skills and experience quickly. His departure at the beginning of the Audit Period demonstrated that keeping a person in this position remains as difficult as initial placement proved to be. The departure of this person began a series of extensive personnel changes during the Audit Period. The Company must place much greater emphasis on the importance of organizational stability, and make greater effort to achieve it. It takes time to learn the complexities of positions within FERM, as well as to learn the responsibilities of the overall organization in its critical role to provide fuel and electric power for the utility. When there is such instability caused by changes in the majority of key positions, there are bound to be issues that do not receive sufficient attention, or which actually do fall through the cracks. People new to jobs are not yet fully focused, because they are still transitioning out of their old jobs, and going through the process of mentoring the person who has replaced them in their prior positions. Similarly, in their new positions, they are being mentored by a person who is already focusing primarily on learning the responsibilities of yet another position somewhere else within NSPI, or the overall Emera organization. Proper focus on all of the dimensions of the position within FERM simply cannot be achieved instantly and takes time. When personnel in multiple positions are making changes, the problems of focus are compounded and proper focus will take even longer.

2. Improve the FERM Commercial Incentive program by providing more relevant and specifically focused incentives. (Conclusion #2)

The FERM Commercial Incentives tend to be too general and too much related to market conditions, rather than to specific objectives which can be directly influenced by individuals within the organization. FERM management should focus on Commercial Incentives that can be structured in ways which can be measured, which are important to overall department success, and which can actually be influenced by department personnel.

3. Improve administration of the Quarterly Fuel Manual Compliance program and correct specific problems noted within this chapter. (Conclusion #4)

The purpose of the Quarterly Fuel Manual Compliance program, and the data sheets within, is to ensure that the tasks specified in the Fuel Manual are taken seriously, completed appropriately, and in a timely manner. The deficiencies which Liberty has noted indicate that the program is not taken seriously, and should be a warning sign to FERM management that compliance with the Fuel Manual must be emphasized, and is vital to the effective functioning of the organization. Administration of the program must be improved and the specific problems noted must be resolved.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) II. Forecasting and Supply Planning

July 9, 2012 Page II-1 The Liberty Consulting Group

II. Forecasting and Supply Planning

A. Background NSPI’s fuel-supply planning begins with load forecasts covering the next ten years. The Integrated Customer Service department prepares a base-case forecast, and prepares high- and low-demand cases each year. The department does so in the context of NSPI’s business planning/budgeting process. The Company has based load forecasting on econometric modeling, supplemented by direct conversations with large-volume industrial customers about their likely power requirements. NSPI prepares forecasts for Net System Requirements, defined as in-province billed sales plus associated system losses and changes to unbilled sales. NSPI also forecasts peak hourly demand on the basis of forecast energy requirements and expected load shapes. A Load Forecast Report, prepared annually, presents results. NSPI files this report with the NSUARB on April 30 of each year. NSPI produces longer-term forecasts, for the next 25 years, as part of Integrated Resource Planning (“IRP”). NSPI prepared a comprehensive IRP in 2007, under a process including the participation of NSPI’s stakeholders and NSUARB consultants. The same parties participated in a 2009 IRP Update. The NSUARB received a report on the update in November 2009. Appendix B to the FAM Plan of Administration presents the principal steps of fuel-requirements forecasting. It also presents general statements of the principal assumptions that NSPI uses in making its forecasts. Liberty’s preceding FAM Audit summarized those steps and assumptions, and described the schedule that the Company uses in preparing and updating its forecasts. The prior FAM Audit also noted the influence of NSPI’s Fuel Manual, which contains the Company’s policies for fuel-supply acquisition. Chapter II of that report discussed how the Company used its fuel-requirements forecasts to configure fuel tenders, and how the Company used financial instruments to fix the prices of most of its fuels. Liberty found the Company’s processes for understanding the nature of its fuels requirements satisfactory, and its use of its fuel-requirements forecasting in procurement planning effective. We also found that the long time gap between initiation of the fuels forecast and the first update resulted in excess hedges for natural gas in 2009. We recommended that the Company explore whether, and under what circumstances, the Company should reduce its hedging targets for HFO and natural gas. NSPI experienced a continued shift in its generation mix from coal to natural gas in 2010 and 2011. Purchased power also increased as a share. Wind-powered projects contracted under the 2007 RFP for renewable power came on-line. The Company consumed considerably more gas in both years, and, as a result, considerably less coal than forecasted when it prepared its annual Fuel Budget. The tables below show how estimated requirements of those two fuels changed with forecast updates. These shifts caused problems in fuel-supply acquisition, including entry into shorter-term gas markets for additional supplies, and excessive coal inventories.



2010 Estimated Fuel Consumption (MMBtu) 2010 Budget Q1 Update Q2 Update Q3 Update

Solid Fuel ''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''''''''' Natural Gas ''''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''''' All Fuels ''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''''''

2011 Estimated Fuel Consumption (MMBtu)

2011 Budget Q1 Update Q2 Update Q3 Update Solid Fuel ''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''''' Natural Gas '''''''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''' All Fuels ''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''

The exceptional decline in the price of natural gas and late-2010 coal-price increases contributed to the shift, particularly in 2011. Liberty examined these processes in more detail in this audit, seeking to determine whether NSPI’s fuel-requirements forecasting contributed to the shift.

B. Findings

1. Audit Period Production Sources The chart below, taken from NSPI’s fourth quarter 2011 Quarterly FAM Report, shows the shift in generation fuels at NSPI since the end of 2006. The proportion of generation fueled by coal has decreased from 76 to 58 percent over that period. Gas has correspondingly increased from 8 to 20 percent. Purchased power, including purchased wind power, power purchased from other independent power producers (primarily fueled with biomass) and power imports, increased from 5 to 11 percent. Power from NSPI’s hydroelectric facilities has increased from 7 to 11 percent.

Proportions of Energy Production



The next table presents descriptions of NSPI’s generating units and production.

Generation Unit Summary

Plant/Unit Net Capacity

In Service

Fuel Type

2010 GWh

2011 GWh

Lingan Unit 1 153MW 1979 Coal / Petcoke 859.7 931.8 Lingan Unit 2 153MW 1980 Coal / Petcoke 875 778.3 Lingan Unit 3 153MW 1983 Coal / Petcoke 961.9 767.9 Lingan Unit 4 153MW 1984 Coal / Petcoke 961.6 843.4 Tufts Cv Unit 1 81MW 1965 Oil / Natural Gas 583.6 522.6 Tufts Cv Unit 2 93MW 1972 Oil / Natural Gas 629.5 621.8 Tufts Cv Unit 3 147MW 1976 Oil / Natural Gas 685.9 883.3 Tufts Cv Unit 4 49MW 2003 Natural Gas 223 259.8 Tufts Cv Unit 5 49MW 2005 Natural Gas 162.1 151.4 Tufts Cv Unit 6 Natural Gas 3.3 Pt Tupper 152MW 1973 Coal / Petcoke 1,170.80 627.6 Pt Aconi 172MW 1994 Petcoke / Coal 1,211.30 1,098.5 Trenton Unit 5 152MW 1969 Coal / Petcoke 758.3 644.5 Trenton Unit 6 155MW 1991 Coal / Petcoke 1059.5 1,173.3 Burnside 1 33MW 1976 Light Oil 1.819 1.357 Burnside 2 33MW 1976 Light Oil 1.747 1.422 Burnside 3 33MW 1976 Light Oil 3.149 1.33 Burnside 4 33 MW 1976 Light Oil -0.234 -0.046 Victoria Jnctn 1 33MW 1976 Light Oil 0.355 0.189 Victoria Jnctn 2 33MW 1975 Light Oil 0.309 0.261 Tusket 1 24MW 1971 Light Oil 0.3 0.005 Hydro System 397MW Various Hydro 991.5 1,088.50 NSPI Wind 76MW Various Wind 25.3 247.5

NSPI planned for Tufts Cove 6 to enter service in late 2010. It is now expected to achieve commercial operation on or about July 1, 2012. NSPI curtailed gas-fired generation in December 2010 because of the delayed return to service of one of the Tufts Cove steam units. Natural gas prices also increased considerably mid-way through December 2010. Several factors limited 2011 gas consumption: (a) an August mechanical failure at Tufts Cove 5, and (b) the effect of that loss on the schedule for final commissioning of Tufts Cove 6. The next table summarizes fuel costs in the two years of the Audit Period.



Audit Period 2011 Fuel Cost Summary – per MWh (Chart is Confidential)

2. Load Forecasting

The prior FAM Audit noted that an NSUARB consultant reviewed NSPI’s load-forecasting methods. NSPI then was making some adjustments in response to the consultant’s recommendations. The same group reviewed NSPI’s load forecasting again in 2011, again at NSUARB request. The consultant raised issues about how NSPI treats demand-side reductions in estimated requirements, but those issues did not have large consequence in the near term. The Company’s large-volume industrial customers make the most difference in near-term forecasting. The consultant noted that the closure of a large paper mill “by itself could reduce



total NSPI load by 10% and overwhelm the other effects.” Large-volume customers account for 78 percent of the Company’s industrial load. NSPI surveys them individually in preparing its load forecasts. NSPI considered the large-volume industrial load as an undifferentiated component of total load for fuel-requirements estimation purposes prior to 2012. Appendix B to the FAM Plan of Administration, on page 3, states that the “Large Industrial load forecast will rely on industry trends and customer input. For those industrial customers receiving the ELI 2P-RTP rate, NSPI will use the Customer Baseline Load (CBL) profile.” The largest customer ceased operations for an extended period in 2006 and again in 2011. The loss of this customer reduced NSPI’s load very substantially. This effect and other factors affecting solid-fuel requirements (particularly the price of natural gas versus coal) caused NSPI to change to a “book-end” process of multiple Strategist runs used to put upper and lower limits on solid-fuel consumption forecasts. The Company considers these limits in deciding whether and when to fill open positions in its forecast requirements for solid fuels.

3. Fuel Requirements Forecasting Appendix B to NSPI’s FAM Plan of Administration presents its fuel-requirements forecasting methods, which follow these steps:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ NSPI feeds these inputs into a dispatch-simulation computer model, which calculates the optimum dispatch of generation and power-purchase resources for satisfying the load at least cost. NSPI uses preliminary and subsequent Strategist runs, to ensure that external constraints, such as emissions limits, are satisfied. An estimate of the amount of each fuel required, by month, comes as a corollary output of the calculation of optimum dispatch. Those amounts can be compared to amounts of each fuel under contract, with the uncontracted balance in each month representing amounts that NSPI must secure. NSPI specifies power from several sources to the model, rather than permitting the model to solve for them:



• Independent Power Producers (IPPs) providing power to NSPI under power-purchase contracts: Monthly profiles of power supplied are specified, taken from volumes in the contracts. Where contracts do not fix monthly volumes, the modelers use a simple average of monthly production in the last three years.

• Wind-powered energy: NSPI’s estimate uses averages of the last three years’ production by each project.

• Hydroelectric power: The Company estimates the energy provided by each unit by using a 23-year rolling average. NSPI adjusts the average for unit additions, decommissionings, and unavailability for extended periods due to factors such as inspections and maintenance, for example.

• Power imports: Imported energy forecasts use a 24-month rolling average of imports during the most-recent 24 months, adjusted for known changes (such as transmission-line maintenance), as necessary.

NSPI decreases the load forecast specified to the model in each month by the volumes anticipated to be available from these sources. Following these adjustments to the load forecast, a preliminary Strategist run estimates how much each fossil fuel plant will run in each month of the forecast year. NSPI increases the forecast by the amount of anticipated power exports. The Company assumes the volume of export power will comprise ''''' '''''''''''''''' ''''' ''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' ''''' ''''''''''''' '''''''''''' ''''''''''''' '''''''''''''' ''' ''''''''' ''' as calculated in the preliminary Strategist run. NSPI also uses the preliminary Strategist run to provide fuel requirements by generating station to the Coal Model. NSPI uses the latter to optimize the blends of solid fuel across the generation fleet within the available emission limits. Coal Model outputs include costs and emissions factors by fuel blend by generating station, for use in a final Strategist run. The final run produces estimates of required fuel quantities by generating station, with all constraints satisfied. FAM Plan of Administration Appendix D provides the annual schedule for these activities. The forecast process begins in July of the year prior to the one being forecast. NSPI updates results three times during the forecast year, as it learns information on actual load, any new contracts for committed volumes of fuel and fuel-price hedges, and fuel-market conditions. NSPI updates every assumption required for producing the forecast each time it performs one of these updates. NSPI’s quarterly updates produced considerable changes in the Company’s estimates of its fuel requirements, particularly in 2011. In an effort to determine whether NSPI’s fuel-requirements forecasting processes were part of the reasons for these changes, Liberty examined them in more detail.

a. Strategist Utilities typically employ a combination of software models to perform simulations as part of projecting fuel requirements for generating fleets. Forecasting power production and fuel consumption involves a data-intensive, model-driven process that generally requires a production cost model. Production cost models simulate the long-term dispatch of generating units on an economic basis, optimizing the portfolio of generating assets for the best (least-cost) solution that meets the utility load and reserve requirements. Production cost models take into consideration the load forecast, transmission constraints, fuel costs, emissions constraints, and



the key operational and financial parameters that characterize each generating unit available for commitment and dispatch. Modeling meets the system load for each time period of the analysis by dispatching units based on their physical constraints and their economic merits, by minimizing the total forward-looking variable dispatch cost that is driven by each unit’s heat rate, fuel unit costs and variable operation and maintenance (VO&M) costs. Production cost models produce outputs that allow utilities to predict the output required from each generating unit, the resulting emissions from each unit, and the required fuels by type and quantity to meet the projected generation profile. Outputs typically get fed into other post-processing models and tools in order to support financial analyses and procurement decisions, such as fuel purchasing and emissions management. NSPI uses outputs from Strategist to finalize fuel purchases. NSPI uses Strategist as its primary energy production forecasting tool. The resulting production forecast, in conjunction with NSPI’s “Coal Model,” forms the basis for the Company’s fuel forecast. NSPI uses the two models together in an iterative fashion. This use comprises a key step, because each model depends on the output of the other. Changes in Coal Model outputs drive potential changes to Strategist runs. The outputs, when used by the Coal Model, then cause changes as well. Iterations between the models in this manner ultimately lead to an equilibrium solution. The objective of each iteration is to close on this final, equilibrium solution that reflects NSPI’s best estimate of fuel requirements. The relative disparity between coal and gas prices influences the number of iterations required. That is, with gas prices at traditionally higher levels, the disparity does not cause displacement of coal generation by gas-fired resources, thus requiring fewer iterations. Low gas prices require model iteration up to five times to reach an equilibrium solution of generation and fuel consumption. Strategist operates as a commercial model licensed to NSPI by Ventyx, a leading vendor of models to the electric power industry in North America. Ventyx, however, markets Strategist as an Integrated Resource Planning (IRP) tool, not as a production-cost model. This IRP role represents the industry-established use of Strategist. NSPI actually uses Strategist in a way that would be better served by a true production-cost model. Strategist’s design as an IRP tool suits it best to the evaluation of resource alternatives, including a full array of demand-side and supply-side options for inclusion in a utility’s long-term resource plans. Such functionality requires a dispatch simulation somewhat similar to that of a production-cost model. Nevertheless, IRP modeling does dispatch simulation at a fairly “high-level,” using relatively simplistic algorithms and data sets. By contrast, the models more commonly used for production-cost modeling perform such simulations at an extremely detailed level.1 Inputs to the Strategist model begin with a load forecast. NSPI’s “Load Forecast Model” provides the load forecast. This forecast results from a combination of spreadsheets and Forecast 1 Examples of models typically used for production-cost modeling in North America include AURORA, GE MAPS, Promod and several others with detailed data and sophisticated algorithms.



Pro software. The load forecast takes an “8,760” format (i.e., consisting of all hours of a given forecast year), and converts it to 12 “typical week” 168-hour forecasts; i.e., one for each month of the forecast year. This simplification enables the model to run fewer time periods than a full 8,760-hour run would require, thus reducing solution run-time. The loss of specific hours to which outages can be assigned is a shortcoming of NSPI’s typical-week approach. Strategist must use a relatively simplistic “percentage-derate” approach to outages, rather than providing the more-accurate full outage of a specific time frame. Strategist considers many (but not all) of the key operating and financial parameters associated with the dispatch of power plant units. It considers seasonal capacity values and availability, fuel cost and heat rates, and VO&M costs. These key unit parameters include:

Capacity (MW) Minimum load (MW) Heat rates (Btu/kWh) Variable O&M costs ($/MWh) Fuel costs ($/MMBtu) Outages

Strategist does not consider:

Ramp rates (MW/min) Start-up costs Emissions constraints Strategist can consider emissions, but NSPI uses its Coal Model for this function. NSPI represents its system in Strategist as 24 thermal units, 16 hydro systems, 36 IPP sites, and one wind transaction representing NSPI-owned wind generation. Outputs from Strategist include plant-specific energy production, emissions and fuel burn. The fuel-burn numbers feed the Coal Model, which the next section of this chapter addresses in more detail. Strategist does not consider transmission constraints per se, but limits constrained interfaces by limiting the amount of imported and exported power allowed from neighboring systems. We have seen this approach commonly for external interfaces, but it risks ignoring possible transmission constraints internal to NSPI now or in the future. NSPI’s use of Strategist also does not consider the costs associated with cycling units. Such costs can prove difficult to quantify, but have become increasingly important, due to the potential that coal plants will perform more and more cycling in the presence of increased intermittent (wind) generation and the continuation of low gas prices. VO&M forms a key component of dispatch cost. NSPI’s VO&M data appears low relative to that used for similar units in other North American power plants. Traditionally, VO&M comprises a relatively small portion of total O&M for base-load coal units. Such units have tended to run essentially non-stop when not in planned or forced outages. However, as units face increased cycling, and therefore lower capacity factors, VO&M becomes increasingly important.

b. The Coal Model NSPI’s in-house Coal Model seeks to optimize coal purchases for use in power generation. It contains several modules (worksheets) developed by NSPI. The Company currently uses it in conjunction with Strategist through an iterative process. Coal Model outputs provide Strategist inputs, and vice versa. Accordingly, it takes several iterations of feeding outputs from one to serve as inputs to the other to reach a stable solution.



The Coal Model starts with a “Load Forecast” module. Strategist runs produce the data for the Coal Model. Calling it a load forecast module does not mean that it forecasts electric load forecast; rather, it forecasts solid fuel requirements for each generating unit. This annual load forecast presents monthly tables by unit for Lingan 1-4, Trenton 5-6, Point Aconi and Point Tupper. The table serves as the primary input for meeting fuel requirements. It shows unit fuel requirements in Btus, without consideration of how NSPI will meet those Btus. Another model blends fuels to meet the Btu requirements in the most cost-effective manner. This other module also serves to assure compliance with air emissions limits. Another module, “Vessel Schedule,” consolidates records for coal supply options by Shipper, Load Port, Supplier, and Coal Type. It contains physical information on each type of coal available. The data include sulphur and Btu content, and information from other tabs that address escalation and demurrage. This module ultimately uses pricing inputs to calculate the total and per-Btu costs of each coal source. The Coal Model does more than meet fuel requirements on a least-cost basis. It also addresses emissions by fuel type. This model ultimately summarizes final fuel blend and total requirements for each unit. The results of the Coal Model fuel blend and prices then become inputs to Strategist, which in turn produces another “load forecast” for optimization by the Coal Model. NSPI considers iterations between Coal Model and Strategist runs complete when the prices and blends stabilize between the two. Of particular note is the fact that the Coal Model relies heavily on human interaction and it does so for more than basic operation and QA/QC. The model requires extensive manual operation to perform several “hard calculations” in cells. These calculations represent numbers as part of formulas, rather than formulas based on input parameters. The Coal Model works in somewhat of a trial-and-error manner. It does so by testing purchases through user entry of various values for quantities of blends. The user then examines whether emissions constraints (SO2) are met. Models of this sort more typically contain an additional feature; i.e., an automated optimizer. This feature finds not just a solution that works, but the one that works best. Models used to perform the functions of NSPI’s Coal Model should have features that would substantially improve the way coal requirements are forecasted. The Coal Model should have the following characteristics:

• Automation of inputs: Data from Strategist should be automatically input to a database used by the coal model.

• Automation of solution: The Coal Model should solve with an automated macro that does not require trial-and-error solution tests by users.

• Optimization of solution: The Coal Model should implement an optimization module that finds the optimal (least cost) solution for coal procurement and inventory management.

• Multiple solutions: The Coal Model should solve for the entire portfolio simultaneously and not for each unit individually.



c. Review of 2010 and 2011 Forecasts The substantial discrepancies between forecast and actual fuel consumption in 2010 and 2011 led Liberty to examine possible reasons underlying the inaccuracy of NSPI’s forecasts. We understood that upheaval in the fuel markets has played a material role; our goal was to identify any other major contributing, systemic issues with NSPI’s processes or models. Fuel markets have seen large drops in natural gas pricing, causing gas-fired generation to displace much coal-fired generation. Additionally, the two fuels more recently have not tracked as well or even moved in the same direction for extended periods. Their divergence has posed challenges for all fuel forecasters. One cannot simply look at inputs and outputs to identify all of the drivers of the discrepancies between forecast and actual results. Forecasts use the best information available at the time; i.e., mid-year of the year preceding actuals in NSPI’s case. Dispatch decisions thus rely on information gleaned from markets between six and 18 months after the forecast. Understandably, such a time frame, especially one in which fuel markets so drastically change, creates forecast discrepancies. Utilities therefore typically employ scenario planning and risk analysis/risk management techniques to address the “surprises” that such a time gap can cause. Effective use of models requires a structured program for checking results validity and accuracy. Accuracy testing of model algorithms can employ model runs that “back-cast” variables. A back-casting exercise populates production models with input data to reflect actual market and operational conditions that have occurred. Analysts then run the model in question, using this “actual data,” for the purpose of comparing results to actual fuel burn and generation by unit. A back-cast thus enables the user to confirm that the model produces results consistent with the real-world actual results. Isolation of variables is another useful exercise for model testing. A variable isolation study runs and stores a base case. A next run adjusts a key parameter, while holding all other variables constant; i.e., isolating the single variable. The analyst then compares outputs to those of the base case. This enables the attribution of any variance from the base case to the isolated variable. This approach permits model use for reconciliation of forecast and actual values for unit generation and fuel consumption.

4. Fuel Supply Planning The Fuel Manual presents NSPI’s general policies for fuel-supply acquisition. The manual also provides more specific direction and guidance on processes for determining fuel requirements, fuel and transportation procurement procedures, allowed fuel procurement transactions and fuel procurement administration. Appendix C presents the Company’s procurement strategy and objectives for the major fuel types: solid fuel and transportation services, heavy fuel oil (HFO), light fuel oils (LFO), and natural gas. Appendix D presents the Company’s fuel hedging strategy and objectives, for each of these four major fuel types. The next subsections present Liberty’s findings regarding procurement planning for each fuel.

a. Solid Fuels Solid fuels comprise the largest source of NSPI’s generation. Solid fuels account for 50 to 60 percent of the annual fuels budget. These fuels vary the most in quality and burn characteristics,



and are subject to the most stringent emissions constraints. The variability in factors like these presents significant opportunities for improving performance through effective procurement planning. The first Strategist run estimates the amount of energy required from the solid-fuel fleet and the amounts of emissions available. Those parameters provide inputs to the Coal Model, for optimization of fuel blends across the fleet and within available emissions limits. The Coal Model produces cost and emissions factors for use in a final Strategist run. That final run solves for the optimal dispatch to produce the lowest fuel cost for the forecast period. The results of the final Strategist run provide particular objectives for solid-fuel competitions. The run produces an optimal fuel blend for each generating station, seeking compliance with applicable emissions constraints at the lowest overall cost. NSPI can compare these target fuel blends with inventories and fuel already under contract in configuring further solicitations. Existing commitments and prospective solicitations also bear on efforts to hedge the prices of coal supplies. ''''''''''''' '''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''' '''' ''''''''''''''' ''''' ''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''' When those alternatives prove unavailable, however, the Company uses financial instruments in conjunction with physical delivery commitments to limit exposure to price changes.

b. Heavy Fuel Oil NSPI faces periods when it burns gas rather than heavy fuel oil (“HFO”) at Tufts Cove. '''''''''''''''''''' '''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''''''' can provide much of the HFO supply that NSPI needs for the other generating stations at those times. NSPI’s requirements for HFO, however, vary widely, and depend on the HFO price relative to the price of natural gas. A relatively low price of HFO can produce HFO burns as high as 3.5 million barrels per year. ''''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''' supply all of NSPI’s requirements when HFO offers comparatively more economical prices than does natural gas for extended periods, however. NSPI therefore conducts tenders for larger HFO quantities. The tenders seek a requirements contract, which gives NSPI the flexibility to avoid HFO purchases when natural gas is more economical to burn. NSPI conducts procurements for lot sizes that fit the size of commercial vessels used to transport HFO. NSPI’s storage for the fuel at Tufts Cove holds about ''' ''''''''''''''''''' '''''''''''' of maximum HFO consumption. NSPI uses a “rule of thumb” for ordering additional cargoes at certain inventory levels. NSPI hedges its HFO according to its anticipated usage. Consider the case when the relationship between HFO prices and gas prices over the planning period (the next two years for FAM forecasting) indicates burning HFO in the Tufts Cove steam units. NSPI will then hedge the anticipated burn quantity pursuant to a schedule specified in the Fuel Manual. NSPI still hedges some HFO when forward prices indicate burning gas at Tufts Cove, recognizing use at other generating stations. NSPI at these times places hedges pursuant to the schedule in the Fuel Manual, but it reduces the quantities hedged, commensurate with the reduction in the exposure.



c. Light Fuel Oils NSPI’s requirements for light fuel oils (“LFOs”) focus on furnace oil for boiler start-up and diesel fuel for combustion turbines. NSPI’s use of them varies considerably, depending in particular on how much the diesel-powered combustion turbines run. These requirements, while substantial, remain moderate enough to permit management through the local distribution infrastructure. NSPI invited ''''''''' suppliers to bid in the Company’s most recent tender for supply. NSPI requires no special plans for the procurement of LFOs. The variability in LFO use has led NSPI not to hedge the price.

d. Natural Gas NSPI uses natural gas to fuel the steam units at Tufts Cove when it finds natural gas prices low relative to the price of HFO. NSPI also uses gas to fuel the two turbine generators at Tufts Cove. The turbines burn only gas. Therefore, the position of the units in the dispatch order determines the fuel amounts required. Adding the waste heat steam generator to be commissioned in mid-2012 should move the units to a base-load position. NSPI did not need a procurement plan per se for its gas requirements before November 2010. In the late 1990s NSPI had entered into ''''''''''''''''''''' '''''''''''''''''''''' ''''''' ''''''' '''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''' '''' ''''''''''''''''' ''''' '''''''''''''''''''''''''''' '''''''''''' '''''''''''' '''''''''''''''''''' ''''''''''''''' '''''''''''''''' '''''''''''''''''. NSPI used the gas provided under those contracts to fuel generation as the price level relative to HFO and the position of the turbines in NSPI’s dispatch order dictated. The Company sold the balance available under the contracts into the Northeast (U.S.) Gas Market. Those contracts '''''''''''''''''' '''' '''''''' ''''''''' ''''' ''''''''''''''''''' ''''''''''. Requirements analysis and procurement planning were important NSPI functions during the term of those long-term contracts. Optimizing revenues from sales of gas in excess of burn requirements formed a major need. ''''''''' '''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''' '''' ''''''''' ''''''''''''''''''''' '''''''''''''''''''' '''''''''''''' '''''''''' although production interruptions at the source often reduced the amounts available. The variables to be optimized through planning and analysis included: a) the amount of gas available for resale, and b) the proportions available for resale on monthly and daily bases. Monthly sales sometimes commanded a pricing premium, and made hedging more manageable. Thus, effective analysis of the monthly/daily split was a high-value activity. NSPI used its fuel forecasts to estimate this split. The Company estimated quantities it expected to offer on monthly and daily bases for each month. NSPI used these estimates to evaluate competing offers from market participants potentially interested in buying the excess gas. Quantities actually available for monthly and daily sales varied from the estimates, as NSPI’s electric load and other variables changed. NSPI accommodated these changes by specifying in its sales contracts that quantities it would sell each month would be specified during the last few days of the prior month. The Company would specify applicable daily quantities in accord with pipeline nomination deadlines. Thus, while forecast quantities formed the bases for evaluation of competing offers for the right to buy the gas, the sales contract reserved to NSPI the right to adjust quantities sold to a point when the monthly/daily split could be adjusted to maximize returns. '''''''''''''' ''''''' '''''''' '''''''''''''''''''' '''''''' '''''''' ''''''' ''''' ''' ''''''''''''''''''' '''''''''' '''''''''''''''' '''''''' ''''''''''''' ''''''''''''''''.



NSPI hedged the prices of its gas supply in accordance with two objectives: ''''''' ''''''' '''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''' ''''' ''''''''''''''' '' ''''''''' '''''''''''''' '''''''' '''''' ''''''' '''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''' ''''' '''''''''''''''' ''' '''''''''' '''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''' '''''''''''''''''''''' ''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''' ''''' ''''''' ''''''''' ''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''''' '''''''''''''' Appendix D to the Fuel Manual specifies the objectives and strategy for hedging. The Fuel Manual allows the use of the following financial instruments:

''''''''''''''''''''''''''''''''' ''''''''''' ''''''''''''' '''''''''''' '''''''''' '''''''''''' '''''''''''''' ''''''''' '''''''' '''''''''' NSPI has since early 2008 used ''''''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''''' '''''''''''''' '''''''''''''' '''' ''''''' '''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' The next chapter of this report addresses NSPI’s planning for gas supplies.

5. Hedging

a. Initial Hedging Program NSPI engaged a consultant in 2006 to assist the Company in addressing certain NSUARB findings regarding the Company’s policies and procedures with respect to hedging generation fuels prices. The consultant recommended restructuring the Company’s Fuel Manual to clarify and distinguish among policies, goals, and strategies. The consultant also developed specific hedging strategies by using a computerized assessment model customized to NSPI’s operational parameters. Examples of those parameters include weather, plant outages, dispatch of all of NSPI’s generation facilities, and fuel types. The next table summarizes the recommended hedging parameters for solid fuels in tonnes per year:

Solid Fuels Hedging Objectives Component Contract Length Volume Targets '''''''''''''''''''''''' '''''' '''''''''''''' ''''' ''' ''''''''''''

'''''''''''''''''''''''''''''''''''' ''' ''''' '''' ''' ''''''''''''' ''''' '' '''''''''' ''''''''''''''''''''''''''' ''' ''' '''''''''' ''' ''' '''''''''''

NSPI has sought to hedge its solid fuel exposure with '''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' '''''''''''''' ''''''' ''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''''' ''''''''''''''''''' '''''''''''''' NSPI also seeks ''''''''''''''''' '''''''''''''''''''''''''' '''' '''''''''''' '''''''''''''' from its suppliers. When NSPI established these targets, it was finding suppliers were willing to provide up to ''''' '''''''''''''''''' ''''''''''''''''''''''''. The next table summarizes solid fuel freight hedging objectives in tonnes per annum. Fixed-price contracts hedge transportation.

Solid Fuels Freight Hedging Objectives Component Fixed Price Volume Targets '''''''''''''''''''''''''''' ''''''' ''''''''''' '''''' ''' '''''''''''

''''''''''''''''''''''''''''''''''' ''' ''''' '''' ''' ''''''''''' '''''' '' '''''''''' '''''''''''''''''''''''''''' ''' ''' ''''''''''' ''' ''' '''''''''



The next table shows the HFO hedging schedule in barrels per year. NSPI has typically used ''''''''''''''''''''''''''''''''''''''''' '''''''''''''' to fix the price of its HFO requirements. The Fuel Manual permits '''''''''' ''''''''' ''''''''' ''''''''''''''''''''' with the approval of the Fuel Strategy Table, to manage the uncertainty in the requirements of large-volume industrial customers.

Heavy Fuel Oil Price Hedging Schedule Time Prior to Consumption Month Quantity Hedged

'''''''''' ''''''''''''''''''' ''' ''''' ''''' '''''''' ''''''''''''''''' ''' '''' '''''''''''

'''''' ''''' ''''''''' ''''''''''''''''''' '''''''''''' ''''' ''''''''''' '''''' '''' '''''''''' '''''''''''''''''' ''''''''''' ''''' ''''''''' ''''' ''''' ''''''''' '''''''''''''''''' '''''''''' '''' '''''''''

''''''''''' '''' ''''''''' ''''''''''''''''''' ''''''''' ''''' ''''''''''''' The next table summarizes the natural gas hedging schedule, in MMBtu per day.

Natural Gas Price Hedging Schedule

Time Prior to Consumption Month Quantity Hedged ''''''''' '''''''''''''''''' ''''

'''''' ''''' ''''''''' ''''''''''''''''''' ''' ''''' '''''''''' '''''' ''''' '''''''''' ''''''''''''''''''' '''''''''' ''''' '''''''''' '''''' ''''' ''''''''' '''''''''''''''''' '''''''''' ''''' ''''''''''' '''''' '''' '''''''''' ''''''''''''''''' ''''''''' ''''' ''''''''''

''''''''''' '''' '''''''' '''''''''''''''''' ''''''''''' ''''' ''''''''''''''' NSPI’s long-term gas-supply contract with ''''''''''''' ''''''''''''''''' '''''''''. tied pricing '''' ''''''' ''''''''''''''' ''''' ''''''''''' '''''''' '''''''''''''''''' ''''''' ''''' '''''''''''''''' ''''''''''''''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''' '''''' '''''' ''''''''''''' '''''''''''''''' '''''''''''''''''' ''''' ''''''' '''''''''''''''''''''''' '''''' '''' When that contract was in force, NSPI typically used '''''''''''''''''''''''''''''''''' '''''''''''''' for natural gas and for '''''''''''' to fix the price of its natural gas requirements. '''' '''''''''''''''''''''''''' ''''''''' '''''''''' '''''''''''' ''''''''''''' ''''' ''''''' ''''''' ''''''''''''''''''''' '''' '''''''''''' ''''''''''''''''''''' ''''''' '''''''''''''''' ''''''''' '''''''' '''''' '''''''''''''''''''' '''''' '''' The NYMEX-traded natural-gas futures contract settles at Henry Hub. The Company, '''''''''''' ''''''''''''''''''''''' ''''' ''''''''' '''''''''''''''''''' ''''' ''''''' '''''''' ''''' ''''''''''''''''' '''''''''''' has used ''''''''''''''''''''''''''''''''''''''''' ''''''''''''' to fix the monthly price at the Henry Hub location. NSPI then uses '''''''''''''''' ''''''''''''''''' to limit its exposure to differences between the monthly price and the average of daily prices. The Fuel Manual, as with HFO, allows the use of '''''''''' ''''''''' '''''''''' '''''''''''''''''''''' for natural gas hedging, with the approval of the Fuel Strategy Table, to manage the uncertainty in the requirements of large-volume industrial customers.

b. Subsequent NSPI Hedging Study The same consultant re-evaluated NSPI’s hedging schedules, following the issuance of Liberty’s preceding FAM Audit Report. This late-2010 work added an estimate of expected daily wind generation in estimating the optimum hedging schedules. Significant levels of wind-powered generation entered NSPI’s system in 2010 and 2011. The consultant, however, did not have access at the time of its work to reliable wind production. Data



from 2009 drove assumptions about expected daily wind generation for 2012 (i.e., the test year for determining the benefits of alternative hedging programs). Forward fuel price data for 2011, 2012 and 2013 (observed on August 9, 2010) drove the analysis of price volatility and cross-correlation. The consultant assumed no hedges already in place for 2012. Identifying the largest reduction in total fuel cost volatility relative to the costs of the hedges remained the objective, as in the initial study. The results of the analysis were as follows:

• Solid fuels: ''''' ''''' '''''' ''''''''''''''''' ''''' ''''''' '''''''''''''''''''' '''''''''' ''''''''' ''''''''''''''''''''''''''''''''' Hedging of solid fuels was defined as '''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''''''' ''''''''''''''''''''' ''''' '''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''' ''''''''''' '''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' The consultant did not provide a specific hedging schedule recommendation, due to '''''''' '''''''''''''''''''''' ''''' '''''' ''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''

• Natural gas and HFO: At the time of the analysis, NSPI’s HFO- or gas-fired generating units tended to be “on the margin” within NSPI’s generation portfolio. Thus, the degree of variability in wind generation translated directly into variation in HFO or gas requirements, depending on which fuel was lower-priced in the marginal units. Accordingly, the consultant recommended one of two price-hedging schedules, depending on the degree of variability in wind generation: o With low variability, the recommended schedule was '''''''' '''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''''

''''''''''''''' '''''''''' ''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' '''''''' ''''''''''''''''''' ''''' '''''''''''''''''''''' '''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''' ''''''' '''''''' ''''''''''''' ''''''''''''''''' '''''''''''''''' ''''' '''''''''''''''''''' ''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''' ''''''''''' '''''

o With generation variability equal to the variability of the wind itself (2009 data), the consultant recommended '''''''''''''''''''''''''''''''''''' ''''''''''''''''', which the next table summarizes in MMBtu/day:

HFO and Natural Gas Price Hedging Schedule

Time Prior to Consumption Month Quantity Hedged '''''''' '''''''''''''''''' '''

'''''' ''''' '''''''' ''''''''''''''''' '''''''' ''''' ''''''''' ''''' '''' ''''''''' '''''''''''''''''' '''''''''''' ''''' '''''''''

'''''' ''''' ''''''''' ''''''''''''''''''' '''''''''' ''''' '''''''''' '''''' ''''' '''''''' '''''''''''''''''' ''''''''''' ''''' '''''''''''' ''''' ''''' '''''''' '''''''''''''''' ''''''''''' ''''' ''''''''''''

''''''''' ''''' ''''''' ''''''''''''''''''' '''''''''' ''''' ''''''''' NSPI presented the Update Report to its Small [Stakeholder] Working Group (SWG) in December 2010. The Company noted ''''''' '''''''''''''''''' hedging percentages for HFO and gas, but was reluctant to ''''''''''''''''' ''''''' targets as much as the new schedule suggested, pending acquisition of more data on actual wind generation. The Company undertook to keep its hedging proportions for HFO and gas at ''''''' '''''''''''' '''''''' of the previously-recommended ranges for the next ''''' ''''''''''''''''', at which time it expected more wind production data.



C. Conclusions

1. NSPI has appropriately changed its process to use scenarios to evaluate the impact of large changes in load. (Recommendation #1)

NSPI’s new practice of examining alternative load scenarios as part of its decision-making process regarding fuel procurements is sound. The perilous financial condition of the pulp and paper industry in Nova Scotia did not arise only in 2011. The Company’s exposure to the credit of customers in this industry has been known since at least the time of the prior FAM audit.

2. The Strategist model is not well suited for the role it plays at NSPI. (Recommendation #2) The Strategist model’s design makes it effective for use in high-level screening of potential demand- and supply-side resources. Models of this type do not have strong capabilities for performing detailed forecasts for procurement and budgeting decisions. Detailed production cost models are a better fit for this role given their ability to:

• Perform 8,760 analyses with unit commitment and sequential dispatch, and the ability to assess the impact of outages discretely

• Consider detailed transmission topography • Consider detailed unit parameters such as ramp rates and startup costs.

3. The Strategist model data does not adequately account for variable O&M costs. (Recommendation #3)

Variable O&M costs will play an increasingly important role in both the forecasting and dispatch processes at NSPI due to cycling, and to the proximity in the dispatch curves of coal and gas units. NSPI plants are modeled in Strategist with Variable O&M values that are far lower than other typical power plants in North America. This should be addressed and adjusted to reflect more accurate reflections of cost. The Company’s under-forecasts of gas requirements and over-forecasts of solid-fuel requirements for 2011 forced expanded entry into shorter-term markets for gas in that year, and contributed to the excess inventories of solid fuels now slowly being reduced. Absent careful back-casts with better values for variable O&M costs, and perhaps other parameters as well, it is impossible to know whether those better values would have changed the Company’s forecasts sufficiently to avoid those adverse consequences. What we know for sure is that the positions of the Company’s coal units and its gas units in its dispatch “stack” ''''''''' '''''''' '''''''''''''''''''''' ''''''''''' ''''' '''''''''''' '''''''''''' We can also see that the ''''''''''''''''''' '''' gas prices that the Company ''''''''''''''''' ''''' ''''''''''''' ''''''''''''' '''''' ''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''' '''''' '''''''''''''''' ''''' '''''''''''''''''''' An effect of this magnitude demands careful analysis and appropriate contingency planning.

4. The data used in the Strategist model does not adequately reflect the cost or other operational impacts of cycling coal units (Recommendation #4)

NSPI does not account for the short- or long-term impacts of cycling its coal units. Cycling of coal units causes major stresses on components and causes increases in outages, and in O&M and capital expenditures. Studies indicate that the cost of cycling on coal plants may be in the



range of US$1-2 per MWh. Currently, NSPI does not have a solid grasp of the costs associated with cycling, nor does it apply any cycling costs in its forecasting tools.

5. The Coal Model is overly simplistic and needs major improvement (Recommendation #5) Liberty’s review of the Coal Model found it lacking in sophistication and suitability. The model uses an overly manual approach to populating data, solving, and meeting constraints. Improvements or replacement would enable solution of all assets simultaneously, provide direct linkage to data from Strategist and other key sources, and reduce the potential for human error. Automation will also save processing and it will promote optimal solutions.

6. The concern about hedging targets for HFO and natural gas from the preceding FAM Audit remain unaddressed. (Recommendation #6)

Our recommendation stated (2010 FAM Audit Report, on p. II-8): The usual purpose of hedging is to reduce exposure to volatility in fuel prices. In the particular instance of 2009, reduced exposure to gas price volatility, provided by the hedges, came at the expense of increased exposure to fuel-requirements volatility, caused by the nature of NSPI’s most unpredictable load, its large-volume customers. NSPI should use the facts and circumstances experienced, due to the observed change in the power requirements of its large-volume customers in late 2008 and early 2009, to explore with its stakeholders alternative approaches to the situation.

Discussion of this recommendation arose in a meeting of the SWG on April 28, 2010. At that time, NSPI undertook to have its consultant (Black & Veatch) “examine” the issue, “… and report back to stakeholders.” NSPI’s consultant’s report came before the SWG for discussion at a December 2010 meeting. The report mentioned the impact of load variation on fuel requirements, and thus on fuel-supply hedging. Most of the discussion, however, focused on the effects of wind resource variability. In response to a question from Liberty, NSPI reported that load variability had also been tested, but found to have little effect on recommended hedging limits. The consultant’s report did not present those results, however. At the conclusion of the SWG meeting, NSPI expressed its intention to repeat the consultant’s analysis in about a year, after securing additional wind resource data. Liberty recommended testing of load variability at that time, with results reported back to the SWG. NSPI has reported at a recent meeting of the SWG that it has asked the consultant “to prepare a proposal to update their prior hedging study in view of the additional wind generation that has been added to the system.” There was no mention of load variability. NSPI incorporated much of its consultant’s original work for NSPI on hedging into the Hedging Strategy section of Fuel Manual Appendix D. That work suggested that a different approach might be “used to manage large industrial customer uncertainty.” NSPI’s additional work on hedging requires expansion to address this question.



D. Recommendations

1. Discuss with the SWG whether and how to address load uncertainty in the Company’s Fuel Budgets. (Conclusion #1)

The forecast forming the basis for the annual Fuels Budget comprises a particularly obvious product of the load-forecasting process visible to stakeholders. The Fuels Budget, in turn, becomes the Base Cost of Fuel for adjusting the Company’s FAM in years when there is no rate case, and is the basis for the fuel component of the Company’s rates when there is a rate case. Stakeholders and the NSUARB have a strong interest in a Fuels Budget that deals with load uncertainty realistically. Moreover, the incentive aspect of the FAM rewards a high estimate of load, all else equal, when it operates.

2. Replace the Strategist model with a model better suited for production-cost modeling and forecasting. (Conclusion #2)

NSPI has reported an initiative to replace Strategist. This initiative is very important; NSPI needs to complete it with dispatch and to select a production-cost model that performs detailed commitment and dispatch functions, considers detailed unit operational and financial parameters, and addresses transmission topography.

3. Adequately account for variable O&M costs. (Conclusion #3) Variable O&M costs will play an increasingly important role in the forecasting and in the dispatch processes at NSPI, due to cycling and the proximity in the dispatch curve of coal and gas units. NSPI should perform or commission an accounting/operational study to accurately identify more carefully and fully its own internal breakdown of true fixed and variable components of O&M costs.

4. Adequately reflect the cost of cycling coal units in modeling. (Conclusion #4) NSPI does not account for the short- or long-term impacts of cycling its coal units. NSPI needs to perform or commission a study of cycling costs on NSPI’s coal units. NSPI should then apply the identified cycling costs on a per-unit ($/MWh) basis to be included in its forecasting process.

5. Replace or completely overhaul the Coal Model. (Conclusion #5) Liberty recommends that the existing Coal Model be replaced with a model that enables:

• Automation of inputs—Data from Strategist should be automatically input to a database used by the coal model.

• Automation of solution—The Coal Model should solve with an automated macro that does not require trial-and-error solution tests by users.

• Optimization of solution—The Coal Model should implement an optimization module that finds the optimal (least-cost) solution for coal procurement and inventory management.

• Multiple solutions—The Coal Model should solve for the entire portfolio simultaneously and not for each unit individually.

6. Expand the scope of the forthcoming review of hedging practices to address large-volume load uncertainty. (Conclusion #6)



The consequences of variation in large-volume load for the Company’s hedging program have been a concern of long duration. NSPI needs to address it explicitly and completely in its forthcoming review.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) III. Gas Supply Planning

July 9, 2012 Page III-1 The Liberty Consulting Group

III. Gas Supply Planning

A. Background Liberty’s preceding FAM Audit raised concerns about a number of aspects of NSPI’s gas supply planning. We made a number of recommendations:

1. Submit a plan for a comprehensive analysis of NSPI’s alternatives for back-up and load-following services.

2. Become more pro-active in obtaining competitive-market prices for NSPI gas supplies. 3. When conducting NSPI planning and project evaluation, consider a broader range of

possible gas prices in Nova Scotia. 4. Maintain contracts with existing sources of gas-supply components, and work

aggressively to develop new ones. 5. Answer more fully the NSUARB’s question regarding the effect on its generation

planning of provincial and national requirements for reduction of carbon-dioxide emissions.

NSPI did not accept the conclusions underlying these recommendations, and therefore, did not express substantial agreement with the recommendations they produced. Liberty worked with the Company through the first half of 2011 on Action Plans to address these and the preceding audit’s other recommendations. The Action Plan for the first recommendation listed above evolved into the Wind Integration Study (discussed in Chapter X of this report). NSPI observed, with respect to the third and fifth recommendations listed above, that emissions compliance planning and the Province’s Renewable Electricity Standard primarily drove its capital program. NSPI stated that forecasted prices for natural gas therefore did not have a significant impact on its capital applications. NSPI also pointed to several forward-looking initiatives (e.g., the Wind Integration Study and a Generation Investment Strategy review), which will inform its next Integrated Resource Plan. That Plan will consider a range of potential fuel prices, including continued low natural gas prices. The Company did agree to provide twice-yearly reports to the NSUARB addressing progress on the second and fourth recommendations from the list above. Liberty has provided a separate report to the NSUARB. This July 25, 2011 Report on NSPI Natural Gas Activities (“Liberty’s Gas Activities Report”) sought to:

• Provide additional information on the particular concerns that we have expressed to NSPI in the areas of the two remaining recommendations

• Provide context for Board and stakeholder consideration of the Company’s efforts to address our concerns

• Provide a framework for setting expectations regarding those efforts. The Company filed the first of its twice-yearly reports in December 2011. NSPI will file future versions of this report (“the Company’s December 2011 Natural Gas Report”) each May and December. The May version’s historical discussion will cover the preceding winter gas season (November through March). The May version’s forecast discussion will address the summer gas season (April through October). The December version will normally address the historical period from the preceding April through October, and the forecast period from November



through March. The first (December 2011) report reviewed the entire year from November 2010 through October 2011. It presented forecasts for November 2011 through March 2012. Liberty’s work in this audit explored the Company’s perspectives on gas supply planning. We also studied how the prices that NSPI paid for gas during the Audit Period changed over the period, particularly by comparison with prices in the Northeast U. S. Gas Market. Finally, we discussed NSPI’s perspectives on gas availability, pricing, and gas use going forward.

B. Findings

1. Overall Supply Planning Framework NSPI’s reports to the NSUARB, its responses to our data requests, and interviews of NSPI personnel, identified that gas-supply planning occurs in the context of a number of major concepts and assumptions. First, the Canadian segment of the Maritimes & Northeast Pipeline system (M&NP-CA) would move gas produced in Maritimes Canada at a level ''''''''' ''''' ''''''''''''''''''' ''''' '''''''''''' '''''''''' '''''''' ''''''''' '''''' ''''''''''''' '''''''''''''' '''''''''''''' ''''''' ''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''''''''''''' '''''''' ''''''''''''' '''''''' ''''''''''' '' '''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''' '''''' ''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''' '''''''''''''' '''''''''''''''' ''''''''' '''''''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''' '''''' '''''''''''' ''''' ''''''' '''''''''''' '''''''''''''' '''''''''''''''''''''''''''''''''''' '''''''' '''''''''''''' ''''''''''''''''''' ''''''' ''''''''''' '''''''''''''''' ''''''''''''''' ''''''''''''''''''''''''''' NSPI considers the unconventional supply “promising,” but “unproven.”

Second, LNG introduces a new alternative. In an arrangement with Irving Oil, Repsol YPF, S. A. (Repsol), a global company based in Spain, built a $750 million liquefied natural gas (LNG) receiving facility next to Irving Oil’s petroleum refinery in Saint John, New Brunswick. Constructed with an initial throughput capacity of 1,000,000 MMBtu/day, the Canaport facility can expand to 2,000,000 MMBtu/day. Repsol’s Canadian subsidiary, Repsol Energy Canada, Ltd. (Repsol Canada), entered into a 25-year firm transportation service contract with Emera Brunswick Pipeline Company Ltd. (Brunswick Pipeline), a subsidiary of NSPI’s parent company, to ship 750,000 MMBtu/day through a new pipeline that Brunswick Pipeline would build to connect the new LNG receiving facility to the U. S. segment of the M&NP system (M&NP-US). This $350 million pipeline’s design accommodates reasonably easy expansion to 1,000,000 MMBtu/day. Repsol’s U. S. subsidiary, Repsol Energy North America, Inc. (RENA) entered into a similar contract with M&NP-US to ship 730,000 MMBtu/day through that segment.

NSPI characterized the outlook for ''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''''''''''''' despite these commitments. ''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''' ''''''''''''' '''''''''''''' ''''' ''''''''''''''''''''' ''''''''' '''''''''''' ''''''''''''''''' ''''''''''''''''' '''''' ''''' '''''' ''''''''''''''''''''''' '''''''''''' ''''' '''''''''''''''''' '''''''' ''''''''' ''''' ''''''''''' ''''''''''''''''''''''''''' ''''''''' '''''' ''''' ''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''' '''''''' ''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''''''

Third, NSPI projected ''''''''''''''''''''''''' trends in natural gas prices. NSPI anticipated that the wholesale price in the Maritimes ''''''''''''''' '''''''', citing:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋



∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

NSPI’s “Base Case” assumptions for the update of its Integrated Resource Plan, developed in the second quarter of 2009, assumed that the price that it would have to pay for gas ''''' ''''''' '''''''' '''''''''''' ''''' '''''''''''''''''''''' ''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''' ''''''''''''''' ''''''''''''''' '''''''' ''''' '''''''' '''''''''''' ''''' ''''''' '''''''''' ''''' '''''''' '''''''''''''''''''''' '''''' ''''' '''''''' '''''''''''''''''''' ''''''''' '''''''''' ''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

''''''' ''''''''''''''''''''' ''''''' '''''''''''''''''' '''''''''''''''''''''''' '''' ''''''''' ''''''''''''''''''''' '''''''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''' ''''''''''' '''''''''''' '''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''' ''''''''' '''''''''''''''''''''''''''''''' '''''''''''''''' ''''''''''' '''''' '''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''''' '''''''''''''

Fourth, NSPI’s planning envisioned '''''''''''''''''''' ''''''''' ''''''' over the integrated-resource-planning time horizon (25 years), despite a number of factors that tended to suggest '''''''''''''''''''''''' ''''''''. This expectation ''''' ''''''''''''''''' has led NSPI’s near-to-intermediate-term supply planning therefore to continue to focus on ''''''''''''''''''' ''''''''''''' ''' ''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''''' ''''' ''''''''. The factors suggesting ''''''''''''''''''''' gas use include:

• NSPI’s recent addition of substantial gas-fired generating capacity (in 2003, 2005, and 2010)

• A provincial energy strategy favoring use of natural gas for power generation • The anticipated introduction of large amounts of wind-powered generation, ''''''' ''''''''''''' '''''''

''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''''' ''''' ''''''''''''' '''''' '''''''' '''''' ''''''' '''''''' '''''''''''''''''''''''''''''''''' ''''''''''''''''' ''''''' ''''''''''''''''' '''''''' '''''''''' '''''''''''''''''''''''

This NSPI construct drove a number of gas-supply decisions that Liberty addressed in the preceding FAM Audit:

• The requirements analysis for the Company’s gas-supply planning omitted important components of anticipated future demand. (Chapter III, Conclusion #1)

• NSPI’s expectations of higher gas prices did not appear consistent with either the general regulatory regime for gas exports from Canada or the specifics of the authorities granted to '''''''''''''''''' (Chapter III, Conclusion #2)

• NSPI’s response to evidence of ''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''' was not sufficient. (Chapter III, Conclusion #6)

• '''''''''''' '''''''''''''''''' '''''''' ''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''' '''''' '''''''''''''''''''''' '''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''' ''''''''''''''''''' was inconsistent with the Company’s analysis of its gas-supply possibilities at that time. (Chapter V, Conclusion #3)

The report from the preceding FAM Audit concluded that, despite growing use of gas for power generation, NSPI was not sufficiently aggressive in assuring competitively-priced gas to fuel its gas-fired generation.



This section of this chapter updates the discussion of NSPI’s approach to gas supply in the context of the markets it needs to consider.

2. The 2002 NEB Decision We discussed with the Company Action Plans for implementing the recommendations of the preceding FAM audit. FERM personnel referred us to a 2002 order by the National Energy Board of Canada (NEB) regarding a petition by the Province of New Brunswick for a special export procedure for Maritimes-produced gas. NSPI did not participate in the proceeding that led to this order, which included the Province of Nova Scotia Petroleum Directorate as an intervenor. '''''''''''' '''''''''''''' ''''' ''''''''''''''''''''' ''''''' ''''' '''''''''''''''''''''' '''''' ''''''' '''''''' '''''''''' '''' ''''''''''' '''''''' ''''''''''''' '''''''' '''''''' ''' '''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''' ''''''' ''''''''''''''''' ''''' ''''''''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''''''' '''''' ''''''''''''''''' ''''''''''''''' '''''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' '''''' '''''''''''''''''''''' ''''''''''''''' ''''''' '''''''''''''''' The principal issue in that case involved EnCana Corporation development plans for its Deep Panuke Field. EnCana’s anticipated level of production would bring shipments on M&NP-US to levels requiring expansion. M&NP-US demanded that EnCana contract for transportation service before it would expand the system. M&NP-US offered different contract levels, depending on the size of the expansion required. EnCana effectively sought to give Canadian buyers two options:

• Agree to buy the gas before EnCana commits to the costs of transporting it to Boston, in which case the Dracut price less the cost of transportation to Dracut (Dracut Netback) will apply

• Otherwise, if EnCana must commit to Boston transportation costs without a prior agreement from Canadian users to buy, then Canadian buyers will pay the Dracut price without netback. In that case, EnCana will have paid for the transportation to Boston whether it used it or not.

The circumstances prevailing at the time of that case differ from those existing now. Gas production in the Maritimes was then increasing faster than the market for gas in the region. Producers therefore had to find another market (i.e., New England) to take large portions of growing production. Gaining access to this region of the U.S., however, required expansion of an already-full M&NP-US segment. The pipeline required a contractual commitment of a reasonably long duration to provide a basis for financing the required expansion. The following circumstances highlight today’s differences:

• Five interests hold the capacity on M&NP-US: o Three gas producers, each of which has more gas available to it in the

Maritimes than it has capacity on the U.S. segment o NSPI’s affiliate, Emera Energy Services, Inc., '''''''''''''' ''''''' ''''''' '''''''''''''''''''''''''

'''''''''''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''' ''''' '''''''''''''''''''' ''''' ''''' '''''''''''''''''' '''''' ''''''' '''''''''''''''''' o Repsol Canada, which acquired in late 2008 and early 2009: (a) all Maritimes-

produced gas not already under contract, (b) the entire output of EnCana’s Deep Panuke project, (c) all production from an existing gas field in New Brunswick, and (d) all of ExxonMobil’s uncommitted production from the Sable Offshore Energy Project (SOEP)

• Repsol Canada can also fill the U.S. pipeline segment pipeline with LNG imports



• Production from Deep Panuke has not yet begun • SOEP production is declining, rather than increasing.

NSPI’s reliance on the MH-2-2002 case appears to proceed on the basis that, like EnCana at that time, Repsol can charge gas buyers in the Maritimes the Dracut price because Repsol has already committed to pay for the transportation to Dracut. This view suggests that Repsol should be willing to buy all Maritimes gas it can get for a price approaching the Dracut price without netback (“Dracut flat”). The best case comes from purchases at Dracut Netback, under which Repsol would recoup all of money that it paid for the transportation to Dracut when it sells at the Dracut price. Less attractive, but still net positive cases occur at prices up to Dracut flat, because any discount from Dracut flat recoups some of Repsol’s U.S. transportation commitments when Repsol sells at Dracut prices. NSPI’s gas markets witness in its just-filed GRA takes this concept further. He observes that, as Maritimes production declines, the sources of incremental gas supplies to Nova Scotia will come from western Canada and the U. S. This change will cause pricing ''''' '''''''' '''' the price at Dracut '''''''''' '''''''''''' ''''''''''''' '''''''' ''''''''''''''''''', consisting of: (a) '''''' '''''''''''''''''''' '''''''''''''''''''''''''''''''' '''''''''''''''' ''''' '''''''''''''''''''''' '''''''' '''''''''''''''''''' '''''''' ''''''' ''''''''''''''''''''' ''''''''''''''' ''''' ''''''''''''''''' ''''''' ''''''''''''''''''''''

3. Other Aspects of NEB Decisions Liberty’s first FAM Audit Report observed that NSPI’s expectations of '''''''''''''''' ''''''' prices did not appear consistent with either the general regulatory regime for gas exports from Canada or the specifics of the authorities granted to Repsol. Each of these points is discussed in turn.

a. General Regulatory Regime for Gas Exports from Canada NSPI places substantial reliance on the NEB’s MH-2-2002 decision in deciding that taking the issue of Dracut netback pricing before the NEB would not be useful. We did not read the decision as conclusive or even substantially inhibiting. Section 118 of the National Energy Board Act (“Act”) addresses export licenses of more than two years in duration. The grant of such a license requires that the National Energy Board (“Board”) “satisfy itself that the quantity of oil or gas to be exported does not exceed the surplus remaining after due allowance has been made for the reasonably foreseeable requirements for use in Canada having regard to the trends in the discovery of oil or gas in Canada.” Sections 116 and 119 together empower the Board to approve exports for periods of less than two years, pursuant to Part VI (Oil & Gas) Regulations (SOR/96-244). The Board adopted in 1987 a new “Market-Based Procedure” (MBP) for reviewing export applications. This decision observes that:

The fundamental premise of the MBP is that the marketplace will generally operate in such a way that Canadian requirements for natural gas will be met at fair market prices. However, the MBP was designed to provide for intervention if there was evidence that the market was not working to adequately and fairly serve Canadian needs. [emphasis added]



This language does not define any of the emphasized terms. It does, however, appear to add a test beyond pricing at market, observing that whatever prices the market produces must be adequate to serve and fair in treating Canadian buyers. This decision describes the Complaints procedure in connection with export licenses as follows:

Under the Complaints Procedure, Canadian natural gas buyers have an opportunity to intervene with respect to an application for a natural gas export license if they believe they have not been able to purchase natural gas on terms and conditions that were similar to those of the proposed export. [emphasis added]

The term “similar” does not support a conclusion that prices identical to those of the proposed export meet the standard. In fact, its use of “similar” implies that pricing need not be identical if factors (e.g., transportation asset use or length) differ. Moreover, if “similar” does mean “identical,” then it would appear that NSPI’s prediction that pricing in Canada will '''''''' ''''''''''''' those in the U.S. would interest the NEB. This decision notes that 1986 changes in the regulations removed the Board’s ability to place pricing conditions on export orders. Both volume available after export and price appear to relate directly to the goals of the Act. Clearly, therefore, the changes would not seem to suggest that the NEB Board has no interest in examining the volumes remaining for Canadian users or the effect of the exports on prices to Canadian purchasers. And, most certainly, there is a connection between volumes available and prices. We observe the following:

• The Board has, as this decision notes, fixed “maximum daily, monthly, annual and term quantities of the gas that may be exported”

• Those fixings would appear to have no purpose other than to assure that gas remaining in Canada will

o Be transferred at “fair market prices” o “adequately and fairly serve Canadian needs” o Transfer under terms and conditions “similar to those of the proposed export”

• Thus, while the Board may not have the power to set conditions on the prices of exported gas, it appears that it does have the power to consider the effect of exports on prices in Canada when examining the public interests affected by such exports.

Expectations of increasing Maritimes production and continuing supply in excess of Maritimes’ needs formed a part of this decision’s backdrop:

• Since the early 1970s, significant accumulations of natural gas have been discovered on the Scotian Shelf near Sable Island. Six natural gas fields were initially identified for development.

• Gas production from three of the six SOEP fields began in late 1999. • Additional fields will be developed as required to maintain the planned sales gas

rate for the life of the project. • Studies conducted on the Scotian offshore basin resulted in discovered and

undiscovered resource estimates of 512 billion cubic meters.



• A recently-discovered field, the Deep Panuke gas field, has had plans prepared for development and new exploratory wells are being drilled.

• The Scotian basin is a relatively unexplored geologic basin which has had some discoveries and is promising in regard to further exploration, potential for discoveries, and further gas production.

• The Deep Panuke field has gas in the deeper Abenaki reef play. The deep water area is believed to be a turbidite play. Turbidite plays in other areas of the world are prime exploration targets because they contain large reserves and resources.

• With this [existing only] production, the SOEP producers expect to be able to continue to serve, at current rates, domestic and export markets for approximately 13 years.

• The Board is of the view that there is adequate supply to maintain the current level of deliveries to the domestic and export markets. Production from the development of the SOEP Tier II fields and additional future production from development of the shallow water SDLs should ensure that at least the current level of production is maintained for approximately 13 years.

• The outlook for incremental supply remains very uncertain, although promising. • The Board notes that Maritime gas consumption has been increasing and that

Canadian gas buyers have been reselling natural gas in excess of their requirements into the export market. This fact provides a strong indication that Canadians do have adequate access to natural gas supplies in today’s gas market.

A particularly interesting feature of this backdrop is that the supply conditions underlying the decision continued to support gas in Canada at Dracut netback prices. This basic pricing approach held true until U.S. M&NP capacity got locked up by those wishing to move LNG to the northeast U.S. If: (a) such differential pricing was at fair market prices earlier, (b) market pricing of that fashion was sufficient then to adequately and fairly serve Canadian needs, and (c) such pricing was considered similar then, why would postage stamp pricing (i.e., paying for transport to Dracut for gas that does not go there for Canadian buyers) now be considered to meet those tests? The only thing that has changed is that traders bought into U.S. capacity in the so far mistaken belief that they needed it to move to the U.S. more gas after LNG came than was being moved there before LNG came. NEB satisfaction with this circumstance suggests comfort with the notion that the public interest is served by asking Canadian market customers to bear risks that have come home to roost for those who have taken U.S. market risk. Canadian purchasers certainly could lay no claim to increased profits or draw benefit; why they should bear the risk of failure of the traders’ assumptions to bear out is unclear. It is not difficult to see how the NEB’s optimistic view of supply would serve to keep the U.S. segment full, in which case there would be much of that gas that could not escape Canada. Canadian buyers would still therefore get a discount off Dracut prices. That those holding capacity to the U.S. now control enough supply in the Maritimes to permit them to lay off some of their sunk U.S. capacity losses does not appear to justify a conclusion that prices “equal” to Dracut produce a “fair” market or “similar” pricing in Canada.



The NEB expressed interest in monitoring the development of gas resources. It is clear that the Canadian market fails to function according to normal rules at least in part because those who control the gas in Canada are (or have substantial business ties with) those who have the misfortune (in current market circumstances) of having paid for transportation to Dracut that they cannot lay off on LNG, because LNG cannot compete with gas hitting Boston from the other direction. This decision referenced the M&NP request for approval of a postage stamp rate and a Lateral Policy toll methodology, which M&NP considered “inseparable.” The Lateral Policy’s objective was to encourage Maritimes gas markets. SOEP, M&NP and the provinces of Nova Scotia and New Brunswick supported that approach, combined with discounts for deliveries in the two provinces in the project’s initial years. This policy could cut both ways:

• If the postage stamp-rate anticipated was for delivery anywhere in either the U.S. or Canada on M&NP, then the offering of a discount for “initial years” implies that at some point transporters would pay the same rates regardless of delivery location (i.e., same rate for U.S. and Canada points).

• If the rate to be discounted for initial years was only for deliveries to the two Canadian provinces, then it seems it was understood that there would, in fact, be separate rates for deliveries on each of the two M&NP segments.

Such factors appear to point to a postage stamp rate for Canada. It is not clear how current market conditions should have turned it into a postage stamp rate for anywhere in U.S. or Canada on M&NP. This decision also states that:

On the other hand, CAPP and Nova Scotia argued that the Maritime gas market is connected to the larger North American market. Specifically, CAPP argued that gas producers are price takers in the competitive North American natural gas market and that prices in the Maritimes could be effectively priced off the Boston market at Dracut. It noted that this is the method by which prices are set in places such as Manitoba or Montreal, where gas is priced, respectively, off the market in Alberta at the AECO-C hub and at the Dawn hub in Ontario.

This statement reinforces the point that “similar” does not mean the same thing as “equal to.” Prices that use “Market X” minus or plus clearly are considered to be “priced off” Market X. It is not clear that the NEB is stating here anything more than that Dracut adjusted for transportation is not problematic. This decision also states that:

The transportation capacity on M&NP is widely held by a number of shippers who can assign the transportation to other users. There are also a number of marketers who are entering the Maritime gas market. All of these factors contribute to making the Maritime gas market more competitive than if only the number of gas producers were considered.

These are not the market conditions that exist at present. Transportation on the U.S. side is locked up by a small number of participants. Because they can transport all of the Maritimes gas to the U.S. markets, they are not releasing capacity, but instead demanding prices equal to what they would gain in U.S. markets. It is directly contrary to their interests to release capacity on the



Canadian portion at Canadian portion rates, because all gas delivered to Canadian buyers through that transportation causes a direct loss of the U.S. transportation fees that can be gained by selling at Dracut. Moreover, those bearing the sunk costs of U.S. transport are incented, and evidence shows they are in fact doing so, to acquire all Canadian supply that comes available to sell in the U.S. Thus, their incentives, their actions, and the results produced are that fewer parties hold significant positions in Canadian supply. As legacy contracts expire, the consolidation of supply holdings can be expected to increase for so long as LNG remains uneconomic, which one can expect it to do for a lengthy period, at least. This decision directly addressed the issue of pricing Canadian deliveries at the Dracut price (i.e., with no netback).

New Brunswick suggested that other power projects in the Province had been unable to obtain gas at reasonable prices. For example, New Brunswick submitted that Northland Power Inc. and the Louisbourg Power Corporation were offered gas at a price which included transportation charges in the U.S., that is, a Boston Price.

Maritime Electric claimed that, while it was prepared to match the price that producers could obtain in the U.S. net of delivery costs, gas suppliers have argued that there is value provided in the U.S. which is not provided by Maritime Electric. Therefore, the gas suppliers maintain that some adjustment or premium to the U.S. price is warranted. From Maritime Electric’s perspective, this would result in a situation where it would not be paying for gas on equivalent terms and conditions as the export market.

EnCana submitted that negotiations are taking place in good faith and that it is prepared to make sales to Canadian customers on terms and conditions, including price, equivalent to those available in the export market.

As indicated in previous sections, New Brunswick submitted that marketers of Scotian offshore gas have been requiring potential Canadian purchasers to commit to paying the Boston price for gas, even though that price incorporates Maritimes & Northeast Pipeline, L.L.C.’s (M&NE) U.S. pipeline toll and Canadians do not require transportation in the U.S. It suggested that producers appear to be using this requirement to try to pass along to Canadian customers costs that the producers have incurred as a result of long-term transportation commitments on M&NE’s system. NB Power indicated that, since there was no transparent liquid market at Goldboro, netback pricing was a reasonable way to determine fair market prices for Scotian offshore gas as it would give producers the same equivalent netback price that they would receive if they had to pay transportation charges to ship the gas to the Boston/New York market. However, NB Power indicated that it would be appropriate for producers to seek transportation charges for the gas that they sell after they have made firm service transportation commitments. NB Power indicated that, unless the Scotian offshore gas is made available to Canadian



purchasers before those firm service transportation commitments are entered into by the producers, there is a significant risk that the only way a Canadian purchaser would be able to obtain access to that gas is by paying a premium equal to the transportation cost between Goldboro and Dracut.

EnCana submitted that, if negotiations are occurring with a Canadian buyer in advance of 31 July 2003, the starting point for the negotiations would likely be the Boston price less the Goldboro to Boston (Dracut) transportation charges. If negotiations were to occur after EnCana has made the commitment to transportation, the starting point for the negotiations would likely be the Boston price due to the fact that EnCana is paying for transportation to Boston.

EnCana argued that the Boston price became a non-issue as the hearing progressed. Maritime Electric, PEI and NB Power all agreed that if a seller of Scotian gas made firm transportation commitments to Boston, that fact would need to be recognized in the pricing negotiations. EnCana suggested that the only party that had difficulty with that concept was New Brunswick’s witness who contended that a Scotian gas producer that had paid for transportation to Boston should be prepared to sell at Goldboro for the Boston price less the transportation tolls. EnCana argued that, instead of losing their transportation charges, producers would elect to ship the gas to Boston to obtain the price in that market.

The lack of netback pricing under these circumstances did not persuade the NEB that a problem currently requiring remedy existed:

The hearing produced no direct, first-hand, convincing evidence that Maritime gas buyers have not had access to Scotian natural gas supplies on terms and conditions similar to those in the export market.

The hearing produced no evidence that any seller of Scotian offshore gas had refused to deal in good faith.

However, the previous two quotes came in the context of other issues, such as unwillingness to commit to 15-year or longer supply agreements and laterals to New Brunswick and PEI. When it came to Dracut netback pricing, the NEB ordered no relief, but did not deem it a non-issue.

The Board is of the view that there are significant qualitative differences between the Maritime market and other markets for gas in Canada and the U.S. In all other gas markets, buyers have the option of purchasing gas from a wide range of selling agents. For example, while there is no market hub in Montreal, gas buyers in that city can purchase gas under a variety of arrangements at the highly liquid Dawn hub upstream of Montreal, where there is a high degree of price transparency. The same holds true, for example, for gas buyers in Manitoba who have the ability to purchase gas at the AECO-C hub in Alberta, again at an upstream location.



In contrast, Maritime gas buyers do not have access to an upstream hub in the Maritimes that would provide them with high liquidity and price transparency. The Board recognizes that prices at Dracut provide a relevant pricing point to assist Maritime gas buyers in negotiating prices with gas sellers. However, the fact that Dracut is located downstream of the Maritime gas market means that Maritime gas buyers cannot participate as effectively in the market at this point. The Board recognizes that many of these differences are not a function of inappropriate behaviour by market participants, but rather due to the fact that the Scotian basin and the Maritime market are in relatively early stages of development. [emphasis added]

The emphasized language is relevant in a number of respects. First, it makes clear that the NEB considers the number of available sellers. Second, it declares pricing at Dracut to provide a relevant (which is not the same thing as “determinative”) benchmark. Third, and most importantly, the language makes clear that the NEB considered circumstances then (a decade ago) to reflect a market in early development. Its acceptance of conditions in that market cannot be read as endorsing the continued acceptability 10 years later. This point is emphasized by the decision’s statement about what suppliers need to develop Maritimes resources.

Producers require access to a large liquid market in order to economically develop Scotian resources. The current size of the Maritime market is not sufficient to drive Scotian offshore development without relying on the size and high level of liquidity of the U.S. northeast as the anchor market. Therefore a producer such as EnCana must ensure that it has access to the U.S. northeast in order to guarantee it has a market for its gas.

Ten years later, the issue is not just development of emerging sources, but fair exploitation of what has been developed; i.e., operation in a more mature market. The NEB further noted that, at this time; i.e., early development, “the Maritime market is highly concentrated with few producers and sellers,” suggesting that there is an expectation of change, which unfortunately had not occurred by the period of concern to the audit. Therefore, the NEB concluded that the circumstances (which presumably include Dracut pricing without netback) meant that, “Canadian buyers, at this time, have to overcome a number of difficulties to compete for Scotian offshore gas.”

i. The NEB Decisions Involving Canaport

The Brunswick Pipeline Decision: Soon after the NEB’s decision in MH-2-2002 was issued, EnCana suspended the development of Deep Panuke. A June 2005 announcement, however, raised similar U.S.-side capacity issues. Irving Oil and Repsol (the parent company) announced that they had entered into definitive agreements to develop Canaport. Irving Oil would market the re-gasified LNG in Atlantic Canada. Repsol subsidiaries would market it in the U.S. and elsewhere in Canada (presumably Quebec and Ontario). Emera filed its application for Brunswick Pipeline in May 2006. Repsol wanted 730,000 MMBtu/day of capacity to move gas to the U.S.; existing capacity limited deliveries to 400,000 per day. M&NP-US required transportation contracts to support the requested expansion.



Some Canadian interests this time argued that the Brunswick pipeline from Canaport would “bypass” Maritimes markets, being configured to join M&NP-US only on the U. S. side of the border. Enbridge New Brunswick, the LDC for the Saint John area, sought a direct interconnection with Brunswick’s pipeline, and a condition reserving a portion of the incremental natural gas supply for the Maritimes. In response, Irving Oil and Repsol Canada made the following statements:

Irving Oil stated that, while Repsol and Irving Oil have not yet completed the negotiation of commercial agreements such that Irving Oil could pursue marketing the Canaport LNG Terminal natural gas, they had initiated discussions on the necessary arrangements. Under these arrangements, Irving Oil would purchase natural gas from the Canaport LNG Terminal, both for its proprietary use and for resale to third parties in Maritime Canada, pursuant to its marketing rights. Irving Oil stated that it intends to utilize, for its local proprietary purposes, roughly one-third or about 80,000 MMBtu/day of the natural gas that could be available, leaving approximately 170,000 MMBtu/day that it intended to market to third parties in the rest of Maritime Canada. Repsol2 confirmed that an initial framework of commercial arrangements governing the marketing of Canaport LNG Terminal natural gas was in place, and this framework would help the finalization of negotiations between Repsol and Irving Oil. Irving Oil would be the exclusive marketer of Canaport LNG Terminal natural gas in Maritime Canada, and up to 250,000 MMBtu/day of natural gas (firm and interruptible) would be available through Repsol’s exclusive marketer, Irving Oil, for Canadian shippers to acquire the gas on competitive terms and conditions. [Emera Brunswick Pipeline Company] maintained that Maritime Canada interests would be adequately satisfied by the proposed Brunswick Pipeline. Based on the information contained in M&NP’s 2005 annual surveillance report filed with the [National Energy] Board, 410,000 MMBtu/day of gas was transported by M&NP during the 12 months ending 31 December 2005. The report further indicated that deliveries to Maritime Canada markets were only 19 percent of total gas transported, or about 80,000 MMBtu/day.3 Accordingly, the potential 250,000 MMBtu/day of gas that could be made available on the Brunswick Pipeline to Maritime Canada markets would be over three times the average daily quantities that had been delivered to Maritime Canada markets in 2005. Therefore, EBPC argued that the available capacity on its proposed pipeline could provide ample deliveries to the existing Maritime Canada market as well as to new markets that might develop there.

The NEB found as follows: 2 The participant in these proceedings is not the parent, but Repsol Energy Canada, Ltd., subsequently reported to be an affiliate of Repsol Energy North America Corporation, a U. S. corporation. 3 At that time, NSPI was burning mostly HFO at Tufts Cove, rather than natural gas.



… the Board is of the view that one aspect for the justification of this Project is its ability to provide an opportunity for access to a new source of natural gas supply to the Maritimes. While some parties expressed concerns regarding the ability of Maritime Canada markets to access the incremental gas supply provided by the Project, the evidence before the Board indicates that Irving Oil is the largest user of natural gas in Maritime Canada.4 Therefore, Irving Oil’s access to the gas supply supports the Board’s finding that there will be Canadian access to the Project’s gas supply. Furthermore, Maritime Canada could also access this new natural gas supply source, to fulfill current and anticipated future natural gas needs, through the use of backhauls, swaps and direct connection to the Brunswick Pipeline.

Brunswick Pipeline had described Maritime markets’ access to the gas as follows:

1. When gas is flowing on M&NP to the US: a. Repsol and shippers on M&NP could enter into an exchange

transaction, also called a swap, whereby supplies of natural gas transported on the Brunswick Pipeline would be delivered to a US customer of an M&NP shipper while that M&NP shipper serves the needs of an Irving Oil/Repsol customer in Canada by delivering gas to the Canadian customer on the M&NP pipeline; or

b. An existing or new shipper on M&NP could elect to receive natural gas using St. Stephen [the border point on M&NP-CA] as its receipt point.

2. When gas is not flowing on M&NP to the US, natural gas could be physically backhauled on M&NP from the Canada/US border. Thus an existing M&NP shipper could use St. Stephen as a secondary receipt point or a new M&NP shipper could contract for capacity on M&NP to receive gas at St. Stephen for delivery along M&NP. The M&NP system has been designed to accommodate reverse flows or physical backhauls.

3. A direct pipeline connection to the Brunswick Pipeline could be made. Accordingly, EBPC submitted that any party currently connected to M&NP could contract for natural gas supplies from the Canaport LNG Terminal and receive the supplies via a swap, a change in its receipt point, a direct connection to the Brunswick Pipeline, a backhaul, or any combination of such.

On the strength of that evidence, the Board concluded that:

Based on the record in this proceeding, including the current and anticipated use of natural gas, the Board is of the view that it is reasonable to conclude that the current and anticipated needs of Maritime Canada’s market would be adequately met. … This Project would make new natural gas supplies accessible to the market, and the Board is of the view that market forces would adequately govern the distribution of natural gas within the Maritimes and the Northeast US. Based on the evidence noted above, the Board is not persuaded that imposing a

4 This was before NSPI started firing a lot of gas at Tufts Cove.



condition, such as the one proposed by [Enbridge Gas New Brunswick] to reserve a certain amount of natural gas for a specific region in an open market, is necessary.

NSPI registered as an intervenor in this proceeding, and filed a letter of support, stating:

NSPI is pleased to see continued investment in the development of natural gas supply and energy infrastructure in our region, including LNG terminals and related facilities such as those proposed by Emera Brunswick. Such development can benefit our customers by providing an additional source of natural gas supply to supplement the existing volumes available from the Sable Offshore Energy Project (SOEP).

Repsol’s Import and Export Licenses: Following the terminal arrangement with Irving Oil and the Brunswick pipeline deal with Emera, Repsol needed authority to import and re-export LNG. That matter was addressed by the NEB in GH-1-2008 (December 2007 filing). The NEB denied Repsol’s request to export some Canada-produced gas under its license. Export licenses have 25-year terms. The NEB appeared unprepared to authorize exports of Canada-produced gas for that duration. NSPI did not participate in this proceeding. Other intervenors, including the Nova Scotia Department of Energy, expressed concern about “… the nascent nature of the Maritimes market” (e.g., lack of price transparency, etc.), and recommended that the NEB impose conditions on the applied-for licenses. The NEB promised to:

continue its ongoing monitoring of natural gas markets which, for the Maritimes market, will include LNG imports. The Board will consider any complaints from Canadian gas buyers … Accordingly, the Board finds that it is not necessary at this time to require Repsol to file the marketing and distribution agreement between it and Irving Oil when concluded. This does not preclude an interested party from raising concerns at some later date concerning terms and conditions to access the proposed imported LNG. (Emphasis added.)

The NEB also stated that:

While the [Gas Purchase and Sale Agreement (referred to in the decision as the GPSA)] between Repsol Energy Canada Ltd. (referred to in the decision as Repsol) and its U. S. affiliate [Repsol Energy North America Corp. (referred to in the decision as RENA)] is not arm’s length, Repsol stated that all of RENA’s sales will be arm’s-length and market-based. Repsol further indicated that the pricing in the GPSA between Repsol and RENA are reflective of a market price in the U. S. Northeast, and utilizes a netback approach to determine pricing back to Repsol. The Applicant indicated that the price is structured to recover associated transportation costs with allowance for RENA to cover its expenses. Repsol also testified that, if there were a market in Atlantic Canada that had the same risk profile as RENA, the buyer would have had the same price structure.



The GPSA provides for the sale of a Daily Contract Quantity of up to 1 Bcf/d.5 RENA is obligated to take all volumes up to a maximum of 750,000 MMBtu/d (approximately 750 MMcf/d) as designated by Repsol. An additional 250,000 MMBtu/d (approximately 250 MMcf/d) may also be requested by RENA, and is subject to the acceptance and confirmation of Repsol. Given that not all of the applied-for export volume is contractually committed to the export market, Repsol reiterated its commitment to make gas available to Maritimes Canada on competitive terms and conditions. (Emphasis added.)

The LNG is physically and contractually isolated from the Maritimes Gas Market. The Brunswick Pipeline and the Saint John Lateral of M&NP-CA are within “a few hundred meters of each other” at their closest point. From the perspective of gas supplies for the Maritimes, however, Canaport is inaccessible. NSPI’s skepticism notwithstanding, LNG imports into Canaport have been substantial. The chart below compares M&NP-CA volumes, both consumed and exported, with Brunswick volumes, which are only exported. The chart shows that, in two months of 2010 and seven months of 2011, Brunswick volumes were larger than M&NP-CA ones.

M&NP-CA and Brunswick Volumes (Mcf)

Month Maritimes Consumption

Exports at St.

Stephen

Total Exports at Brunswick

Jan-2010 6,678,742 4,003,296 10,682,038 13,537,043 February 6,025,302 3,631,245 9,656,547 8,963,019 March 5,923,763 4,653,067 10,576,830 4,819,276 April 5,320,363 4,632,600 9,952,963 4,037,213 May 5,160,953 4,347,268 9,508,221 4,948,207 June 4,957,091 5,113,597 10,070,688 4,378,743 July 4,922,585 5,343,275 10,265,860 4,422,805 August 5,121,621 4,833,376 9,954,997 3,642,821 September 5,292,174 4,319,078 9,611,252 3,473,503 October 4,888,671 4,293,240 9,181,911 3,658,801 November 5,391,775 3,489,891 8,881,666 4,100,425 December 5,426,947 3,986,163 9,413,110 12,834,787 Jan-2011 6,625,670 2,147,834 8,773,504 21,239,815 February 6,385,653 2,141,787 8,527,440 16,734,350 March 6,849,422 2,727,770 9,577,192 12,462,976

5 Brunswick Pipeline was initially authorized at 750,000 MMBtu/day, although it contemplated ready expansion to 1,000,000 MMBtu/day (very nearly the same as 1 Bcf/day).



April 6,171,051 2,559,028 8,730,079 8,765,373 May 5,874,594 3,254,180 9,128,774 1,304,285 June 4,948,140 2,052,693 7,000,833 7,864,936 July 6,176,855 2,912,125 9,088,980 7,793,351 August 5,413,254 3,147,252 8,560,506 4,441,282 September 4,962,191 3,281,546 8,243,737 4,664,626 October 5,669,443 2,523,161 8,192,604 7,812,700 November 5,967,634 2,083,743 8,051,377 8,480,105 December 6,393,289 2,201,005 8,594,294 9,810,494

A condition of long-term export and import licenses is that the prices at which the gas has been imported and exported must be reported to the NEB, and the NEB must publish them. Short-term export prices must be reported to the NEB, but the NEB only publishes them in summary fashion, in order to protect the details of individual transactions. Repsol Canada is the only exporter at Brunswick; no price information is published for short-term exports at that location. Over the period in the table, there have been no exports under the long-term licenses; all of the exports have been under “short-term orders,” so no price information is available. We can infer, however, that the value of the re-gasified LNG at the export point is the Dracut Netback price, as the netback structure was specified in the NEB’s order regarding the long-term licenses.

4. NSPI Actions

a. Discussions with ''''''''''''' Liberty asked NSPI whether it had discussed access to the LNG with ''''''''''''''''''. We noted in the preceding Audit Report that NSPI had an '''''''''''' '''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''' '''' ''''''' ''''''''''''''''''' ''''' '''''''''''' ''''' ''''''' ''''''''''''''' ''''' ''''' ''''''''''''''''''''''''''' ''''''''''' '''''''' '''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' ''''''' ''''''''''''''''''''''' ''''' '''''''''''''''''''''''' '''''''''''''''''' '''''''''' '''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''' '''' '''''''' '''''''' '''''''''' '''' ''''''''''''''''' '''''''''''' ''''' '''''''''''''''''''' '''''''''''''''' '''' '''''''' '''''''''' '''''''' ''''' '''''' ''''''''''''''''''''''' '''''''''' ''''''''''''''' '''''''' '''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''' ''''' '''''''''''''''''''''''''' '''' ''''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''' '''''''' '''' ''''''''' '''''''''''' ''''' '''''''' ''''' '''''''''''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''' ''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''' '''' ''''''''''''''''''''''' ''''' ''''''''''''''''' '''''''''''' ''''''''' ''''''' '''''''''' '''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''' '''''''' ''''''''''''''''''''''''' '''' ''''''' ''''''''''' ''''''''''' ''''''''''''''''' ''''' ''''''''''''' '''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''''' '''''''''''''''''''''''''' ''''''''' ''''''''''''' '''''''''''''''''''' ''' ''''''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''' '''''''' ''''' '''''''' ''''''''''''''''''' ''''' '''''''''''' ''''''' '''''''''''''''' '''''''''''''''''' ''' '''''''''''''''''''''' '''''''''' ''''''''''''''''' ''''''''''''''''''''''''' '''' ''''''''' ''''''''''''''''''' '''''''''''''''' '''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋



'''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''' '''''''''''''''''''''' ''''' '''''''''''''''' '''''''''''''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''' '''''' '''''''''''''''''' ''''''' '' ''''''''''''''''''''''''' ''''' '''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''' '''''''''''''''''''''''' '''''''''''''''' ''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''''' ''''''''''' '''''''''''''''''' '''''''''''''' NSPI also met with ''''''''''''''''' ''''''''''''''''' later in 2010, ''''''''''' ''' '''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''' '''''''' ''''''' '''''''''''' '''''''''''''''''' '''''''' ''''''' ''''''''' ''''''''''' '''''''' ''''''''''''' ''''''''''''''' '''''''''''''''''' '''' '''''''' ''''''''' '''''''''''''' ''''' ''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' '''''''' ''' '''''''''''''''''''' ''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ''''''''''''''' '''''''''''''''' ''''''''''''' '''''''''''''''''' ''''' ''''''' '''''''''''' '''''' ''''''''' ''''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋

NSPI provided an analysis comparing the price that NSPI paid in 2010 and 2011 ''''''''''''' '''''''' '''''''''''''''' '''''''''''' ''''''''''''''''''' ''''' ''' '''''''''''' '''''''''''''''''''''''' ''''''''''''' '''''''' '''''''''''' ''''''''''''''' '''''''''''' '''''''''''''''''''' ''''' ''''''' ''''''''''''' '''''''''' ''''''''''''''''' ''''''''''' ''''''' '''''''''''''' ''''''''''''' '''''' ''''''' '''''''''''''''' '''''''''''''' '''''''''''' ''''''''''' '''' '''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''' ''' '''''''''''' ''''''''''''''''''' ''''''''''' ''''''' ''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''' ''''''''''' ''''''' '''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''' ''''' ''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''' ''''''''''''' '''''''''' '''''''''''''' '''''''''''''''' '''''' ''''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''' ''''''' ''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''' NSPI also reported having met with ''''''''''''' ''''''''''''''''''' in August and September 2011 to discuss ''''''' '''''''''''''''''''''''' '''''''''' '''''''''''''' '''''''' '''' ''''''''''''''''''''' NSPI reported that events in Japan (the infamous tsunami and resulting nuclear production curtailment there) had driven LNG’s world price substantially higher. ''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''' '''''''''''''''''''''' ''''''''''''' ''''''''''''''' ''''''''''''''''' '''''' '''''''''''' ''''''' '''''''''''''''''''''''''''''''''''''' '''''''''

b. Discussions with '''''''''''' ''''''' Liberty also asked NSPI about discussions with ''''''''''''''' '''''''''' '''''''''''''' '''''''' '''''''''' ''''''''' '' ''''''''''''''''' '''''''''' '''''''''''''''''''''''''''''' ''''''' ''' '''''''''''''' ''''' ''''''' ''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''' ''''''' ''''''' ''''' '''''''' ''''' '''''''''''''''' ''''' ''''''''''''' '''''''''''' ''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''''''''' ''''''''''' '''' '''''''''''' '''''''' '''''''' ''''''''''''''' ''''''' ''''''''' '''''''' '''''' '''''''''''''' '''''''''''''''''''''''' '''''' '''''''' ''''''''''''''''''''''' '''''''' ''''''''''' ''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''''''''' '''''''''''''''''''' '''''''''' ''' ''''''''''''''''''''''''''''''' ''''''''''''''' ''''' '''''''''''' ''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''' ''''''''''' ''''''''''''''' NSPI met with ''''''''''''''' ''''''' ''''' '''''' '''''''''''''' ''''' '''''' ''''''''''''''''''''''''' ''''''''''' '''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''' ''''' ''''''' '''''''''''''''''' ''''' '''''''''''''' ''''''''''''''' '''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''''''' ''''''''''' '''''' ''''' '''''''''''''' ''''''''' ''''''' '''''''' '''''' '''''''''''' '''' ''''''''' ''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''' '''''''''''''''' '''''''''''' ''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''' '''''''' ''''''''' ''''' '''''''''''''' '''''''' ''''''''' ''''''''''''''''''''''''' '''''''''' '''''''''' ''''' ''''''''''''' '''''''''''' '''''' ''''''''''' '''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''' ''''''' ''''''''''''' ''''''''' ''''''''''''' '''''''''''''''''''' ''''''''''''''' '''''' ''''''''''''''''''''''''' '''''''' '''''' '''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''''''' ''''''''''''' ''''''' ''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''''' ''''''''' ''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''' '''''''' ''''''''''''''''' '''''''''''''''' '''''''''' '''''''''''''''''''' '''''''''''''' '''' ''''''' '''''''''''' '''''''' ''''''''''' '''''''''''''' '''''''' '''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' '''''''''''' ''''''' ''''''''''' ''''' '''''''''''''''''' '''''''''' ''''''''''' '''' '''''''''''''' '''''''''''''''' '''''''''''''''



''''''''''''''''' ''''''''' '''''''''''''' '''''''' ''''''''' ''''''''''''''' ''''''''''''''' '''''''''' '''''''''''''''''' '''''''''''''' ''''' ''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''' '''''''' '''''''''''' '''''''''''' ''''''' '''''' '''''''''''''''''''''' '''''''''''' '''''''''''''''' '''''''''''''''' '''''''' ''''''''' ''' ''''''''''''''''''''''''' '''''''''''''''

c. Discussions with NEB Staff '''''''''''''''''' ''''''''' '''''''''''' '''''''''''''''''' ''''''''''''' ''''''' '''''''''''''''''''' ''''' '''''''''' ''''' ''''''''''''''' '''' '''''''' '''''''''''' ''''''''''' ''''''' '''''''''''''' '''''''''''''' '''''''''''''''''''' ''''''''' ''''''''''''''''''''''' '''''' ''''''' ''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''' '''''''' '''''''''''' ''''' '''''''''''''''''''''''' '''''''''' ''''' '''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''''''''' ''' '''''''''''''''''''' ''''' ''''''''''''''' '''''''''''' ''''''''''''''' '''' ''''''''''''''''''''' ''''''''''''''''' '''''''''' ''''''''''''''''''''' '''''''''''''' ''''' '''''''''''''''''''' '''''''''''''' '''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''' ''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''''''' ''''''''' '''''''''''' '''''''' ''''''''''''''''''''''''' ''''''''' '''''''''''' '''''''''' '''''''''''''''' '''''''''''' '''''''''''''''''''' '''''''''''''''''''''''' '''''' ''''''''''''''''''''''' '''''''''''' ''' '''''''''''''''''' '''''''' '''''''''''''' ''''''' '''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''''' ''''' ''''''' ''''''''''

''''''''''' ''''''''''''''''' '''''' ''''''''' NSPI received a July 2010 RFP from '''''''''''''''''''' ''''''''' '''''''''''''''''' '''''' ''''''' ''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''' '''''''''''''''''''' '''''''''''' '''''''''''''' ''''''''''' '''''''''''''' '''''''' '''''''''''''''' ''''' '''''' '''''''' '''''''''''' '''''''''''''''' ''''' '''''''' '''''''''''' ''''' '''''' '''''''''' ''''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''''''''''''' ''''''''' '''''''''''''''''' ''''''''' ''''''''''''' '''''''''''''''''''''''' ''''' ''''' '''''''''''''''''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''''''''''''''''' '''' '''''''''' '''''''''''' '''''''''' ''''''''''''''''''''''''''' '''''' '''''''''''''''''''''''''''' '''''''' ''''' ''''''''''''''''''''''' '''''''''''''''''''' ''' '''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''''''''''''''' '''''''''' '''''''''' ''''' ''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

''''''''''''''''''' '''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''

'''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''

5. Patterns in Gas Pricing During 2010 and 2011 NSPI’s now-expired, long-term '''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' ''' '''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''' '''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''''''''' ''' '''''''''' ''''''''' '''''''''''''''''''''' '''''''''''''''''''' ''''''''''' ''''''''''''' ''''''''''''''' ''''''''' '''''''' ''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''' '''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''' '''' '''''''''''''''''''' ''''' ''''''''''' '''''' '''''''''''''''''''''' '''' '''''''''''' Liberty examined the records of NSPI’s other gas-purchase transactions since 2008 in order to observe the pricing behavior of the other components of NSPI’s gas supply over that period. We focused on purchase transactions, rather than both purchases and sales, because NSPI reported that ''''''''''' ''''' ''''' ''''''''''''' ''''''''''''' ''''' '''''''''''''''' ''''''''''''''''''''. We simplified the analysis, normalizing the transaction-price data by '''''''''''''''''''''''''' ''''''' '''''''''''''''' ''''''''''''''''''''' ''''''''''' '''''''''''' ''''''' ''''''''''''''''''''''' '''''''''''' ''''''''' ''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''' '''''''''''''''''''' '''''''''''' ''''''' ''''''''''''''''' '''''' '''''''''''' '''''''''' '''''''''''''' ''''''''''''''



''''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''''6' '''''''' ''''''''''''''''' ''''''''''''' '''''' '''''''''''' '''''''''''''''' ''''' ''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''' '''''''' ''''''''''''''''''''''' ''''''''' ''''''''' ''''''''''''' ''''''''''''''''''' ''''''' ''''''''' ''''''''' '''''''''''''''''''''''7 The next subsections summarize the results of our analysis.

a. Seasonal Purchases '''''''''''''' '''''''' ''''''''' '''''''''''''''''''' '''''''''''''' ''''' ''''''''''''' '''''''''''''''''' ''''''''''''''''''''''' '''''''' ''''''''' '''''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''' ''''' '''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''' '''' '' ''''''''''''''' ''''''''''''''''' ''''' ''''''' '''''''''''''' ''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''''''''' ''''''' '''''''''''''''''''''''' '''''''''''''' ''''''''''''''' ''''''''' '''''''''''''''''' ''''''''''''''''''''''' ''''''' ''''''' '''''''''''''''' ''''' '''''''''''''''''''''''' '''''''' ''''' ''''''''''''''''' '''''''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''' ''''''' ''''''''''' ''''' ''''''''''''''' '''''''''' '''''''''''''''''' '''''''' ''''''''''''''''''''

'''''''' '''''''''''' '''''''''''''''' '''''''''''''''''''''''''''''''' '''''''' ''''''''' '''''''''''' '''''' ''''''''' ''''''''' (Chart is Confidential)

b. Monthly Purchases ''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''' '''''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''' ''''''''''''' '''''''''''''''' ''''''''' '''''''''''''''' '''''''''''''' ''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''' '''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''' ''''''''''' ''''''''''''''''' '''''''''''''' '''''''''''''''''''' ''''' '''''''' ''''''''' ''''''''''''''''' ''''' '''''''''''''' '''''''''' ''''''''''''''''''''' '''' '''''''''''''''''''''''' ''''''''''''

' '''''''''''''' ''''''''''''''''' ''''''' ''''''''''''''''''''' '''''' ''' '''''''' ''''''''' '''''''''' ''''''''' '''''''''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''' ''''' '''''''''''''' '''''''' '''''''' ''''''''''''''''' ''''''''''' ''''''''''''''''''''' ''''''' '''''''''''''''' ''''' ''''''''''''''''''''''''' ''''''' ''''''''''''''''''''' '''''''' ''''''''''' '''' ''''''''''''' '''''' '''''''' ''''''''''''''''''' '''''''''' '''''''''''''''''''''''' '''' '''''''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''''' '''''''''''''' ''''' '''''' '''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''' ''''''''''''''''''' ''''' ''''''''''''' ''''' '''''''' '''''''' '''''''''''''''''''''''' ''''''''''''''''''' '''''''''' '''' '''''''''''' '''''''''''' '''''''''''''''''''' ''''' ''''''''''''''''' ''' '''''''' '''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''' ''''''''''' '''''' '''''''''''' ''''''''' '''''''''' ''''''''''''''''' ''''' '''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' ''''''' '''''''''''' ' '''''''' '''''''' ''''''''' ''''' ''''''''''''''''''''' ''''''' '''''''''''''''' ''''''''''''''''''' ''' '''''''''''''' ''''''''''''''''''' ''''''''''' ''''''' '''''''''''' ''''''''''' ''''''''''''''''''''''' '''''' '''''''' '''''''''''' '''''''''''''''''''''



'''''''' '''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''' '''''''' '''''''''' '''''''''''' ''''' ''''''' ''''''''' (Chart is Confidential)

c. Daily Purchases NSPI has made daily purchases since at least 2008, and probably longer. '''''''''''''' '''''''' ''''''''' '''''''''''''''''''' ''''''''''''' '''' '''''''''' '''''' ''''''''''' ''''''''''''''' ''''' '''''''''''''''' ''''''' ''''''''''''' ''''' '''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''' ''''''''' '''''''''''' '''''''''''' ''''''''''''' '''''''' ''''''''''''''''''''''' ''''' ''''''''''' '''''''' '''''''''''' ''''''' ''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''' ''''''''''''''' '''''''''' ''''''''''''''''''''' ''''' ''''''''''''''''''''''' '''''''''' ''''' ''''''''''''''' ''''''''''''''''' '''''''''' '''''' '''''''' ''''''''''''''''' ''''''''''''' ''''''' ''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''' ''''''''''''' ''''''''''''''''''''''''''''''''''''' '''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' ''''''''' '''''' ''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''' ''''''''''''



''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' '''''''''' '''''''''''' '''''' ''''''' ''''''''' (Chart is Confidential)

d. Intra-Day Purchases ''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''' ''''''''''''' '''''''''' ''''''' '''''''''''''''''''''''''' '''''''''''''''''' '''''''' ''''''''''' '''''''''''''''''''''''' ''''''''' '''' '''''''''''' ''''''''''''' '''''''''' ''''''''' '''''''''''''' '''''''''''''' '''''''''''''' '''''''''' '''''''''''' ''''''''''''''''''''' '''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''''''''''' ''''''''''''' '''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''' '''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''' '''''''' ''''''''''''' '''''''''''''''' ''''' '''''''''''''' '''' ''''''''''''' ''''' '''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''' '''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''' '''''''''''''''''''''''' '''''' ''' ''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''' '' '''''''' '''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''' '''''''' '''''' ''' '''''''''''''''' '''' '''''''''''''''''''''''



''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''''' '''''''''' ''''' '''''''' ''''''''' (Chart is Confidential)

6. Gas Requirements Forecasting Gas requirements forecasting accuracy has remained an issue for NSPI over an extended period. Chapter II of this report addresses NSPI’s need to increase dramatically the amount of gas that it needed to buy in each of the last several years. As recently as its Gas Report to the NSUARB last December, NSPI was forecasting a ''''''''''''' '''''''''' '''' ''''''''' ''''''''''''''''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''' ''''''''''''''' '''''''''''''''''' '''' ''''''''''''' '''' ''''''''''''' ''''''''''' '''''''''''''''''' '''''''''''''''''' '''' '''''''''''''' '''''''' '''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''' ''''' ''''''''''''' ''''''''''''' ''''''''' ''''''''''''' '''''' ''''''''''''' ''''' '''''''' '''''''''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''' ''''''''''''' ''''''''''''' '''''''''''' '''''''''' '''''''''''' ''''' '''''''''''''' ''''' '''''''' '''''' ''''''''''''''' '''''''''''''''''' ''''' ''''''' ''''''''''''''''''''''''' ''''''''''''''' The preceding FAM Audit Report noted that the Company’s 2009 IRP Update assumed higher gas prices than seemed justified at that time. The only sensitivity-analysis cases examined as part of that work that showed any impact on the results were the cases that assumed lower gas prices. Liberty recommended that future NSPI capital projects be tested against lower gas prices. NSPI believes, however, that its emissions compliance planning and the Province’s Renewable Electricity Standard primarily drive its capital spending. NSPI also believes, therefore, that changes in assumed natural gas prices would not have substantial impact on its resource-selection processes. Our examinations of this subject continue to show that NSPI assumes ''''''''' ''''''''''''''''' ''''''' ''''''''''''''''' Recent evaluations of converting the Trenton 5 Unit to gas, for example, '''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' regarding the costs of getting gas to the plant. In the summer of 2008, NSPI did not analyze converting Point Tupper to gas or using gas as a supplemental fuel there. NSPI’s evaluation of whether to accept assignment of the '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''


July 9, 2012 (Revised Redactions 9/12) Page III-23 The Liberty Consulting Group

'''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''' ''''' ''''''''''''''' '''''''''''''''''''' '''''' '''''''''''''''''''''''''''' '''' '''''' '''''. Point Tupper was vulnerable to impacts of new Federal requirements on emissions. '''''''' '''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''' '''' ''''''''' '''''''''''''''''''''

C. Conclusions

1. The introduction of new sources of natural gas into the Maritimes has not produced lower prices for NSPI; instead they have risen. (Recommendation #1)

'''''''''''''''''''''' ''''' '''''''' ''''''''' ''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''''''' ''''''''''''''''''''' ''''' ''''''''''''''''''''''''''' ''''''''' '''''''''''''' ''''''''''''' '''''''''''' ''''''''' '''''''''''''' ''''' ''''''''''''''''''''' ''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''''''' They have been considerably higher during the peak winter months. Through 2011, even in the summer season, Dracut continued to be a supply point, delivering gas into higher-priced markets on Tennessee Zone 6 (TGP Z6) and the Algonquin city gates (ALG). Dracut lies downstream from Maritimes supply; i.e., it takes added transportation to get Canadian gas to Dracut. All else equal, therefore, one would expect such supply to bring prices for Canadian delivery on M&NP at discounts to the Dracut price. This was, but is no longer, the case. ''''''''''''' ''''''''' ''''''''' '''''''''''' ''''''''' '''''''' ''''''''''''' ''''''''''''' ''''' ''''''''''' '''''''''''''''''''''' ''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' Wholesale gas prices in the Maritimes cannot be a result of those “normal market forces” on which NEB relies as determiners of prices and availability of gas to Canadian users. Instead, these prices result from Repsol Canada’s commitments to transportation capacity on M&NP-US, and its decisions regarding how much LNG to import. If Repsol Canada brings in less LNG, the value to it of a unit of gas on M&NP-CA goes up. Conversely, if Repsol Canada brings in more LNG, the value goes down, because it does not need Canada-produced gas as much to recoup its investment in M&NP-US capacity. The persistence of these circumstances results from physical and contractual segregation of the LNG supplies structured by Repsol Canada, which conducts its operations through the Brunswick Pipeline that another Emera subsidiary owns. The Canaport/Brunswick facilities isolate LNG imports from the Maritime Provinces. This result varies significantly from the expectations that underlie earlier NEB rulings, including its grant of import and export licenses for the LNG and authorization for the Brunswick Pipeline. The NEB noted that “Irving Oil’s access to the gas supply supports the Board’s finding that there will be Canadian access to the Project’s gas supply.” Irving Oil and Repsol Canada have now been negotiating for eight years over the terms of the access that Irving Oil, and therefore the Maritimes, will have. It no longer remains reasonable to await a breakthrough in what one may consider entrenched positions.

2. NSPI has demonstrated that customers cannot rely upon it to champion their interests with respect to prices for natural gas in the Maritimes Market. (Recommendation #2)

An NSPI consultant report some time ago addressed negative pricing developments in the Maritimes Gas Market. It sought to demonstrate that a relationship between the quantity of LNG imported and the value of Maritimes-produced gas provided the economic impetus behind a



pricing spectrum presented in the report. Prices have actually risen higher than the “highest” level envisioned in that analysis. NSPI expressed concern in that report about “the exercise of market power” by Repsol Canada. It has yet to take any action, however, to address that concern. Its affiliate has very strong business connections with Repsol Canada. Moreover, as addressed in Chapter I of this report, progression out of FERM, in some cases to non-utility Emera affiliates, is a well-traveled career path. It has always been our expectation, and it has been a general result, that introduction of a FAM does not diminish utility focus on controlling customer costs. Consideration of the circumstances here, in the context of other examples of insufficient NSPI focus and attention, leads us to conclude that NSPI has not been up to the challenge of meeting those expectations. NEB staff has sought out NSPI on at least two occasions in carrying out its responsibilities with respect to Canadian gas markets in general, and the Maritimes Gas Market in particular. We asked for a comprehensive listing and description of NSPI’s communications with the NEB. The Company’s responses demonstrate that it has never expressed any concern about the behavior of gas prices in the Maritimes or the functioning of the Maritimes Gas Market. The most that can be said is that, following the raising of the issues by Liberty, NSPI discussed the issue with NEB staff. The information available from those discussions seem more in the nature of soliciting comfort for NSPI’s lack of action than seeking means of redress. NSPI sought the advice of outside counsel about potential NEB action only after the report from the preceding FAM Audit questioned its failure to have done so. Moreover, while NSPI cited that advice as evidence of its actions, the Company claimed privilege when asked to describe it. Not only did the Company make the claim with respect to the content of any advice it received, but even as to the timing of its request. Similarly, the first meeting with NEB staff that NSPI initiated came only after Liberty’s Gas Activities Report, filed in the summer of 2011, questioned why it had not sought the agency’s assistance in dealing with the physical and contractual segregation of Canaport LNG from the Maritimes Gas Market. NSPI’s passive stance on the Maritimes Gas Market leads us to conclusions that kept NSPI from becoming a more substantial “player” in gas markets where its affiliate and Repsol have at least some common and competing interest.8 The Brunswick Pipeline, owned by Emera’s wholly owned subsidiary Emera Brunswick Pipeline Company Ltd., represents an example of those interests. The pipeline provides transportation service for regasified Canaport gas under a 25-year firm service agreement. Emera’s latest 10-K lists Brunswick Pipeline’s assets at $545.8 million, its operating revenue at $49.7 million, and its contribution to net income at $19.7 million. In announcing Emera’s investment in that pipeline, Emera’s CEO reportedly stated:

“This is a nice diversification strategy for us,” said [the CEO], who is projecting annual profits of 11 to 14 percent over the 25-year life of the project.

8 The Company’s thinking on this and related subjects was presented to the NSUARB in a report prepared on NSPI’s behalf by ICF International, Report on Planning for Future Natural Gas Supply: A Review of the Activities of Nova Scotia Power, Inc. Dated April 30, 2009, the report was filed on that date by NSPI in Docket No. NSUARB-NSPI-P-888. See especially pp. 15-21. This report is referred to hereinafter as “the 2009 ICFI Report”.



“It's a low-risk investment very much in our neighbourhood. It becomes growth for our shareholders.”

The parent company’s lucrative relationship with Repsol is a compelling explanation for NSPI’s lack of action in defense of NSPI’s customers’ interests in this matter. NSPI’s passive stance, approaching silence, regarding this element of its fuel costs is an abdication of clear responsibilities for managing customer costs. That this abdication comes in the context of a valuable business relationship between its affiliate and Repsol Canada we believe gives color to the reasons. More importantly, it makes the failing suggest more than neglect. The failing raises substantial questions about whether NSPI exhibits those characteristics that we consider essential for a utility operating under an automatic recovery mechanism; i.e., one like the FAM, which puts first risk on customers, rather than shareowners. Those characteristics manifest themselves in a clear dedication to managing pass-through costs with the same vigor shown for those that fall first on shareowners. In the case of NSPI, those characteristics should also include the demonstrated ability to pursue legitimate customer interests even where they are not identical to those of the parent or its other subsidiaries and operations. That characteristic has special relevance in Nova Scotia, given the nature of the energy market operations of its other corporate family members and their relationships with the dominant market players with whom NSPI must deal. We raise this concern in the context of gas market conditions, not because it solely, or even necessarily, predominantly springs from the concerns raised in this immediate context. We raise it here because this context best demonstrates the likely added impacts created by the existence of inconsistent affiliate objectives. The concerns raised in Chapter I about the impacts of Audit Period staffing changes in FERM have equal importance in considering the continuing appropriateness of using a mechanism like the FAM. Many aspects of the staffing issues bring into question the degree to which tight management of fuel and energy costs remains a corporate (including Emera’s role as parent) priority at a sufficiently high level. For example:

• The great extent of those changes • That so many of them resulted from permitted transfers and not unanticipated departures • That many changes in personnel served other Emera interests • The loose (e.g., part-time work on FERM responsibilities) way that NSPI handled

transitions • The emergence of a number of performance-related gaps and weaknesses in performance

during this Audit Period, as personnel worked through the massive changes in resources. We observed a strong and clear contrast between NSPI’s efforts to address natural gas costs, on the one hand, and its exertions to deal with prospective greenhouse-gas controls on its coal-fired power plants, on the other. The greenhouse-gas issue warranted a “full-court press” over multiple years, involving senior officers of the Company working with peers at other companies to deal with Federal and Provincial governments at many levels. On gas markets and prices, however, the front-line Federal government agency, the NEB, has had to make inquiries to NSPI about the Maritimes Gas Market, rather than the other way around. When the NEB gave NSPI opportunities to express its views, the answer as far back as 2006 has been to raise no concerns.



Even at the Provincial level, where the Electricity Strategy favors gas-fired generation, we have found no indication of action by NSPI to assure effective gas supplies at reasonable prices.

3. NSPI’s incorrect assumptions about future gas use have weakened its ability to control customer costs. (Recommendation #3)

The Company’s persistence in viewing gas a market asset of diminishing value has compromised its ability to deal with gas-supply issues going forward:

• Its refusal to address its lack of access to Canaport has compromised its ability to deal with the owners of that facility regarding its future.

• Its refusal to seek capacity on M&NP-US has not only compromised its near-term ability to deal with the level of gas prices in the Maritimes, but now constrains its access to burgeoning gas supplies in the Northeast U. S.

• Its failure to study the full range of its likely gas requirements leaves it considerably behind in planning for cost-effective integration of increasing amounts of wind-powered generation.

The Company must use the results of its Wind Integration Study and its Generation Investment Strategy Review as building blocks for an honest reappraisal of its future power-supply mix. Building on that reappraisal, it must essentially “start over” in gas-supply planning.

D. Recommendations

1. NSPI should have been contesting and should continue to contest gas market circumstances; however, there is no basis for confidence that it can be relied on to do so, even if it did undertake the effort. (Conclusions #1 and 2)

NEB staff have visited NSPI in that agency’s market-monitoring role at least twice since Repsol Canada became the major presence felt in the Maritimes natural gas market. The nature of its regulatory processes is to respond to matters raised to it by affected parties. NSPI has stood remarkably silent as conditions have worsened. When Liberty has raised the possibility of protests to government authorities, NSPI’s response has been concern about jeopardizing its business relationships with other firms active in the Maritime Provinces. Liberty finds this response inconsistent with the responsibilities of a franchised public utility company providing a regulated service pursuant to rates that include a fuel-adjustment mechanism. It remains logical to conclude that Emera’s non-utility interests and relationships in the market make it fruitless to look to NSPI to act at arm’s length from its parents’ interests. We have gone from a position of seeking to urge more action to the fatalistic view that an uncommitted champion will serve no useful purpose. It is this view that raises questions about whether NSPI can continue to engender the confidence that needs to exist in an enterprise that uses an automatic-adjustment method for fuel and energy costs. Those questions include whether changing the method of recovery to one that sets fair but challenging cost targets in advance might work better in the circumstances here. Once set, such targets might at least cause Emera to recognize that a lack of aggressive efforts to control costs will produce shareowner, rather than customer harm.



The first FAM Audit addressed calendar year 2009. The report of that audit raised a number of concerns, which at the time could reasonably be attributed to adjustment to a new recovery regime. This audit addresses 2010 and 2011. It demonstrated that lingering concerns about how NSPI has been addressing the gas market remain, and in fact have become more substantial. The stakes continue to rise. NSPI’s consultant has, in NSPI’s recent rate case filing, predicted '''''''''' ''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''' for NSPI’s customers going forward. At the same time, a failure to maintain continuity in fuel and energy management resources (also affected by the competing interests and needs of affiliates) has contributed to a growing series of errors in judgment and mistakes in execution. Those too have had cost consequence.

2. NSPI’S 2009 IRP Update does not provide a useful planning base; its assumptions about natural gas do not support sound decision-making. (Conclusion #3)

Liberty continues to believe, following the additional work of this audit, that NSPI’s 2009 IRP Update is no longer useful as a planning base. It uses natural gas assumptions that are not supportable and it does not adequately follow up the results of the sensitivity analysis done at that time. Since that Update was completed, other fundamental elements of the potential supply-side resources available to NSPI have changed, particularly the availability of biomass for co-firing in NSPI’s solid-fuel plants. Moreover, as noted in our discussion of Forecasting and Supply Planning (Chapter II), a number of the parameters used by NSPI to simulate the operation of its generating units are suspect. Report Chapter VIII presents additional reasons for re-examining the planning basis laid out in the Update.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) IV. Solid Fuel Procurement and Contracts

July 9, 2012 Page IV-1 The Liberty Consulting Group

IV. Solid Fuel Procurement and Contracts

A. Background This chapter addresses the following solid fuel procurement, pricing and contracts subjects:

Solid Fuel Burned Solid Fuel Prices Contract Purchases Contract Actions Environmental Transportation

B. Findings

1. Solid Fuel Forecasted Versus Actual Burns Ocean-going vessels provide the primary transport method for solid fuel consumed by NSPI to generate electricity. Rail and truck deliveries supplement the primary method. NSPI receives solid fuel under a combination of long-term and short-term (or “spot”) contracts. Long Term contracts comprise those agreements whose term equals or exceeds '''''''''' ''''''''''''. Medium Term contracts have a term between '''''''' '''''''' ''''''''' '''''''''''', and Short Term contracts have a term of less than ''''''''' '''''''''''' The following NSPI generating stations burn solid fuel:

Lingan Units #1 through #4 Point Aconi #1 Point Tupper #2 Trenton Units #5 and #6 NSPI burns a range of solid fuels including low-, mid-, and high-sulphur coals and petroleum coke (Petcoke). All four of the stations can burn all of these fuels. Petcoke consumption occurs primarily at '''''''''''' ''''''''''''''' ''''''''' '''''''''''''''''' ''''''. The next graph shows Audit Period total solid fuel consumption in metric tonnes by month and compares this actual burn information with NSPI’s forecasts of burns for each month. Total solid fuel consumption for 2010 at the eight generating units of these four NSPI stations amounted to 10.8 percent less than forecast (3,105,491 tonnes, compared to the forecast of 3,480,400 tonnes). For 2011, the actual consumption was 2,822,609 tonnes compared to the forecast of 3,471,300 tonnes, or 18.7 percent less.

Budgeted versus Actual Audit Period Solid Fuel Consumption

The graph shows that actual solid fuel consumption under-ran the forecast consistently through the Audit Period. The previous audit period’s difference in burn corresponded reasonably closely

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Jan-1

0Marc

hMay Ju

lySep

tNov

Jan-1

1Marc

hMay Ju

lySep

tNov

Audit Period

Met

ric T

onne

s

ConsumedBudget



to the difference in actual versus forecasted energy produced from solid fuel (12.7 percent), indicating that plant performance was not a primary contributor to the gap in expected versus actual burns. The current audit period difference, however, became progressively greater, calling into question whether plant performance deteriorated. The 2010 actual energy produced from solid fuel ran 12.5 percent less than the forecast. The 2011 actual energy produced from solid fuel ran almost twice as much less (22.2 percent) than the forecast. Chapter VIII addresses plant performance. The forecast numbers came from the 2010 FAM Forecast filed in October 2009. Two major factors explain the difference between actual and forecast consumption. Actual NSPI loads for 2010 fell 0.9 percent below the level included in that forecast. However the vintage of the fuel-price information underlying this forecast made a bigger difference. This information had a late-July 2009 vintage. The comparative economics of fuel and purchased power alternatives changed significantly from those envisaged in mid-2009. An unexpected shift in the relationship between solid fuel prices and natural gas prices continued as 2010 progressed. It became more economical to burn natural gas than to burn coal in many instances. This result had no substantial precedent. Coal had consistently sustained an economic advantage over natural gas throughout North America. NSPI’s solid fuel contracts require it to take large minimum tonnage amounts. Therefore, increased displacement of fossil fuels by natural gas significantly increased coal inventories. Chapter VI of this report describes this phenomenon more fully. The difference during 2011 became even more striking in terms, because the unexpected decrease in load as the NewPage Port Hawkesbury manufacturing plant went off line in August 2011 added to the decreased use of fossil fuels. As NSPI experienced reduced loads and increased opportunities to displace coal with gas, the Company chose to adjust maintenance schedules on its coal-fired generating units. This choice contributed further to reduced coal burns, as compared with forecasts. Chapter VIII of this report discusses plant maintenance and outages.

2. Solid Fuel Sources NSPI’s solid fuels come from a number of locations. The Company uses ''''''''''''' '''''''''''''''' '''''''''' ''''''''''' '''''''''' '''''''' ''''''''''''''''''''' '''''''' ''''''''' '''''''''''''''''' ''''''''' ''''''''''' ''''''''''''' ''''''''''''''''''' The next graph shows the contribution of each of the three components of the total solid fuel mix. Import coal represents the majority of solid fuel consumed. Its monthly consumption volumes varied from ''''''''''''''''' ''''' '''''''''''''''''''' tonnes across the Audit Period. The graph demonstrates that NSPI can normally anticipate a reduction in quantities of solid fuel consumed over the summer months, when overall system load is lower. The graph also shows the overall decline in use of solid fuel as natural gas became more competitive relative to solid fuel. This phenomenon became more pronounced in the latter half of 2011 when the typical recovery in coal burn after the summer dip in consumption did not occur, because of natural gas remained so competitive.



''''''''''''''''''''' '''' ''''''' ''''''' ''''''''''''''''''''' (Chart is Confidential)

'''''''''''''''''''' ''''''''' comprised the next largest component of solid fuel. Its monthly consumption in the Audit Period ranged from ''''''''''''''''' ''''' ''''''''''''' tonnes. The quantities dropped significantly compared to 2009 in the early part of the Audit Period, because NSPI entered a mercury capture program. Domestic coal characteristically has high sulphur content. High sulphur in coals interferes with the mercury capture capabilities of the activated carbon sorbent used for mercury capture. NSPI began therefore to consume less domestic coal after initiating the mercury capture program in the early part of the Audit Period. The provincial government, however, changed mercury emission limits in July 2010, enabling NSPI again to burn more domestic coal. Petroleum coke comprised, as usual, the ''''''''''''''''''' '''''''''''''''''''''''' of the solid fuel mix. Its monthly consumption ranged from '''''''''''''' ''''' '''''''' ''''''''''''''''. The low consumption months came primarily as a result of outages at Point Aconi and Trenton #6, where petroleum coke is typically consumed. Solid-fuel types consumed varied widely from station to station, and even from unit to unit within a station. The next graph illustrates this wide Audit Period variation in solid fuel consumption. Several factors influenced the variation. They include boiler design, pollution control equipment, unit age, and unit location.



''''''''' '''''''' '''''''''''''''''''' ''''' '''''''''''''''''' (Chart is Confidential)

Lingan station consumed the most solid fuel '''''''''''''''''''''''' '''''''''''''''''' in the Audit Period. One would expect this result, given its size. The station consists of four individual generating units, which have capacities of ''''''''''' ''''''''''' ''''''' ''''''' ''''''''' MW. Import coal provided over '''''' '''''''''''''''' of Lingan’s consumption ''''''''''''''''''''''''' ''''''''''''''''''. The balance of '''''''''''''''''''' '''''''''''''''' came from '''''''''''''''''''''' ''''''''''. Lingan consumed ''''' ''''''''''''''''''. The station’s units must burn low-sulphur coal to support NSPI compliance with overall utility sulphur emission requirements. NSPI has regularly blended limited quantities of higher-sulphur domestic coal with low-sulphur coal in order to optimize its compliance activities. Pt. Aconi, a 171 MW fluidized bed unit, consumed the vast majority of the Petcoke burned at NSPI’s generating units. The unit consumed '''''''''''''''''''' ''''''''''''''' of Petcoke in the Audit Period. Pt. Aconi consumed ''''''''''''' '''''''''''''''' amounts of ''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''') and of '''''''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''. The unit’s fluidized bed operates very effectively in removing sulphur from fuels. This capability equips the unit well to burn significant quantities of Petcoke, which has a comparatively high sulphur content. The 135 MW Trenton 5 unit consumed ''''''''''' ''''''''''''''' '''''''''' during the Audit Period. Its burn for the period totaled ''''''''''''''''''' ''''''''''''''. The 157 MW Trenton 6 unit consumed the most domestic coal of any NSPI unit during the Audit Period. Its consumption totaled '''''''''''''''''''' ''''''''''''''''. Trenton 6 also consumed '''''''''''''''' '''''''''''''''' of Petcoke and '''''''''''''''''' ''''''''''''''' ''''' '''''''''''''''' '''''''''. The 152 MW Pt. Tupper unit consumed '''''''''''''''''''' '''''''''''''''' ''''' '''''''''''''''' ''''''''' and a small amount ''''''''''''''' '''''''''''''''''' ''''' '''''''''''''''' in the Audit Period.



3. Solid Fuel Prices The next graph shows Audit Period prices ($/tonne) for Solid Fuel consumed at NSPI generating stations. Total solid fuel costs were relatively consistent with the Forecast throughout the Audit Period.

'''''''''''' ''''' ''''''''''''' '''''''' '''''''' ''''''''' (Chart is Confidential)

The next graph shows contributions to total solid fuel costs by import coal, domestic coal, and Petcoke. The graph illustrates that import coal comprised the '''''''''''' ''''''''''''''''''''' '''''''''''' '''''''''. Domestic coal and Petcoke ''''''''''' '''''''''''''''''''''''''' '''''''''' '''''''''''''''''''''''''. Import coal has typically been NSPI’s ''''''''''''' '''''''''''''''''''' solid fuel. The preceding graph shows that its prices were ''''''''''''''''''''' ''''''''''''' during most of the Audit Period, ranging from a high of ''''''''''' ''''''' ''''''''''''' ''''''''''' ''''' ''''''' '''''''''''''' to a low of '''''''''''' '''''''' '''''''''''''. Average cost for the period for import coal was '''''''''''' ''''''' '''''''''''. Much import coal was priced on the basis '''''' '''''''''''''''''. Domestic coal prices '''''''''''''''''''' ''''''''''''''''''''''' ''''''' during the period, averaging '''''''' '''''''' ''''''''''''''' '''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''' '''''''''' '''''''''''''''''''' '''''''''' ''''''''''''''''''' Petcoke prices showed '''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''' ''''''''''''''' ranging from less than '''''''' to more than '''''''''''' ''''''' '''''''''''''. They averaged '''''''' ''''''' '''''''''''''' over the period. NSPI purchased Petcoke on '''''' '''''''''''''''''''''''''''''' market under ''''''''''' '''''''''' ''''''''''''''''''' during the period, making its prices for this fuel subject to market forces.



'''''''''''''''''''''' ''' ''''''''' '''''''' '''''''' (Chart is Confidential)

The next figure shows that Solid fuel prices also varied widely by station. The differences resulted from wide variation in ''''''''' ''''''''' '''''''''''''''' ''''''''''''''''. Trenton 6 had the ''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''' because it was able to '''''''''' '''''''' '''''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''. It was followed closely by Pt. Aconi, which burned significant quantities of '''''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''.

''''''''' ''''''''' ''''''' ''''''''' ''''' ''''''''''' (Chart is Confidential)

The two stations with ''''''''''''''''' '''''''''''''''''' fuel costs are Trenton 5 and Pt. Tupper, which burn ''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''. Trenton 5 costs are ''''''''''''''' '''''''''''''' than those of ''''''' ''''''''''''''' because of '''''' '''''''''''' '''''''' ''''''''''''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''' ''''' '''''''''''''''' ''''''''''' '''''''''' '''''''''''' '''''''' '''''' '''''''''''''''' ''''''''''''''' '''''''''''''''''' ''''' '''''''' ''''''''''''''''' ''''''''''''''''' '''''' '''''''''''''''' '''''''''''' '''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''''' '''''''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''' ''''''''''''''''''' ''''' '''''' '''''''''''''''' '''''''''''' ''''''' ''''''''''''''' ''''''''''''''''''''''



'''''''''''''''''' ''''''''''''''''''''''''''' ''''''' ''''''''''' ''''''''''''''''' '''''''''' '''''''' '''''''''''' '''''''' ''''''''''''''' ''''''''''''' ''' ''''''''''' ''''' '''''''''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''' '''''''' '''''''''''''''''''' ''''' ''''''''''''''' '''' '''''''''''''''''''''''''''' '''''''''''' ''''''''''' '''''''''' '''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''''' '''''''''''' '''''''''''''' Domestic coal comprises ''''''''''''''''''' of the blend at Lingan. Trenton 6 and Pt. Aconi have the ''''''''''''''' '''''''' costs because of the blends of solid fuel they burn. The content of the blends, however, differs significantly. Trenton 6 blends '''''' '''''''''''''''''' '''''''''' '''''''''' ''''''''''''''''''' '''''''' with '''''' ''''''''''''''''' ''''''''''' '''''''''''''''' '''''''''''''''''''''''''''' '''''''''''' Pt. Aconi burns a multi-part blend consisting of ''''' ''''''''''''''' ''''''''''''''''''' ''''' ''''''''''''''' ''''''''''''''''''''''''''''''' '''''''''' ''''''''' '''' '''''''''''''''''' '''''''''''''''''' ''''''''''

4. Audit Period Contract Purchases NSPI scaled back its normal solid fuel procurement processes significantly during the Audit Period because of reduced consumption of solid fuel as a result of unexpected competitiveness of natural gas as a power plant fuel. For example, the last procurement of low sulphur international solid fuel was in ''''''''''''''''''' ''''' '''''''''''. The next subsections describe Audit-Period purchases in more detail.

a. Portfolio Considerations NSPI solid-fuel procurement must address many interrelated factors. These factors include generating unit type (fluidized bed vs. conventional coal fired), unit age, sulphur-emission control requirements, lack of '''''''''''''''''''' '''''''' ''''''''''''''''''' '''''''''''', availability of ''''''''''''''''''' '''''''' ''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''', and generating unit designs that limit ability to capture sulphur emissions. NSPI has no scrubbers on any units. Pt. Aconi uses a fluidized bed that effectively captures high sulphur in fuel, but NSPI’s other units require it to procure the majority of its solid fuel as low sulphur coal, in order to comply with sulphur emission requirements. NSPI maximized its use of '''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''', in order to minimize fuel costs while complying with sulphur-emission requirements. In addition to its usual complexity, government action during the Audit Period added complications. When the Audit Period started NSPI was planning to phase out of its use of high sulphur domestic coals, allowing its existing contracts to expire. However, on July 22, 2010, the provincial government changed the requirements for the mercury control program, allowing NSPI to make greater use of high-mercury domestic coals. NSPI restructured its coal portfolio to take advantage of the ''''''''''''' ''''''''' domestic coals. NSPI made other contracting adjustments, in addition to agreeing to take domestic coal over ''''''' '''''''''''''' '''''''''. NSPI also began contracting for high Btu, mid sulphur coal from the ''''''''''''''' '''''''' ''''' '''''' '''''''''''''''' '''''''''''''. Later portions of this chapter discuss this change. NSPI procures solid fuel in accordance with the provisions of the Fuel Manual and the manual’s portfolio requirements. The next table summarizes these portfolio requirements.



Solid Fuel Portfolio Contract Requirements Category Definition Minimum Maximum Long Term ''' ''' '''''''''''' '''''''''' ''''''''''''

Medium Term '''' ''' ''' ''''''''''''' ''''''''' '''''''''' Short Term ''' ''' '''''''''' '''''''' ''''''''''''

Country Risk ''''''''''' Supplier Risk '''''''''

Mine Risk ''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''' The following table summarizes NSPI’s compliance with these portfolio balance elements on a quarter by quarter basis throughout the Audit Period. NSPI remained within the applicable bands for Country Risk, Supplier Risk, and Mine Risk. However, there were slight variations in the contract term requirements, as this table demonstrates.

Category Limits %

2010-Quarterly Actuals 2011-Quarterly Actuals 1 2 3 4 1 2 3 4

Long Term '''''''''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' Medium Term '''''''''''''' '''''' '''''' '''''' ''''' '''''' ''''' '''''' ''''''

Short Term ''''''''''' ''' ''''' ''''' ''' ''' ''' ''' ''''' Solid fuel contract base quantities form the basis for these quarterly percentages. Many of NSPI’s contracts have associated plus or minus option percentages; therefore, exercise of these minus options could bring the percentages down by a few points.

b. Contracts Existing at the Beginning of the Audit Period NSPI had a total ''''' ''''''' solid fuel contracts at the beginning of the Audit Period. The next table summarizes them. '''''''''' ''''' these contracts (''''''''' '''''''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''''''' '''''''' '''''''''''''''''''''' expired at '''''' '''''''' ''''' '''''''''''. NSPI entered additional contracts over the course of the Audit Period. We discuss actions related to new solid fuel contracts below. Our examination of each procurement listed found all to have been conducted in accordance with the Fuel Manual. NSPI selected in each case the supplier offering fuel on the lowest cost on a total evaluated delivered cost basis.



'''''''' ''''''' '''''''''''''' ''' '''''''''''''' '''' '''''''' '''''''''' ''''''''''''' ''''''''' '''''''' ''''''' '''''''' ''''''''

''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''' '''''''' '''''''''''''''''' '''''''''''' '''''''''' '''''''''' ''''''''' ''''''''''''''''' ''''''''''''' '''''''' '''''''' '''''''' '''''''' '''''''''''''''''''''''' '''''''''''''''''''' '''''''' ''''''''' ''''''''''' ''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''''

'''''''' ' ''''''''' ''''''''''''''' ''''''''''''''''''' '''''''''''''

'''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''' ''''''''

''''''''''''''''''''' ''''''''' '''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''

Quantities in thousands of metric tonnes

c. Contracts Entered During the First Quarter of 2010 The next table shows first quarter 2010 agreements entered by NSPI. Note that all dollars noted in the following subsections describing quarterly Audit Period contracts are in U.S. dollars unless otherwise noted. These subsections provide a brief narrative describing longer-term procurements. NSPI sent out an RFP for coal procurement in January 2010, requesting bids for both a one-year supply of coal for 2011, and a four-year supply of coal for 2011 – 2014. NSPI received ''''''''''''' ''''''''''' ''' ''''''''''' made the most competitive offering. NSPI began negotiations with '''' ''''''''''''' '''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''' ''' '''''''''''' '''''''''''''''' '''' '''''''' ''''' '''''''''' ''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''' '''''''''' ''''''''''''''' ''''''''''''''''''''''''''''''''''''''''' Consequently, NSPI began negotiating with the second place offeror '''''''''''''''''' ''''' ''''''' '''''''''''' ''' '''''''''''''' ''''''' '''''''''''' ''''''''''''''''''''''' ''''''''''' '''' '''''''''''''' ''''''''''' '''''''''''' '''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''' ''' ''''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''' '''''''''''' ''''' '''''''''''' ''' ''''''''''''' ''''''''''''''''''''''''' '''''' '''''' ''''''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''' NSPI concluded negotiations with ''''''''''''' and entered into the ''''''''' '''''''''' '''''''''''''''' agreements listed in the following table.



'''''''''''''' ''''''''' ''''''' '''''''' ''''''' '''''''''' '''''''''''' ''''''''''''' '''''''' '''''''''''''' ''''''''' '''''''''''''''''''''''''' '''''''''' ''''''''''''''''' '''''''''''' ''' ''''''''''''''' ''''''''''''''' ''''''''' '''''''''''''''''''''''''''

'''''''''''' ''''''' '''''''' '''''' ''''''''' ''' ''''''' '''''''

''' '''''''''''' ' '''''''' '''''''''' '''''''''''''''' ''''''''''' ''' ''''''''''''''''' '''''''' ''' ''''''''''''''' ''''''''' ''''''''''''''''''''''' ''' ''''''''''''''' '''''''''

''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''

''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''''''''''' '''''''''''' ''' ''''''''''''''' '''''''''''''''''' '''' '''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''' ''''''''' '''''' '''''''' ''' '''''''''''''

'''''''''''''' '''''''' '''''''''' '''''''''''''''''''' '''''''''' ''' ''''''''''''

''''''''''' ''' '''''''''''''''''' '''''''' ''''''''''' '''' ''''''''''''''''' ''''''''' ''''''''''' ''' ''''''''''''''''' '''''''' '''''''''''' ''' '''''''''''''''''' ''''''''

''''''''''''''''''''''''''''''''''' '''''''''''' '''''''''' ''''''''''

'''''''''''''' ''''''''' ''''''''''' '''''''''''''''' '''''''''' ''' '''''''''''' '''''''''' ''' ''''''''''''''''' ''''''''' '''''''''''''''''''''''''''''''''' NSPI did not enter into any new solid fuel contracts during ''''''' ''''''''''''''''' '''''''''''''' ''''' '''''''''''''.

d. Contracts Entered During the Third Quarter of 2010

'''''''''''''' '''''''''''' ''''''''' ''''''''''''' ''''''''' ''''''''''''

'''''''''''''''''''''''''''' '''''''''''''''

''''''''''''''''''''''' '''''''''''' ''' '''''''''''''

'''''''''''' '' ''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''''''''''''''''''''

'''''''''''''''''''''''''''''''''''

''''''''''''''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''

'''''''''' ''''''''''''''''' ''''''''''''

''' '''''''''''''

''''''''''' ''' ''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''' ''''''''''''''''''' ''''''''''''''

'''''''''''' ''''''''''''''''''''''''''

''''''''''

e. Contracts Entered During the Fourth Quarter of 2010 '''''''' '''''''''''''''''''''''' contract with ''''''''''''''''', shown in the next table, reflects an effort by NSPI to optimize fuel blends for its generating units. The Point Aconi Station can be fueled entirely by coal, or by a combination of coal and Petcoke. Traditionally, the blend of choice favored '''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' because of its competitive pricing relative ''''' '''''''''. However, the price of Petcoke continued to rise across the latter part of 2010. NSPI considered alternatives, such as use of mid sulphur coal at Point Aconi. NSPI, in November 2010, solicited the market for both mid sulphur coal and Petcoke, in order to determine a blend that would be most competitively priced. NSPI received ''''' mid-sulphur coal supply offers from '''''' suppliers. The most competitive offer, for ''''''''''' ''''''''' '''''''''''''''''''''''' ''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''''''' ''' '''''''''''''') coal, came from '''''''''''''''' The offer reflected a delivered price for ''''''''''''''''' ''''''''' of CAD ''''''''''''' '''''''''''''''''' compared to CAD '''''''''''''' ''''''''''''''''''' for '''''''''''''''''''''''''''' '''''''' '''''''''''''''' '''''''''''' '''''''''''''''' ''''''''' ''''''' '''''' '''''''''''''''''''''' ''''' '''''' ''''''''''''''' ''''''''' '' '''' ''' '''''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''' for so long as its prices remained competitive. NSPI could increase the '''''''''''''''''' component, however, '''' '''' '''''''''' '''''''''''''' ''''''''''. Alternately, should '''''''' '''''''''''' '''''''''''''' ''''''''' ''''' ''''''''''''''' '''''''''' ''''''''''''''''''''' ''''' '''''''''''''''' ''''''' ''''''''''''''' ''''''''''''''''' ''''''''''' '''' '''''' ''''''''''''''''''' '''''''''' '''''''' ''''''''''''''''''''' '''''''''' '''''''''' ''''''''''''''' '''''''''''''' ''''' ''''''''''''''''''''' '''' '''''''''''' ''''''''' '''''''''' '''''''''''''''' '''''''' ''''' '''''' ''''''''''''' '''' '''''''''''''''' This overall analysis reflects reasonably sophisticated NSPI evaluations aimed at maintaining fuel blends at its stations which combine fuels in blends that optimize both operational requirements with the most competitive economics.



''''''''' ''''''''''''''''''''' contract with ''''''''''''' '''''''''''''''''''''''' extended the existing contract, which expired ''''''''''''''''''''''''' '''''''' ''''''''''. NSPI commissioned a mine assessment by a third-party consultant to confirm the existence of a reliable supply of coal for the period '''''''''''''''' ''''' ''''''''''''. NSPI knew that the price would likely be '''''''''''''''' ''''''''' the previous price because of '''''''''''''' '''''''''' ''''''''''''' ''''''''' '''''''''''' '''''''''''''''''''''''''''. '''''''''''' ''''''''' indicated that the price would likely be '''''''''''''' '''''''''''''''''''. The FST had approved NSPI’s negotiations with ''''''''''''' ''''' ''' new contract if the price range would be in the '''''''''''''' ''''' ''''''''''''' '''''''''''''''''' '''''''''''''. The amendment agreed to between NSPI '''''''' ''''''''''''' '''''' ''''''' ''''''''''' ''''''''' '''''''''' ''''''''''''''''''''''' set the price at ''''''''''''''' '''''''''''''''''''''

''''''''''''' ''''''''' ''''''' '''''''' ''''''' ''''''''''' '''''''''''''' ''''''''''''' '''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''''

'''''''''''' ''' '''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''''''''''

''''''''''''''' '''''''' '''''''' '''''' '''''''''' ''' '''''' '''''''' ''''''''' '''''''''''''''''' ''' ''''''''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''''''''''''''' '''''''''''' '''''''''''''''''' '''''''

''''''''''''''''' '''''''''''''''' '''''''''' '''''''''''''''''''''''''''''''

''''''''''''' '''''''' ''''''' ''''''' '''' '''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''''''

'''''''''''' ''' ''''''''''''' ''''''''''' ''' '''''''''''''''''''' '''''''''

'''''''''''' '''' ''''''''''''''''' ''''''''' '''''''''''' ''' '''''''''''''''''''' ''''''''''

'''''''''''''''''''''''' ''''''''''

'''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''''''''''

'''''''''''''''''''' '''''''''' ''' '''''''''''''' ''''''''''''''''''''''' ''' ''''''''''''''''' ''''''''''''''

'''''''''''''''''''''''''''''''''''

f. Contracts Entered During the First Quarter of 2011

''''''''''''' '''''''' ''''''' '''''''' '''' '''''''''''' '''''''''''''' '''''''''''' ''''''''' '''''''''''''''' Price '''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''''''''' ''' ''''''''' '''''''''''' ''' ''''''''''''''' '''''''''

''''''''''''''''''''''''''' '''' '''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''' ''''''''''''

'''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''' ''''''' ''''''''''''' '''''''''' ''' '''''''''''''. The 2011 (Audit Period) tonnage covered a small test burn ''''' ''''''''''''''''''' '''''''''' intended to support diversification of the portfolio for future years. NSPI did not enter into any new solid fuel contracts during the second or third quarters of 2011.



g. Contracts Entered During the Fourth Quarter of 2011

'''''''''''''' ''''''''' ''''''' ''''''' '''''''''' ''' '''''' ''''''' '''''''''''''' ''''''''''''' ''''''''' ''''''''''''' ''''''''' '''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''' ''' '''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''' ''' ''''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' ''' ''''''''''''''''' ''''''''''''''''' '''''''' '''''''''' '''' ''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''' '''''''''''' ''''''''''''''''''' '''''''''' '''''''''''''''''

h. Contracts Existing at the End of the Audit Period

Solid Fuel Contracts at End of Audit Period ''''''''''''' '''''''''' '''''''' '''''''' '''''''' '''''''''

'''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''' ''''''''' ''''''''' '''''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''''' '''''' ''''''''' '''''''' ''''''''' ''''''''''''''' ''''''''''' ''''''''' ''''''''' ''''''''''''''''' ''''''''''''' '''''''' '''''''' ''''''''' '''''''''''''''''''''' '''''''''''''''''' ''''''''' ''''''''''''''' ''''''''''''''''''' '''''''' Vitol-II ''''''''''''' ''''''''' '''''''''' '''''''' '''''''' '''''''''''''''''''' ''''''''''''' '''''' ''''''''' ''''''''' '''''''' '''''''''''''''''''' '''''''''''''' '''''''''

'''''''' ' ''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''''''' '''''' ''''''''''''''''' '''''''''''''''''' ''''''''' ''''''''' '''''''' '''''''''''''''' '''''''''''''' ''''' '''''''''''' '''''''''''''' '''''

''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''' ''''''''''' ''''''''' '''''''''' '''''''''''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''' '''''''''' ''''''''

''''''''''''''''''' ''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''' '''''''''''''' ''''' '''''''''' '''''''''''''' ''''' ''''''''''''''''' ''''''''''' ''''' ''''''''''''''''' '''''''''''''''''''' ''''''''

Quantities in thousands of metric tonnes Comparison of the immediately preceding table above (and also the portfolio chart for the end of the Audit Period) with the new contract actions for the third quarter of 2010 shows different tonnage and time periods for the '''''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''''''''''''. Originally, this contract provided '''''''''''''''''' '''''''''' per year through '''''''''''', but as of the end of the Audit Period, NSPI lists the obligation as ending in '''''''''''', with only ''''''''''''''''' '''''''' delivered in this year. In '''''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''''''''''' informed NSPI that it could not obtain targeted yields from ''''''''



''''''''''''''' ''''''''''''''''''''''. NSPI had noticed a degradation in the quality of coal being delivered from '''''''' '''''''''''' ''''''''''''' confirmed in ''''''''''''''''''''''''' ''''''''''' that it could not meet the contractual obligations. Subsequently, the parties negotiated to resolve the issues. Discussions continue, ''''''' ''''''''''' ''''''' ''''''' '''''''''' '''''' '''''''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''' ''''''''''''' ''''''''''''''''''''''''' '''' ''''' ''''''''''''''''''''''' ''''''''' ''''' '''''''''''''''' '''''''''''' ''''''' ''''''''''''''''''''''''''''''''' '''''''''''''

i. Audit Period Purchase Practices NSPI procured all solid fuel through well-documented, controlled processes designed to ensure broad market solicitations and fair evaluations of bids. Requests for Proposal (RFP) were often issued to as many as 50 potential solid fuel suppliers, depending on the type of product desired. NSPI’s Fuel Manual provides detailed fuel procurement procedures. Our review confirmed the proper execution of these procedures. NSPI held all incoming solid fuel bids without opening until the designated time, in order to ensure fairness of evaluation. NSPI performed evaluations of all bids using an appropriate combination of factors, incorporating transportation costs and quality variations in order to evaluate bids for cost competitiveness at the bus bar.

j. Hedges for Index-Priced Contracts NSPI made some procurements on the basis of price indices. NSPI promptly executed a third and related transaction to essentially fix the price of the solid fuel through coal hedges in these instances. During 2010, NSPI made payment for 24 different hedges that had been entered into as early as 2008 and as late as January 2010. These hedges involved 1,260,000 tons of coal, and resulted in payment by NSPI of $6,477,524. Through its coal hedging program, which NSPI has designed to fix through hedges at the time of entering index-based contracts, the Company paid the coal supplier $6.4 million less than the hedged price. NSPI therefore paid the hedge counter-party a corresponding $6.4 million. A total of 36 hedges existed in 2011. NSPI had entered them between April 2008 and February 2010. The latter was '''''''' '''''''' ''''''''' ''''''''''''' '''''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''. These hedges involved 1,150,000 tons of coal. NSPI paid coal suppliers $18 million more than the locked-in price. The hedge counter-parties thus paid NSPI a corresponding amount. NSPI enters these hedges to reduce volatility, not to produce direct economic value. Nevertheless, during the Audit Period, the effect of these hedges was to lower customer costs. The hedges saved customers about $12 million in 2010 and 2011 costs on a net basis, because the effects of the hedge transactions flow through the FAM. Our review determined that all NSPI Audit Period coal hedges conformed to the requirements of Appendix B of the Fuel Manual. Appendix B lists five different types of hedging instruments for solid fuel. NSPI used ''''''''''' '''''''' ''''' '''''''''''''' ''''''' ''''''''''''''''' ''' ''''''''''''' '''''' '''''''''''''''' '''''''''''''''''' ''''''''''' '''''''''''''''''' ''''' '''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''''' NSPI engaged in these swaps with '''''''''' ''''''''''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''' '''''''''''' ''''''''''''''''''''' '''''''' '''''''' ''''''''''' ''''' ''''''''''''' '''''''''''''''' ''''''''''''''''''

5. Solid Fuel Contract Summary NSPI maintains the following charts regularly, and considers them as part of each procurement decision, in order to determine compliance with portfolio requirements of the Fuel Manual. The first two portfolio status charts display the solid fuel portfolio at both the beginning and the end



of the Audit Period. The last chart shows the specific risk categories, as spelled out in the Fuel Manual, and includes the status for both 2010 and 2011.

''''''''''''' ''''''''''' ''''''''''''''''' '''' ''''''''' '''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''' (Chart is Confidential)



'''''''''''''' '''''''''' '''''' ''' '''''''''' ''''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''''''



''''''''''''' ''''''' '''''''''''''''''''''' ' ''''''''' ''' ''''''' ''' '''''''' ' '''''''' ''''''''''''' '''''''' '''''''' ''''''''''''''''''' ''''''''' '''''''' ''''''''' ''''''''''''''' '''' ''''''''''''''

'''''''''''''''''' ''''''''''''''' ''''''' ''''''' '''''''' '''''''' ''''''' '''''''''''''''''''''' ''''''''''' '''''''''''' '''''' '''''''''''''' '''''''''' '''''''' ''''''''''''' '''''''''' '''''''''' '''''''''''''''''''''''''''' ''''''''' '''''''' ''''''''''''''''' ''''''''''' ''''''''' '''''''''''''''''' '''''''''' ''''''''''' '''''''''''''''''''''' ''''''''' ''''''' ''''''''''''''' ''''''''''''' '''''''' ''''''''' ''''''''''''' '''''''' ''''''''''' '''''''''''''''''' '''''''''' '''''''''' '''''''' '''''''''''''' ''''''''''''''' '''''''' ''''''''''''''''' '''''''' '''''''' ''''''''''''' '''''''''''' ''''''' ''''''''''''' ''''''' '''''''' '''''''''''''''' ''''''''''''''' ''''''''' '''''''

''''''''''''' '''''''' '''''''' ''''''''''''''''''''''' '''''''' '''''''' ''''''''''''''''''''''' '''''''''' '''''''' ''''''''''''' ''''''''' '''''''' '''''''''''''''''''' ''''''''''' ''''''' '''''''' '''''' '''''''''''''' ''''''' '''''''' '''''''''''' '''''''''''''''''''''''''''' ''''''''''' ''''''' ''''''''''''''''' '''''''''' '''''''' ''''''''''

''''''''''''' '''''''''''' '''''''''' '''''''''''''''''' '''''''''''''' '''''''' '''''''''

''''''''''''''''''''' '''''''''''' ''''''' '''''''' ''''''''''' '''''''''''' ''''''''' '''''''

'''''''''''''''' '''''''' '''''''' '''''''' '''''''''' ''''''''''''''''''''' ''''''''' ''''''''

'''''''''''' ''''''''' ''''''' ''''''''''''''''' '''''''' '''''''' ''''''''''''' ''''''''' '''''''' '''''''''''''''''''''' '''''''' '''''''' ''' '''''''''' ''''''' '''''''' ''''''''''''''' ''''''''' '''''''''' ''''''''''''''''''''' ''''''''' ''''''' ''''''''''''' '''''''''''''' '''''''''''' ''''''''' '''''''''''' ''''''''''''''' '''''''' ''''''''' '''''''''' '''''''' '''''''' '''''''''''''''''''''''' ''''''' '''''''' ''''''''''''''' '''''''' ''''''''''' '''''''''''' '''''''''''''

Throughout the Audit Period, NSPI managed its solid fuel portfolio to keep the Country Risk below '''''''''', the Supplier Risk below '''''''''' and the Mine Risk below '''''''''''

6. Procurement Consultation Throughout the Audit Period, and essentially since 2005, NSPI has used the services of Energy Ventures Analysis (EVA) as an outside consulting firm to provide an independent perspective on NSPI’s solid fuel, associated marine freight, and procurement decisions. NSPI involves EVA in each solid fuel procurement, and provides EVA with copies of all bids submitted. EVA conducts its own analysis and formulates this analysis into a formal memorandum to NSPI that includes a number of factors, including:



• Background • Bid Results, summarizing each bid and displaying all bids in a summary table • Evaluation, including a year by year analysis of each bid and a ranking of the bids on a

fully evaluated cost basis, in CDN$/MMBtu delivered to specific generating stations • Market Review, including graphs and tables portraying world steam coal quantities and

prices • Historical U.S. Coal Prices • EVA Forecasts of U.S. Coal Prices and quantities • Conclusions • Recommendations.

EVA was especially active for NSPI during the current Audit Period because of the significant changes in personnel within FERM. EVA provided independent analysis, and also training for the new Director of FERM and the new Senior Manager Fuels Strategy and Performance.

7. Procurement Documentation NSPI assembles for each solid fuel procurement the package of supporting information specified in the Fuel Manual, and identified as the Record of Approval (“ROA”). The contents of the ROA includes the following appendices:

Appendix A – Recommendation Memo Appendix B – Evaluation Appendix C – External Evaluation* Appendix D – Portfolio Chart

Appendix E – Credit Review *If required NSPI maintains a copy of the RFP, the RFP distribution list, and details of the solicitation. The documentation retained includes the formal Record of Procurement Approval, as signed by the Fuel Strategy Table, and a summary of the procurement and the decision as approved by the FST, which may vary in some respects from the recommendation made by the Solid Fuel Manager. Liberty reviewed this documentation for actions taken during the Audit Period for procurement of solid fuel. We found it to be adequately maintained, and supportive of the procurement decisions made.

8. Contract Actions

a. Resales or Swaps NSPI did not engage resales or swaps of solid fuel contracts or entitlements during the Audit Period.

b. Price Redeterminations Chapter VI, Section 4.b. of this report (Quality Administration) discusses ''''''''' ''''''''''''''''''''' where NSPI negotiated more favorable prices from suppliers because of coal quality issues. They consisted of adjustments not provided for in the standard coal quality adjustment provisions of the coal contracts.

c. Litigation Related Contract Issues During the Audit Period, '''''''''''' ''''''''''' '''''''' contract issues, one of which has now been resolved, were in litigation.



NSPI has settled litigation with '''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''''''''' ''''' ''''''''''''''''''''''''''''''''' '''''' ''''''''''''' '''''''''''''''' '''' '''''''''''''''''''' '''''' ''' '''''''''''''''''''''' ''''' '''''''''''''''' '''''''''''''''''''''''' '''''''''''''''' '''''''' '''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''' '''''''''' ''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''' '''''''''''''''''''' ''''''''''' ''' ''''''''''' ''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''' ''''''' '''''''''''''''''' ''''' ''''''''''''''''' '''''''' ''''' ''''''''' ''''' '''''''''' ''''''''''''''''' ''''' '''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''' ''''''''' '''''''''''''''''' ''''''''' '''''''''''' '''''''''''''''''''''' '''''''''''' '''''' '''''''''''''' '''''''' '''''''''''''''''''' ''''' '''''''''''' ''''''''''''' '''''''''''''''''''''''' '''''''''' '''' ''''''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''' ''''''''' ''''' ''''''''' '''''''''''''' '''''''''''''''''''''' '''''' ''''''''' '''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''' '''''''''' '''''''''''''' ''''''''''''''''' ''''''''''''''' '''' '''''''''''''' '''''''''' ''''''''''''' '''' ''''''''''''''''' ''''''''''''' ''''''''' '''''''''''''''''''''''''' ''''''''''''' '''''''''''' '''''' '''''''' '''''''''''' ''''' '''''''''''''''''''''''''''''' ''''''''''' ''''''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''' ''''''''' ''''' ''''''''''''' '''''''''''' '''''''''''''' ''''''''''''''' '''''''' '''''''''' '''''''''''''''''''''''' ''''''''''' ''''''''' '''''''''''''''' ''''''''' ''' '''''''''' '''''' '''''''''''''''''''''''''''' '''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''' ''''''''''''''' '''''''''' '''''''''''''''' ''''''''''''' ''''''''''''''' ''' '''''''''''''''''''' '''''''' ''' ''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''' '''''' '''''' '''''''''''''''' ''''''''''''''' ''''' ''''''' ''''''''''''''''''' '''''''''''''' ''''''''' ''''''''''' '''''''''''''' ''''''' ''''' ''''' ''' ''''''''''''''''''''''''''' ''''' '''''''''''''''' '''''''''''''''''''''''' '''''''''''' '''''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''' '''''''''''''' ''''' '''''' ''''''''''''''''''''''''' ''''''''''' '''''''''' '''''''''''' '''''''''''' '''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''''' ''''''''''''' ''''''''''''' '''''''' '''''''''' '''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''' '''''''' ''''''''''''' ''''''' '''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' ''''''''' '''''''''' '''''''''''' '''''''''' ''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''' '''''''''''''''''''' ''''' ''''''''' '''''''''''' '''''''' '''' ''''''''''''''' '''''''' '''''''''''''''''' ''''''' '''''''''''''''''' ''''''''''''''' ''''' ''''''''' ''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''' '''''' ''''' ''''''' ''''''''' ''''' ''''''' '''''''''''' '''''''''''''''' '''''''' '''''''''''' ''''''''''''''''''''''' ''''''' '''''''''''' '''''''''''''''''''''''''''''' '''''''''''' '''''' ''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' '''' ''''''''''''''''''''''''''' '''''''''''''''' During 2010, ''''''''''''''''' '''''''' ''''''''''''''''''''''''' failed to deliver ''''''''''''''' ''''''''' '''''' ''''''''''''''''' to NSPI '''''''''''''' ''''' '''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''''''' '''''' '''''''''''''''''' '''''''' ''''''' '''''''''''' '''''''''''' '''''''' ''''''''''''''''''''' ''''''''''''''' ''''' ''''''''''''''''''''' ''''''' ''''''''''''''''' ''''''''''''''''''''' ''''' '''''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''' '''''' '''''''''''''''''' '''' '''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''''' '''''''''''''''''''''''''' ''' '''''''''''''''' '''''''''''' ''''''' ''''''''''''''''' '''''''''''''''''''''' '''''''''''' ''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''' '''' ''' ''''''''''' '''''''''''' '''''''' ''''''''''''''' '''''''''''' ''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''''''''' '''''''''''''''' '''''''''' ''''''' '''''''''''''''''''' ''''''''''''' '''''''''''' ''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''' ''''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''''''' ''''' ''''''' ''''''''' ''''''''''''''''' ''''''''''''''''' '''''''''''' ''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''' ''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''' ''' '''''''''' '''''''''''''''''' ''''' ''''''''''''''''''' ''''''' '''''''''''''''''''''''''''' ''''''' ''''''' '''''''''''''''''''''' As of the end of the Audit Period, this issue remained unresolved.

d. Force Majeure No supplier provided any solid fuel-related force majeure declarations to NSPI during the Audit Period.

e. Terminations NSPI did not terminate early any solid fuel contracts during the Audit Period.

f. Renegotiations, amendments or extensions NSPI negotiated new terms under existing contracts ''''' '''''''''' ''''''''''''''''''' during the Audit Period. '''''' '''''' ''''''''''''' ''''''''''''''''' ''''' '''''''''''' '''''''''''' ''''''''' '''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''' '''''' '''''''''''' '''' '''''' '''''''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' ''''''' '''''''''''' ''''' '''''''''''''''''''' ''''''''''''' ''''''' '''''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''' ''''''''''''''''' ''''' ''''''''''''''' '''''''' '''''''''' '''''''''' '''''''' '''''''' '''''''''''''''''''' ''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''''''''''' '''''''''' '''''''''''''''''' ''''' ''' ''''''''''''' ''''' '''''''''''' ''''''''''''''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''''' '''' '''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''' '''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''' ''''''''''''''''''



'''''''''''''''''''''''' '''' '''''' '''''''''''''' ''''''''''''''' ''''' ''''''''''''' '''''''''''''' ''''''''' '''''''''' '''''''''''''' ''''''' ''''''''''''''' '''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''' ''''''' '''''''''''''''''' '''''''''''''''''' ''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''' '''''''' '''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''' '''''''''''' ''''''''''' ''''''' ''''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''''' ''''' ''''''' '''''''''' '''''''''''''''''' ''''' ''''' '''''''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''' ''''' ''''''' '''''''''''''' ''''''''''''''''' '''''' ''''''''''''' ''' '''''''''''''''''''' '''''''''''''''''''''''''' ''''' ''''''' '''''''''''''' ''''''' '''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''' '''''''''' '''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''' '''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''' '''''' ''''''''''''''' '''''''''''' ''''''''' '''''''''''''''''''' '''''''''''' ''''''' '''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''' '''' '''''''''''''''''' '''''''''' '''''''''' '''''''''''''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''' ''''''''''''''' '''''''' '''''''' '''''''''''''''''' ''''''''''''''''''''''' ''''''''''' ''''''' ''''''''''''''''''' '''''''''' '''''''''' '''' '''''' ''''''''''''''''''' ''''''' '''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' ''''' ''''''' '''''''''''''' ''''''''''''''''''''''''''''''' '''''''''''' '''''''' ''' ''' ''''''''''''''''' ''''''''''''''' '''' '''''''''''''''''' ''''' '''''''''''''''''' ''''' '''''''' '''''''''''''' ''''''''''''''' ''''' ''''''''''''' ''' ''''''''''''''''' ''''''''''''''''''''''''''' '''' ''''''' '''''''''''''''' '''''' ''''''''''''' '''''''''''''''''''''''''''''''' '''''''''''' ''''''''''' ''''''''''' '''''''''''''''''' '''''''' ''''''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''' '''''''''''''''' '''''''' ''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''' ''''' '''''''''' '''''''''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''' '''''''''''' ''''''''''''''''''' ''' ''''' '''''''''''''''''''''''' '''''' '''''''''''''' '''''''' '''''''''''''''''''''''''' ''''''''' '''''''''''''''''''' ''''' '''''''''''''''' '''''' '''''''''''''''''' ''''''''''' '''''''''' ''''''' ''''''''' ''''''''''' ''''''''''''' '''''''''' '''''''''''''''' ''' ''''' ''''''''''' '''''' '''''''''''' ''''' ''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''

9. Environmental

a. Limits NSPI fuel procurement and management must consider the limitation of emissions in a manner that will comply with government limits on emissions from thermal (coal, oil and natural gas-fired) generating stations. These regulations consisted of annual limits on emissions of CO2, SO2, NOx and Mercury (Hg). The next table compares annual limits and actual emissions for the Audit Period. The caps operate as system-wide caps, without specific limits on emissions from individual generating units. During the Audit Period, NSPI received no citations or government authority contentions or investigations of environmental non-compliance related to fuel use or waste storage and disposal from NSPI power generating stations.

Annual Environmental Emissions Item Measure 2010 2011

CO2 Limit See explanation below See explanation below Actual 9,250,254 tonnes 8,569,186 tonnes

SO2 Limit 72,500 tonnes 72,500 tonnes Actual 61,904 tonnes 64,812 tonnes

NOx Limit 21,365 tonnes 21,365 tonnes Actual 18,230 tonnes 18,013 tonnes

Mercury Limit 110 Kg 100 Kg Actual 81.5 Kg 94.6 Kg

A significant change in Mercury emissions occurred in July 2010. The 2010 Mercury cap started the year at 65 Kg; the Nova Scotia government changed the cap to 110 Kg in July. Subsequently, the emissions cap will continue on a reducing trend, leading to an ultimately much stricter 35 Kg/year target for 2020. For 2011 and 2012, the cap is 100 Kg; for 2013 it is 85 Kg; 2014 it is 65



Kg; and for 2020 it is 35 Kg. NSPI must by the year 2020 make up for any emission over 65 Kg per year in the years 2010 through 2013. The emissions cap for CO2 is 19.22 million tonnes for the years 2010 and 2011. NSPI has, however, set its own internal targets for CO2 at 9.70 million tones for 2010 and 9.52 million tonnes for 2012. Further reductions in the future are scheduled for SO2. The cap will remain at 72,500 tonnes per year for each year through 2014, and then will reduce to 60,900 tonnes in 2015, with a further reduction to 36,250 tonnes in 2020. The cap for NOx will continue at 21,365 tonnes for each year through 2014, and then will reduce to 19,228 tonnes in 2015, and in 2020 the cap will further reduce, to 14,955 tonnes.

b. Strategy The significant change in mercury regulations occurring in July 2010 caused a change in fuel procurement and fuel management strategy for NSPI. The following discussion relates to these changes as they affected operations and fuel supply for the Lingan Station. As of July 2010, the Lingan Station could begin using increased quantities of the lower cost, high sulphur, high mercury domestic coal from the Prince Mine in Nova Scotia. This domestic coal could now be used for three reasons: a) ''''''''' ''''''''''''''''''''''''''''''''''', b) its mercury content would now cause station emissions to fall below the new and higher mercury emission limits, and c) importantly, NSPI assumed that re-introduction of this high sulphur domestic coal would improve precipitator performance sufficiently to avoid derates at the Station due to exceeding stack opacity limits. NSPI knew that precipitator performance improved as sulphur content of the coal increased. NSPI had been using some Prince coal at Lingan in earlier years and during the earlier months of 2010. The NSPI Plant Performance Presentation for Nov-Dec 2010 stated that a stack SO2 of 1,000 ppm or higher was required for favorable precipitator performance. The presentation acknowledged that Prince coal was not achieving minimum level. NSPI understood these facts to be true even before the July change in mercury regulation. NSPI began to use even more Prince coal after the July 2010 easing of the mercury standard. It continued to fail to produce stack SO2 levels of 1,000 ppm. The precipitator was operating with no margin remaining to meet stack opacity limits. Thus, any negative variation in operation would cause a violation of opacity limits. NSPI decided to operate with no opacity margin in part because the average Btu content of coal at Lingan fell below the levels for which the precipitator was designed. Coal flows therefore were running at a high level, in order to achieve necessary station output. The known history of coal use and its relationship to operational performance at Lingan, call into question NSPI’s failure in the July/August 2010 period to procure additional coals that would have conformed more closely to Lingan design conditions. Such coal would have had the higher sulphur content necessary to improve precipitator performance, thereby providing some stack opacity margin. Such a margin would have prevented operation at clear and continuing risk of opacity limit violation. Liberty believes that the drastic changes in fuel management personnel contributed to NSPI’s lack of action. Chapter One (Organization, Staffing and Controls) of this report discusses those changes in more detail.



Liberty undertook a reasonably extensive review of FERM documents related to solid fuel requirements during the Audit Period, which included 2010. That review disclosed no expression of concern about opacity issues at the Lingan Station or addressing the use of solid fuels other than from the local Prince Mine. This lack of attention to the issue is surprising because NSPI was using Prince coals at Lingan even early in 2010. NSPI also acknowledged the precipitator SO2 levels of 1,000 ppm and higher. The merits of considering alternate coals to address the problem appear obvious. From April through the end of November 2010, NSPI did not have a full time Solid Fuel Manager. The previous manager departed in April 2010. The new manager (now called the Senior Manager Fuels Strategy and Performance), addressed her FERM responsibilities part time starting in August; she began to do so full time on November 30, 2010. NSPI advised the NSUARB by letter of February 14, 2011 that:

Opacity related deratings resulted in the loss of 21% of the forecasted generation for Lingan in December. These deratings occur when unit generation is reduced in order to maintain stack gas opacity levels within the limits outlined in the plant’s operating permit.

This discussion focuses on fuel characteristics, not increased rainfall (as will be discussed later), as the reason for Lingan derates. NSPI’s April 2011“Plant Performance Overview, Nov-Dec 2010” document also observed that, “In February and onwards, the arrival of mid sulphur Northern Appalachian (NAPP) coal, and mid sulphur Illinois Basin coal, has eliminated opacity issues at Lingan.” A proper focus on the relationship between Lingan operational and solid fuel supply issues would have brought the problem-solving, high sulphur coals to the plant much sooner. NSPI had at least since July 2010 to address the issue; the derates occurred in December 2010. Operation on coals more suitable than those from Prince would have permitted the Lingan precipitator to perform normally, rather than at the edge of opacity limits. Reasonable and prudent planning would have effectively mitigated the risks of a Lingan derate that NSPI bore. The only discussion about operations in the November RFP process that resulted in procurement of the coal '''''''''''' ''''''''''''''''' concerned Point Aconi. The issue raised concerned the need to procure ''''''''''''''' ''''''''' ''''' ''''''''''''''''''' ''''''''''''' ''''''''''''' '''''''''''''. We found no indication of discussion or strategy for addressing Lingan opacity. NSPI simply has left no record of having addressed the possibility of resolving Lingan opacity issues through procurement of alternate coals. The arrival of '''''''' '''''''''''''' ''''''''' in February thus became fortuitous because NSPI had actually procured it for use at Point Aconi. NSPI’s responses to our audit data requests first raise the issue of rain and wet coal as causes of the Lingan derates. Significant amounts of December rain did fall. The potential for high precipitation, however, comprises an important reason why operating with an appropriate margin below opacity limits constitutes prudent management. The more contemporaneous documents referred to above support the view that coal, not rain, underlay the Lingan derates. Moreover, if rain and wet coal were problems at that time, then NSPI responded to them illogically in any event. NSPI data shows Lingan was burning in December a blend including about ''''' '''''''''''''''' ''''' ''''''''' ''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''''' '''''''''''''' '''''''''' Had NSPI faced a paramount need to



increase fuel flows due to moisture, the question begged is why NSPI did not take PRB coal from the blend, in order to increase average Btu content and thereby reduce coal flows, in order to offset moisture from the rain. Coal such as that provided ''''''''''' '''''' ''''''''''''''' (and successful in resolving opacity problems) would have provided two important benefits: (a) mid sulphur coal’s beneficial impacts on precipitator performance, and (b) high Btu content to reduce coal flows, and thus offset additional coal moisture due to increased rainfall. The average Lingan coal Btu content during December 2010 was 11,285 Btu/lb. On average ''''''''''''''''' ''''''''''''''''''''''' 13,000 Btu/lb. Liberty has calculated that this derating cost the Company $3.65 million because of the more expensive fuel, used at other generating stations, which had to be used to compensate for the 21 percent Lingan deratings in December 2010.

10. Transportation Nova Scotia is remotely located with respect to the world’s major solid fuel market supply regions. This factor makes ocean-freight the Company’s primary delivery method. NSPI receives approximately '''''''''''''''' '''''''' ''''''''''''''''' of its solid fuel by ocean-going vessels. The balance of solid fuel deliveries come from domestic coal, which arrives by truck from coal mines near the generating stations. Ocean-going vessels unload solid fuel for NSPI at either of two unloading ports in the northern part of Nova Scotia. Both lie in the Cape Breton area. The International Coal Pier in Sydney on the northern shores of Cape Breton can accommodate self-unloading vessels. The Point Tupper Marine Terminal located in Point Tupper on the Strait of Canso, can accommodate self-unloading vessels and gearless Panamax vessels. Deliveries to the International Coal Pier generally go to the Lingan and Pt. Aconi generating stations. Deliveries to the Point Tupper Marine Terminal are generally destined for the Pt. Tupper and Trenton generating stations. Long term supply agreements with a number of different marine freight providers cover marine freight services for solid fuels delivered to NSPI during the Audit Period. The next subsections discuss them.

'''''''''''''' ''''''' ''''''''''''''' The agreements with '''''''''''' '''''''' ''''''''''''''' resulted from an NSPI market solicitation conducted on July 26, 2006. The RFP solicited proposals for seven cargoes per year for 2008, 2009 and 2010, and solicited freight rates for multiple load ports and discharge ports. The solicitation went to a list of nine firms. '''''''''' owner/operators and ''''''''' brokers responded. At the time of the solicitation, NSPI had ''''''' ''''''''''''''''' ''''''''''''''' of marine freight open for 2008, ''''''' '''''''''''''''''' ''''''''''''''' open for 2009, and ''''''' ''''''''''''''' '''''''''''''''' open for 2010. Part of NSPI’s objective in conducting this solicitation was to broaden its marine freight portfolio, which at the time only ''''''''''''''''' '''''''''''. The Company considered it important to add freight providers, in order to provide additional competition as well as operational flexibility in scheduling supply. ''''''''''''''''''''' '''''''''''''''' '''''''''' offered the advantage of capability to deliver from multiple load ports and to discharge at each of NSPI’s two facilities.



NSPI evaluated the bids on a bunker adjusted basis to reflect the total delivered cost. No one freight provider offered ''''''' ''''''''' '''''''''''' ''''''' '''' '''''''''' '''''''''''''. The '''''''''''' '''' '''''''''''''''' offers combined to represent the lowest rates on 70 percent of the load ports. ''''' '''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''' '''''''' ''''''''''''''' '''''''' ''''''' ''''''''''''''' '''''''''''' '''''''' '''''''' ''''''''''''''' '''''''''''''' ''''''''''' '''''''''' ''''''''''' '''''''''''''''''''''' ''''''''''''''' NSPI’s Fuel Strategy Table (FST) approved a procurement under which NSPI committed to '''''''''''' '''''''''' '''''''''''''''''' '''''''' '''''''' ''''''''''''' '''' ''''''''''''''' '''''''''''''''' '''''''''' ''''''''''' ''''' '''''''''''' '''''''' '''''''''''''''. This commitment covered '''''' ''''' '''''' percent of the open positions for Point Tupper Marine Terminal (PTMT) in 2008, 2009 and 2010. It was permitted to expire at the end of 2010. These percentages equate to ''''''''''''''''''''''''''''' '''''''''''''' per year in total volume. EVA conducted its own evaluation of this solicitation, and concurred with NSPI’s findings and decision.

''''''''''' ''''''''''''''''''''''' NSPI had in 2007 an existing ocean freight agreement with ''''''''''' '''''''''''''''''''''''''''' '''''''''''''' '''''' '''''''''''''''''' '''''''' of freight per year, continuing through ''''''''''''''''''''''''' '''''''' ''''''''''''. This agreement represented ''' ''''''''''''' portion of NSPI’s overall requirements. '''''''''''''''' '''''''''' ''''' '''''''''''''''' '''''''''''''''''''''' ''''''''' '''''' '''''''''''''''' ''''' ''''''' ''''''''''''' '''''''' '''''''''''''''''''''''' ''''''''''''''''''' ''''' ''''''' ''''''''''''''''' ''''''''''''''' The configuration of the shore equipment at the International Pier causes NSPI to require belted self unloading vessels for solid-fuel deliveries to this pier. NSPI began to renegotiate a multi-year freight agreement with ''''''''''' ''''' '''''''''' for shipments in the years ''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''' '''''''''''' ''''''''''''''''' '''' '''''' ''''''''''''''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''' ''''' '''''''''''''''''''' ''' '''''''''''''''' ''''' ''''''''''''' ''''' '''''''''''' ''' ''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''' ''''''' ''''' ''''' '''''''''''''''''''''''''' '''''''''''' ''''''' '''''''''''''' '''''''''' '''''''''''''' '''' '''''''''''' ''''' '''''''''''''' '''''''''''''''''''' ''''''''''' '''''''''''''' '''''''' '''''''''''''''''''' '''''' ''''''''''' '''''''''''''' ''''' '''''''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''' '''''''''''''''''''''''. The FST approved, on September 22, 2008, '' ''''''''''''''''''' ''''''''''''''' agreement with '''''''''' ''''''' '''''''' following volumes:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋

Prices under the agreement ranged from ''''''''''''''''''''' '''' ''''''''''''''''''''''', as a function of the year, load port, and discharge port. NSPI demonstrated that such rates were lower ''''''''' '''''''' '''''''''''''''''''' '''''''''''''' ''''' ''' ''''''''''''' '''''''''''' There were a number of additional reasons in support of the agreement reached:

• The agreement provides price stability in view of forecasts for a volatile future market ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋

∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋

∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ EVA reviewed NSPI’s analysis, and evaluation, and concurred with NSPI’s decision.



c. '''''''''''''''''''' ''''''''''''''''''' ''''''''''' '''''''''' '''''''''''''''' NSPI issued an RFP on June 30, 2008 for procurement of low sulphur coal the utility required for '''''''''''''' ''''''''''' ''''''' '''''''''''''. '''''''''''''' ''''''''''''' coal from '''''''''''''''''''' '''''''''''' offered the least cost coal on a total evaluated cost basis. Part of this evaluation included freight prices from '''''''''' '''''''''''''''''' '''' '''''''''''''''' ''''''''' ''''''''''''''''' ''''''' '''''''''''' ''''''''''''''. NSPI entered into an agreement with '''''''''' ''''''''''''''''' '''''''' ''''''' provision of ''''''''' '''''''''''''''' ''''' '''''''''''' '''''''' '''''' ''''''''''''''''' '''' ''''''''' ''''' '''''' ''''''''''' '''''''''' ''''''''' ''''''''''''. The load port was to be Superior, Wisconsin, and the unload port was to be '''''''''''' '''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''''''''''''''''''''' '''''''''. The lowest evaluated cost awarded to ''''''''''''''''''' '''''''''''' '''''' '''''''' ''''''''''' '''''''''' ''''''''''''''''''''''''''''' was based on transportation of the coal by '''''''''' ''''''''''''''' '''' ''''''''''' '''''' '''''''''''' ''''' '''''''''''' '''''''''''''''' '''''''' '''''''''''' '''''''' '''''' '''''''''''''''''' '''''''' ''''''' '''''''' '''''''''''''''''''''' ''''''''''' ''''' ''''''' '''''''''''' ''''''''' These rates were to be adjusted at the beginning of 2010 and 2011 by the percentage change in the annual average of '''''''' '''''''''''''''''''''' '''''''''''' ''''''''''''' '''''' ''''''''''''''''''' '''''''' ''''''''''''''.

''''''''''''''''''' ''''''''''''' On June 14, 2010, the FST approved the procurement of low sulphur coal required for '''''''''''' '''''''''''''''' '''''''''''' '''''''''''''' '''''''''''' ''''''''' '''''''''''' ''''''''''''''''''' '''''''''''' offered the least cost coal on a total evaluated cost basis. Part of this evaluation included freight prices from '''''''''''''''' '''''''''''''''' ''''' ''''''''''''''' ''''''''' ''''''''''''''''' '''''''' '''''''''''' '''''''''''''' Consequently, NSPI entered into an agreement with '''''''''''''''''' '''''''''''''''' for provision of '''''''''' ''''''''''''''' '''''''''' cargos of coal for ''''''''''. The pricing agreed to for '''''''''''' ''''''' '''''''''''' '''''''''''''''''' was '''''''''''' ''''''''''''''''''''' ''''''' ''''''''' ''''''''''''''''''''''' ''''''' '''''''''''''''''''''''''''' '''''' '''''''''''''''''. For Sydney the pricing was ''''''''''''' '''''''''''''''''''''''''' ''''''' ''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''''''''' '''''''' '''''''''''' and beyond was awarded to '''''''''' '''''''''''''''''' '''''''''''''' ''' ''''''''''''''''''''' '''''''''''''''''''''''''.

C. Conclusions

1. NSPI’s unit prices for solid fuel remained relatively stable during the Audit Period, and generally consistent with the forecast.

NSPI solid fuel prices for fuel consumed in generating stations were consistent with the forecast for the majority of the Audit Period. Except for a spike in prices early in the Audit Period, prices remained relatively stable, in the range of '''''''''''''''''''''''' for the last 20 months of the period. The early Audit Period’s higher solid fuel prices resulted principally from higher consumption of low sulphur international solid fuels prior to the change in mercury regulations. Then followed decreased consumption of the most expensive international solid fuels, because of relaxation of mercury emission standards and because of decreases in natural gas prices, which continued for the balance of the Audit Period.

2. NSPI’s solid fuel consumption during the Audit Period was less than forecast. Solid fuel consumption was less than forecast for a number of reasons. They included the age of the forecast, which was filed in late 2009, but was based on data generally recorded in late July 2009. Since the time of the forecast, conditions changed in several respects. A contributing factor that existed for the entire Audit Period was the continued, and unexpected shift in the relationship between solid fuel prices and natural gas prices. The shift was severe enough to make it often more economical to burn natural gas instead of to burn coal. The other major factor was loss of a major industrial load in August 2011.



3. NSPI acted promptly to procure '''''''' ''''''''''''''''''' coals from domestic resources upon recognizing temporary easing of mercury emission regulations.

Domestic coal '''''''''''' '''''''''''''' '''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''' '''''''''. It also, however, has a high sulphur content. High sulphur in coals interferes with the mercury capture capabilities of the activated carbon sorbent used for mercury capture. NSPI planned to end the use of high sulphur domestic coal in 2010, in order to meet Provincial mercury emission limits ''''''''''''' ''''''''''''''''''''''''''''. The government, however, temporarily eased those limits, giving NSPI the ability to burn ''''''''''''' ''''''''' ''''''''' domestic coal during the Audit Period. NSPI reacted promptly to knowledge about changes in the emission limits. NSPI '''''''''''''''''''' ''''''''' domestic coal contract and it entered '''''' ''''''''''''''''''''' ''''''''''

4. NSPI’s hedging program for coal has had a stabilizing and beneficial effect on coal prices.

NSPI found itself faced in a number of situations with offers requiring prices based on published indices, such as ''''''''' '''' '''''' '''''''''' '''. Typically these coals have been '''''''''''''''''''''''''' '''''''' ''''''''''''''' ''''''''''''', which were purchased during the previous audit period, and '''''''''''''''''' '''''''''''''''''''' ''''''''''' of the current Audit Period. Such index pricing introduces volatility and uncertainty at levels not typical of earlier markets, where firm pricing prevailed. NSPI fixed the prices under such contracts through “fixed for floating swaps.” Appendix B of the Fuel Manual permits the use of such financial instruments. NSPI transacted with a third party (''''''''''''''''''' ''''' ''''''''' ''''''''''' ''''' ''''''''''''' '''''''''''''') in these swaps, making them whenever it made a procurement that involved coal priced on the basis of indices. '''''''''''''' ''''''''''''''''' ''''''' '''''''' '''''''''''''''''''' '''''''''''''''''''''''''' '''''''' '''''''' ''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''' ''''''''''''''' ''''' ''''''''''''''''''''' ''''' '''''''''''' '''''''''' '''''' '''''' '''''''''''''''''''' ''''' '''''''' ''''''''''''''''' FERM presented a description and analysis of the effects of these swaps to the FST for approval. NSPI did not enter this swap to produce swaps, but to mitigate the volatility of costs, which flow through the FAM. The nature of the swaps requires payments from or to NSPI, based on market price fluctuations. NSPI netted some '''''''' ''''''''''''''''' from these swaps during the Audit Period. That amount has offset customer costs by the net amount received by NSPI.

5. NSPI maintains particularly complete and careful documentation supporting its solid fuel procurement decisions; it demonstrates the propriety of contract selections made during the Audit Period.

NSPI has dedicated considerable effort to establishing a comprehensive set of documents that support its fuel procurement process. The documentation captures in one location all of the necessary support for each procurement, and generally exceeds the scope and quality we have observed at other electric utility fuel procurement organizations. Our review of major procurement decisions found them to be based on comprehensive, accurate, and convincing analysis.

6. NSPI performed well in adjusting to external conditions in its efforts to identify fuel blends that optimize Point Aconi operating needs and cost competitiveness.



Late 2010 increases in market prices for Petcoke brought into question the optimal fuel blends for the Point Aconi Station. In addition, decreasing coal consumption due to increasing use of natural gas as a fuel created additional room in the applicable sulphur emission cap. The circumstances led NSPI to observe the potential for use of additional quantities of lower cost mid sulphur coal at Point Aconi (by blending with Petcoke), or at other generating stations. NSPI undertook a structured bidding and evaluation process, which resulted in the November 2010 award of a mid sulphur coal supply agreement to '''''''''''''''' ''''''' ''''''''''''''' '' '''''''' ''''' ''''''' '''''''''''''''''''''''' over ''' '''''''''''' '''''''''' ''''''''''''''' from '''''''''' through '''''''''''''. This high quality ''''''''' ''''''''''''''''' ''''''''''''''''' coal from '''''''''''''''''''''' ''''''''''''''''''''''' '''' '''''' '''''''''' replaced higher cost, low sulphur coal in the fuel blends at Point Aconi. The ''''''''''''''''''''''''''''''' '''''''''' quality also permitted its use in increasing proportions as the cost of petcoke rose. Moreover, ''''''' ''''''''''''''' '''''''''''''' '''''''''' quality allows its use at other stations, in the event that continuing increased natural gas use creates room in the Company’s sulphur cap.

7. NSPI solid fuel procurement during the Audit Period was at slight, but acceptable, variance with the portfolio requirements as established in the NSPI Fuel Manual.

The NSPI Fuel Manual sets forth certain parameters for the NSPI solid fuel portfolio. These bands seek to ensure balance among the many factors involved in overall solid fuel management, including fuel types, fuel suppliers, contract terms, and pricing structures. NSPI’s portfolio fell within the bands applicable to the diversity objectives of Country Risk, Supplier Risk and Mine Risk. The portfolio fell slightly outside the bands applicable to contract length. However, overall contract diversity met the intended parameters of portfolio design. The percentages comprising the bands use solid fuel contract base quantities. Some NSPI contracts have plus or minus option percentages. Exercise of the minus options could bring the percentages down a few percentage points. Moreover, forecasting solid fuel requirements over the Audit Period has been difficult. Forecasts have to change rapidly in markets such as those seen in the coal and natural gas industry recently. By contrast, once fixed, contract obligations substantially affect the ability to respond immediately. NSPI has seen its ongoing reviews of solid fuel requirements falling regularly in response to loss of load and natural gas pricing favorability, as discussed earlier. Reducing forecasts tend to drive already contracted percentages higher. The degree to which this phenomenon has occurred make NSPI’s moderate gap relative to the duration bands understandable and acceptable. Nevertheless, there remains a need for vigilance on NSPI’s part, in order to preserve needed flexibility to respond to changing circumstances, while continuing to fix a large enough portion of its portfolio to mitigate delivery and price risk.

8. The pendency of discussions about '''''''''' '''''''''''' to provide expected deliveries of ''''''''''''''' ''''''', make conclusions about the circumstances premature. (Recommendation #1)

In ''''''' '''''''''' '''''''''''''''' ''''' ''''''''''', NSPI entered into a contract with '''''''''''' '''''''''''''''''''''''''' ''''''''' ''''''''' for delivery of '''''''''''''''''''' '''''''''' ''''' '''''''''' in '''''''''''' ''''''''' '''''''''''''''''' '''''''' of coal per year from ''''''''''''' '''''''''''''''''' '''''''''''' with delivery from '''''''' '''''''''''''''''''' ''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''''''''''''''' ''''' '''''''''''''''''''''''''' ''''''''''''' of an inability to meet delivery obligations, stating that only ''''''''''''''''''' '''''' '''''' ''''''''' could be delivered in '''''''''' '''''''' ''''''''''''' '''' ''''''''''''.



NSPI and '''''''''''' remain in discussions about appropriate remedy. The pendency of a resolution makes evaluation of the situation premature.

9. The late 2010 deratings due to opacity limitations at Lingan resulted from NSPI’s failure to act reasonably to avoid them; customers experienced higher FAM costs as a result. (Recommendation #2)

NSPI did not act in a timely fashion in 2010 to procure coals that would have mitigated the need for Lingan derates due to precipitator performance and opacity issues. The Lingan precipitators were operating at the margin of performance with respect to stack opacity limits. July 2010 changes in Provincial mercury emissions limits permitted NSPI to use increased quantities of the lower cost, high sulphur, high mercury domestic coal from the '''''''''''' ''''''''''''''' '''''''''''' Use of such coal would '''''''''''''' ''''''''''''' while meeting mercury limits. It would also improve the performance of precipitators, which improves with increasing coal sulphur content. NSPI discussed in the months following July 2010 the use of alternative coals, and procured some. We found no record of discussion about doing so at Lingan, however, even though NSPI already knew that the units had little margin for continuing to meet opacity limits. Lingan was also using coals well below those for which the precipitators were designed. Lingan experienced a 21 percent derate in total power output in December 2010. The failure to continue to meet opacity limits caused that derate. NSPI replaced the lost Lingan output with more expensive generation. The use of other available coals would have mitigated the problem at Lingan, but NSPI did not procure them (or even consider their procurement) on a timely basis. In late November 2010, NSPI procured ''''''''' '''''''''''''''''' '''''''''' '''''''''''' ''''''''''''''''''. NSPI did not even intend this purchase for Lingan, but for Point Aconi. It arrived in February 2011, at which time NSPI recognized its value at Lingan. NSPI began to do so, stating later that it had “eliminated opacity issues at Lingan.” NSPI’s failure to act more timely to address the opacity limit threats caused by operating Lingan at the edge of capacity limits caused fuel costs to increase by $3.65 million in December, 2010. We believe that the extraordinary level of personnel movement in FERM contributed substantially to the failure to act properly. From April through the end of November 2010, NSPI did not have a full time Solid Fuel Manager and many other positions suffered from personnel movement at that time.

10. NSPI effectively procured necessary marine freight services for transportation of solid fuels to its generating stations.

The contracts ''''''''' '''''''''''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''' for marine freight services for the Audit Period were effective for a number of reasons. In the case of the agreements with ''''''''''''' ''''''''' '''''''''''''''', it was effective to divide the freight requirements between '''''' '''''''''' lowest price providers, because '''''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''' ''''' ''''' '''''' '''''''''' '''''''''''' ''''''''''''''''' '''''''' '''''''''''''' ''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''' allowed for



the optimization of freight rates as future supply was purchased, and load ports were determined. '''''''''' '''''''''' '''''''''''''''''''''' also afforded more operational flexibility in scheduling supply. In the case of the negotiated agreement with '''''''''' '''''''''''''''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''''''''''''' was a logical outcome in a global market that offered '''''''' ''''''''''''''''''' ''''' ''''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''. It provided price certainty in a market of volatile freight rates; the multi-year commitment for a portion of freight requirements was consistent with the portfolio strategy; and minimum volumes were such that NSPI would still be able to take advantage of ''''''''' '''''''''''''''''''' ''''' '''''''' '''''''''''''''' ''''''''''''''''' '''''''' '''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''

In the case of the agreements with '''''''''' ''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''', the agreements were effective both in terms of being part of the lowest delivered price for coal from '''''''' '''''''''''''''''' '''''''' ''''''''''''' ''''' ''''''''''''''''''''''', but also in establishing the new delivery route for coal to NSPI via ''' ''''''''''''' ''''''''''''''''

D. Recommendations

1. Defer for future consideration the final resolution of the '''''''''''''''' '''''''''''''''''' '''''''''''' inability to meet expected coal deliveries to NSPI. (Conclusion #8)

NSPI and '''''''''''''' '''''''' ''''''''''''''''''' '''''''''''''''''''''' the appropriate ''''''''''''''''''''''' ''''' ''''''''''''''''' inability to meet coal contract obligations to NSPI for ''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''''''' Once such discussions have been completed, and there is a final agreement between the parties, then such agreement can be analyzed for adequacy.

2. Deem fuel costs associated with the Lingan derates in December 2010 as imprudently incurred; these costs amount to $3.65 million for that portion of the derate period that fell within the Audit Period. (Conclusion #9)

NSPI experienced the derates because the station precipitators were operating at the margin of performance, and could not tolerate any changes in coal quality, coal flow rates, or additional moisture in the coal. When above normal amounts of rain were experienced in December 2010, the station had no choice but to derate in order to comply with stack opacity limits. If NSPI had taken action to make the appropriate alternative coals, there would have been the necessary margin in stack performance to have continued operation at normal power levels without derating. The additional NSPI operating costs to replace the 21 percent of generation lost by the derating of Lingan amounted to $3.65 million. These costs resulted from the use of stations more expensive to operate.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) V. Gas & Oil Procurement and Contracts

July 9, 2012 Page V-1 The Liberty Consulting Group

V. Gas & Oil Procurement and Contracts

A. Background

1. Natural Gas NSPI bought natural gas under ''''''''' ''''''''''''''''''''''' ''''''''''''''''''''' ''''''' '''''''''''''' '''''' '''''''' '''''''''''' '''''''''''''''''' ''''''''' ''''''''''''' ''''''''''''''''''''' ''''''''' '''''''''' ''''''''''''''' '''''''''''''''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''''' '''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''''' ''''''' '''''' '''''''''''' '''''''''''''''''''''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''' '''''' ''''''''''''''''''''' '''''''''''''''''''''''''''' '''''' '''''''''''''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''''' ''''''' ''''''' ''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''''''' ''''''''' '''''''''''''''''' '''' '''''''' ''''''''' ''''''''''''''' ''''' ''''''''''''''''' ''''' '''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''' ''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''''' '''''''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''' '''' ''''''''''''' '''''''''''' '''''''' '''''''' ''' '''''''' ''''''''''''''''' ''''' '''''''''' '''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''' ''''''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' ''''''''''''' '''''''''''' ''''''''''''''''''''''' HFO was less expensive than gas as a fuel for the steam units at Tufts Cove for much of the ''''''''''''' '''''''''''' '''''''''''''''''''''''' ''''''''. NSPI therefore frequently burned HFO at Tufts Cove and resold the ''''''''''''' '''''''''''''''''' gas into the Northeast U. S. Market. Circumstances changed in 2003 with NSPI’s installation of the first of two gas-fired turbine generators at Tufts Cove. The Company added a second at Tufts Cove in 2005. These units used only gas. They took some of the volume available under the ''''''''''''' '''''''''''''''' ''''''''''''''''''''. The two turbines together burned about 15,000 MMBtu/day, reducing the ''''''''''''' '''''''''''''''''' gas available for resale by the amount of their burn. NSPI selected purchasers for its “excess” or resale gas through annual RFPs held a few weeks before the start of a new contract year (November 1 through the following October 31.) NSPI conducted the last of these competitions in September 2009. It covered deliveries for November 1, 2009 through October 31, 2010. ''''''''''''''' '''''''''' '''''''' '''''''''''''''''''''''''''. '''''''' ''''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''''' '''''' '''''''''''''''''''' '''''''' '''''''''''' '''''''''''' ''''''''''''''' '''' ''''''''''' ''' '''''''''''''''' ''''' ''''''''''''''''''''' '''''' ''''''''''''''''' '''''''''' ''''''''''''''''''''''' '''''' '''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' ''''' '''''''''' '''''''''''''''''''''' ''''''''''' '''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''''''' ''''''''''' ''''''''''''' ''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''' ''''''''' '''''''''''''''' '''''''''''''''''''''''' '''' ''''''''' '''''''''''' ''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''' '''' ''''''''''' '''''''''''''' ''''''''''''''''''''' ''''''' '''''''''''''''' '''''''''''''''''''''''''''' '''' ''' '''''''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''' ''''''''''' ''''''''' ''''''' '''''''''''''' '''''''''''''' ''''''''' '''''' ''''''''''''''''' '''''' ''''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''' ''''' '''''''''''''''''''' '''' '''''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''''' ''''' ''''''''' ''''''''''''''' ''''''''''''''' ''''''''''''''''''' ''''''''' '''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''' ''''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''''''''' '''' ''''''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''' '''''''''' ''''' ''''''' ''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''' ''''''' '''''''''' ''''''''''''''''''''''''''''''' ''''''''' '''' ''''' ''''''''''''''''' ''''' '''''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''' '''''''''''''''''''''''''' '''' ''''''''''' '''''''''''''''''' '''''''''''''''''''' '''''' ''''''''''''''' '''''' ''' ''''''''''''''' ''''''''''''''''' ''''' '''''''''''''''' '''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''' '''''''' ''''''''''''''' '''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''' ''''' '''''''''''''''''''''''' '''''''''''''' '''' '''''''''''''''''''''' ''' ''''''''''''''''''''' '''''''''''''''' '''''' ''''''''''''''''''''''' ''''''' '''''''' '''''''''''''''''' '''''' '''''''''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''' '''''''''''' '''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''' '''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''' '''''' ''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''' ''''''''''''' '''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''' '''''''''''''' '''' ''''''''''''''' '''''''''' ''''' '''''''''''''''' '''''' ''''''''''''''''''''''' ''''''''''' '''''''''''''''''''' '''''''''''''''''' ''''''''''''' ''''' ''''''''' ''''''''''''''''''''''''''' ''''' ''''''''''' ''''''''''''''''''''' '''''''''''''''''' ''''' '''''''''''''''''''''' ''''''' ''''''''''''''''' ''''' '''''' ''''''''' ''''''''''''''''''''' '''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''



''''''''' '''''''''' '''''''''''' ''''''''' ''''''''''''' '''''''' ''''''' '''''''''''''''' '''''''''''' '''''''''''' '''''''''''''''''' '''' ''''''''''''''' ''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''' '''''''' ''''''' ''''''''''''''''' '''''''''' ''''''''''''''' ''''''''' ''''''''''''' ''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''' ''''''''' '''''''' ''''''''''''''''' '''''''' '''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''' '''''''''''' ''''''' ''''''''' '''''''''' ''''''''''' '''''''''''''''''''''''''''''''''''' ''''''''''''' ''''' ''''''''''''' ''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' '''''' '''''''''''''' ''''''''''''''' '''''' '''''''''' ''''''''''''''' '''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' '''''' ''' ''''''''''' ''''' '''''' ''''''''''''' '''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''' ''''''' ''''''' '''''' ''''''''''''''' '''''''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''' ''''''' ''''''''''''''''''' '''''' ''''''''''''' ''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''' '''''''''''''''' ''''''''''''''''''''' ''''' ''''''' ''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''' ''''''' ''' '''''''''''''''''''' ''''''''''''''''' ''''' ''' ''''''''''''' ''''''''''''' ''''''''''''' ''''''''''''''' ''''''''' ''' '''''''''''' ''''''''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''' ''''''''''' ''''''''''' ''''''''''''' '''''''''''''' '''''''''' ''''''' ''''''''''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''' '''''' '''''''''''''' '''''''''''''''' '''''''''''' ''''''''''' '''''''' ''''''''''''''''' ''''''''''' ''''' ''''''''' '''''''''''''''''''''' ''''''''' '''''''''' '''''''''''''''''' ''''''''''''' ''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''''''''''''''''''' '''''''''''''' '''''' '''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''''''' '''''''''''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''' ''''''''''''' '''''''''' '''''''' ''''''''''''''''' ''''''' '''''''''''''''''''' '''''''' '''''''''''''' ''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

''''''''' '''''''''''''''' '''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' '''''' ''''''''''''''''' '''''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''''' ''''' '''''''''' '''''''''''''''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''''''' '''''''''' '''''''''''''''''''''''' ''''''''''''''''''''' ''''''' '''''' '''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''''''' '''''' '''''''''''''''''''''' '''''''''''' '''''''''''''''''''''''' ''' '''''''''''''''' ''''' ''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''' ''''''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''' '''''' ''''' '''''''''''''''' ''''' ''''''''''''''' '''''''' ''''''' '''''''''''''' ''''''''' ''''''''''''' ''''' '''''' '''''''''''''''''''''' '''''''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''''''' ''''''' '''''''' '''''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''' '''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''' ''''''''''' '''''''''''''' '''''''''' '''''''''''''' '''''''''''''''''''''' ''''''''' '''''''''''' '''''''''''''''' ''''''' '''''''''''' '''''''''''' ''''''''''''' ''''''' '''''''''' ''''''''''''''''''''' '''''''''''' '''''''''' ''''''' '''''''''''''' ''''''''''''''''''' '''''' ''''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''' '''''''' '''''''''''' '''''''' '''''''''''''''' '''''''' '''''' ''''''''''''''''''''''''' ''''''''' '''''''''' ''''''''''''''''''''''''''''''' ''''''''' '''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''' ''''''''''''''' ''''''''''''''''''' '''''' ''''''''''''''''' '''''''''''' NSPI uses the North American Energy Standards Board (“NAESB”) standard form contract incorporating the Canadian Addendum. Confirmations (in the form prescribed by Exhibit A) cover individual trades. Resales make NSPI a creditor for contract purposes; it provides gas first and receives payment later. NSPI uses a Collateral Annex in these cases. NSPI attaches these documents to the procurement RFPs that it has issued, permitting offerors to propose changes. The prior audit found NSPI’s credit-evaluation and contracting processes insufficiently timely, with the effect of discouraging prospective counter-parties from participating in its gas-supply competitions. NSPI undertook an Audit Action item to include updated lists of its counter-parties in twice-yearly reports to the NSUARB on its gas-supply activities. The table below shows the counter-parties with whom NSPI had master agreements for gas transactions at the time of that report and the effective dates of those agreements.



'''''''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''''''''' '''''''' '''''''''''''''' ''''''''''''''''' '''''''''' '''''''''''''' ''''' '''''''''' '''''''''''''' '''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''''' ''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''''''''' '''''''' ''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''' ''''' ''''''''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''' '''' '''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''' ''''''' ''''''''''' ''''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''' ''''''''''''''' ''''''' ''''''''''' ''''''''''''' '''''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''' ''''' ''''''''''''

''''''''''''''''''''''' '''''''''' ''''''''''''''' '''''''''' ''''''''''' ''''''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''' '''''' '''''' ''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''''''''

'''''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''' ''''' ''' '''''''''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' ''''''''' ''''' ''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''' '''''''''''''''''' '''''' '''''''''''''' '''''''' '''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''' ''''''''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''''''' '''''' ''''''''''' '''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''

2. Heavy Fuel Oil NSPI has for some time used a requirements-type contract to buy heavy fuel oil (HFO). NSPI uses No. 6 fuel oil (sometimes referred to as “Bunker C”). This type of contract includes product-quality specifications, delivery requirements, and other terms and conditions, but not quantity. NSPI’s contract provides for delivery to the Company’s receiving facilities at Tufts Cove. NSPI generally requests pricing with respect to a well-recognized benchmark (usually a New York Harbor price). This approach allows NSPI to secure a price hedge readily. NSPI’s contract commits to buying its requirements for the product from the winner of the competition, but excepts contingencies and HFO bought from Canadian sources. Refineries along the Atlantic and Gulf Coasts of North America comprise this product’s other sources. ''''''''''''' ''''''''' ''''''''' ''''' ''''''''''' '''''''' ''''' ''''''''''''''''''''''''''' '''''''''' ''''''''''''''''''' '''''''' ''''' '''''''''''' ''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''' ''''''' ''''''''''''''''''''''''' ''''''''''' ''''''''''''''''' '''''''''''' ''''''''' ''''' ''''''' '''''''''' '''''''''''' '''''' ''''''''''' '''''''''''''' '''''''''''''''''''''' '''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''' '''''''''' ''' ''''''''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' '''' ''''''' ''''''''''''' '''''''''''' ''''''''''''' ''''''''''''''' ''''''''''''''' ''''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''''''' ''''' ''''''''''''''' ''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''' ''''''''''''' '''''' ''''' '''''' ''''''''''' '''''''''''''''''''''''''''''''' ''''''''''' '''''''''''''''''''''' '''''''''' ''''''' ''''''''''''''''' '''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''''''''''''''' ''''''''' '''''''' '''''''''' ''''''''''''''' ''''''''' '''''''''''''''' ''''' ''''''' '''''''''''''''' ''''''''''''''''''''''' ''''''''''' ''''' '''''''' '''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''' NSPI contracts with trucking companies to move HFO from storage facilities at Tufts Cove to the solid-fuel generating plants using it as an auxiliary fuel. '''''''''''' ''''''''''' trucking companies have Maritime-Province operations ''''''''''' '''''''''''''''' to accommodate NSPI’s requirements. NSPI typically requests proposals for the service every other year. The Company has awarded contracts for one year, with an option for a second year.

3. Light Fuel Oils NSPI has bought light fuel oils (LFO) under a combined solicitation that has included the following products:



Furnace Oil for Steam Boiler Start-Up Diesel Fuel for Combustion Turbines Low Sulfur Diesel Fuel for Plant Vehicles Furnace Oil for Office Heating

Multiple Maritimes region vendors offer these standard products. NSPI has therefore used a standard form solicitation for routine procurements of commonly-available products. The form solicitation includes:

Instructions General Terms Standard Agreement Product specifications NSPI has sought product offers on a delivered basis. The RFP specifies the approximate size of requested deliveries, delivery locations, and required response times. The RFP also specifies special conditions that apply to particular fuels. Suppliers of fuel for the combustion turbines, for example, must be able to deliver specified minimum quantities during the winter months (December, January, and February). The RFP provides estimated annual delivery quantities by location. NSPI requests pricing relative to the Bloomberg Oil Buyers Guide (OBG) Halifax Rack Price.

4. Hedging NSPI uses, as do most companies, the International Swaps and Derivatives Association (ISDA) standard form contract to govern its relationships with its hedging counter-parties. ISDAs use a Credit Annex, which states the maximum amount of credit that NSPI may extend to that counter-party, and how that amount will change if the counter-party’s credit rating changes. NSPI had ''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''''', in addition to its affiliates, for hedging transactions at the time of the preceding FAM Audit. Liberty recommended that the Company make improvement of the performance of its credit-evaluation and contracting processes a priority. NSPI agreed with this recommendation, and agreed to provide a description of its activities in this area in its twice-yearly reports to the NSUARB on its natural gas activities. The table below, taken from the Company’s December 2011 report, shows the counter-parties with whom NSPI has ISDA agreements, with the effective dates of those agreements.

'''''''''''''''''''''''' ''''''''' '''''''''''''' '''''''' '''''''''''' ''''' ''''''''''''''''''''' ''''''''''''''''''''''''' ''''''' '''''''''''' ''''''''''' ''''' '''''''''''''' '''''''''''''' ''''''''''''''' '''''''' ''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''' ''''''''''''''''' '''' ''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''' ''''' '''''''''''''''''''''''' ''''''''''''' ''''' ''''''''''' '''' ''''''''''' ' '''''''''''''''''''''' '''''''''''''''' '''' '''''''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''' '''''''' ''''''' '''''''''''''

'''''''''''''' '''''''''''' ''''' ''''''''''''''''' '''''''''''''''''''' '''''' '''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''''''''''''''''' '''' '''''''''''

'''' ''''''''''''''''''''' ''''''''''''''' '''''''' '''''''''''' ''''''''''''''''''''''' '''''''' ''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''' '''''''' ''''''''''''''''''''''''''

'''' ' '''''''''' The Company reported that it did not previously include agreements with ''''''''''''' ''''' ''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''' ''''' '''''''''''''''''''''''' '''' ''''''''''''' ''''''''''''' '''''' '''''''''''''''' in the above list because NSPI did not have credit limits for them. A meeting of NSPI’s Energy Risk Management Committee in the fourth quarter of 2010 eventually set those limits.



The table below shows NSPI’s active counter-parties for hedging and their respective credit limits. Credit limits apply to external counter-parties; NSPI sets no credit limits with its affiliates.

'''''''''''''''''''''''' '''''''''' '''''''''' '''' ''''''''''''' ''''' '''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''' ''''' '''''''''''''' '''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''' ''''''''''''' ''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''' ''''''''' ''''''''''''''' '''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''' ''''''''''''''''''''' ''''''''''''' ''''' '''''''''''''''' '''''''''''''''''''''''' '''''''''''' ''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''''

NSPI reported that it dropped ''''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''''''''' '''''''' and '''''''''''''''' ''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''''' as hedging counter-parties during 2011.

B. Findings

1. Natural Gas In 2008 NSPI began investigation of its gas-supply options '''''''''''' ''''''''''''''''''''' '''' '''''''' '''''''''' '''''''''''''''' ''''''''''''''''''' A first RFP process, held in August and September of 2008, culminated in a contract with '''''''''''' '''''''''''''''''''' '''''''''''''''' ''''' '''''''''' '''''''''''''' '''' ''''''''''''''''''''''' ''''''' ''''''''''''''''' ''''''''''''''''''''''' '''''' '''''''''''''''''''''' '''' '''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''' '''''''''' ''''' '''''''''''' ''''' ''''''''' ''''' ''''''''''''''' '''''' ''' ''''''''''''''' ''''''''' '''''''''''' '''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''' ''''' '''''''''''' ''' '''''''''''''''''' ''''''''''' ''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' ''''' ''''''''''''' ''''' '''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''' '''''''''''''''''' ''''''''''' '''''''''''''''''''''''' '''' ''' '''''''''''''' ''''''''''''''''' ''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''' '''' ''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''' '''' ''''''''''' ''''''''''''''''''''''''' NSPI added many additional gas-supply contracts in 2010 and 2011. ''''''''''''''''''''''' ''''''''''''' ''''''' '''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''' '''''''''''''' ''''' '''''''''' '''''' '''''''''''''''''''''' '''''''''''''' ''''''' '''''''''''''''''''' '''''''''''''' ''''' '''''''''''' '''''''' '''''''''''''' ''''' '''''''''''''''' ''''' '''''''''''' '''''''''''''''''''' ''''' '''''''''''' '''''''' '''''''''''''

a. Contracts Considered in 2008 and 2009 '''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''

''''''''''''' ''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' ''''''''''' '''''''''' '''''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''' ''' '''''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''' ''''' ''''''' '''''''''''''''''''''' '''''''''''''''' '''''''''' '''''''''''''''''''''' '''' ''''''''''''''''''' ''''''''' ''''''''''''''''''''''' '''''''''' ''''''''''''' ''''''''''''''''''' ''''' ''''''' ''''''''''''''' ''''''''''''' '''''''' '''''''' ''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''' '''''' ''''''''''''''''''''''' ''''''''''''''''''' '''''' ''''''''' ''''''''' ''''''''' ''''''''''''''''''''''' '''''''''' '''''''''''''''' '''''' '' ''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''' ''' '''''''''''''''' ''''''''''''' ''''''''''' '''''''''''''''' ''''' ''''''''''''' ''''''''''''''''''' '''''' ''''''''''''' ''''''''''''' '''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''''' '''' '''''''' '''''''''''''''''''' ''''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''' '''''''''''' ''''''''''''''' '''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' ''' '''''''''''' ''''''''''''''' '''''''''''''''''''''' '''' '''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' '''' '''''''' '''''''''''''''''''' ''''''' '''' ''''''''''''''''''''' ''''''''''''' ''''''' '''''''''''''''' ''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''''''''''' '''''''' '''''''''''' ''''''''' '''''''''''''' ''''''''''' '''''''''''' ''''''''' ''''''''''''' '''''''''''' ''''''''''''''''' '''''''''' '''''''''''''''' '''' '''''''''''''''' '''''''''''''''''''''''''' ''''''''' ''''' '''''''''''''''



''''''''''''' '''''''''''''' ''''''''''''''''''''''''

Liberty asked NSPI for its analysis of the ''''''''''''''' ''''''''''''''''''''. NSPI provided an October 28, 2008 memorandum from its gas supply consultant. The memorandum advised against accepting the contracts due to contract and pipeline risks identified in his “earlier analysis.” Liberty requested that earlier analysis; NSPI replied:

''''''''''' ''''''' ''''''' '''''''' '''''''''''''''''''''' '''' '''''''''''''''' ''''''''' ''''''''''''''''' '''''' '''''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''''' ''''''''''' ''''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''' '''''''''''''''' '''''''' ''''''''''''' ''''''''' ''''' ''''''' ''''' '''''' ''''''''' '''''''''' '''' '''''' ''''''''''''''''''' ''''''' ''''''''''''''''' '''''''' ''''''''''''''' ''''''''''''''' ''''''''' '''' '''''''''''''''''' '''' '''''''''''''' ''''' '''''''' ''''''''''''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''' '''' ''''''' ''''''''''''''''''' ''''''''''''''''''''' '''' ''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''' ''''''''''''''''' ''''''''''' '''''''''''' '''' ''''''' ''' ''''''''''''' '''''''''''' '''' ''''''''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''''''' '''' ''''''''''''''''''''''''''

The response included concerns that NSPI had previously provided to Liberty:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋

Responding to Liberty’s request for NSPI’s analyses of using gas at '''''''''''' ''''''''''''''''''' ''' '''''''''''''''''' '''''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' the Company stated that there had been none, because at that time “gas was not economic vs. coal.” NSPI avoided direct response to a Liberty question asking about Company communications with ''''''''''''' '''''''''''''''''' ''''' '''''''''''''''' '''''' '''''''''''''' ''''''''''''''''''''' ''''''' ''''''' '''''''''''''''''''''''' '''''' '''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''' ''' ''''''''''''' '''''''''''''' '''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''' ''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''' ''''' '''''''''''''''''' '''''''''''''' ''''''' ''''''''' '''' '''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''''''' ''''' ''''' '''''''''''''''''''''' ''''''''''''''''''''''''''''''''''''''' NSPI’s response did include a GLJ Petroleum Consultants November 2007 Deliverability Report to Maritimes & Northeast Pipeline Management Ltd. The report presented a best estimate forecast of future M&NP line use, which would include, but not be limited to SOEP output. The consultant concluded that the maximum “unconstrained supply” on M&NP would reach a maximum level of 528,000 MMBtu/day in 2011. That amount falls considerably below M&NP’s identified capacity of 580,000 MMBtu/day. The consultant’s best estimate of supply as limited by capacity constraints on the U. S. segment peaked at 430,000 MMBtu/day in 2016. This information appeared to go to concerns expressed about NSPI’s ability to get delivery through '''''''''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''''' '''''''''''', as NSPI put it, “if the mainline became full.” Liberty asked for NSPI’s analyses addressing this possibility for the duration of '''''''''''''''''''' '''''''''''''' ''''''''''''''' NSPI did not provide any such analyses. NSPI did report, however, what it said it was hearing about future production estimates in 2008, and that those reports did give a basis for concern about “stranding” gas acquired from ''''''''''''' ''''' '''''''''''' '''''''''''''''''. The Company stated:



'''' '''''''''''''''''''' ''''''''''' '''''''''''''''''''' ''''''' '''' ''''''' '''''''' ''''''''''''''' ''''''''''''''''''''' '''''''''''' '''''''' ''''''''' ''''''''''''''''''''''''''' '''''''''''''''' '''''''' ''''''' '''''' ''''''''''' ''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''''''''' ''''' ''''''''' '''''''' '''''''''''' '''' ''''''' ''''''''' '''''''''''' ''''''''' ''''''' '''''''''' '''' ''''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''' '''''''''''''' ''''''''''''''''''''' ''''' '''''''' ''''''''''' ''''''''''' ''''''''''''''' ''''''' '''' ''''''''''' '''''' '''''''' ''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' '''''''''''''''' ''' ''''''''''''''''' ''''''''''''''''''''''' '''''''''' '''''' '''''''''''''''''''''''' ''''''''''''' '''' '''''''' ''''''''''' ''' '''''''' ''''''''''''''''''' '''' ''''''''''''''' ''''''''' '''''''' ''''''''' ''''''''' ''''' ''''''''' ''''''''' '''''''''' '''''''''''''''''''''' ''''''''' '''''''''''''''' ''''''''''''''''' '''''''' '''''''''''' '''''''' ''''''''''''''''' ''''''' '''''''''''' '''''''' '''' '''''''''' ''''''''''''''' '''''''' '''''' ''''''''' '''' '''''''''''''''''' '''' '''''''' ''''' '''''''' ''''' ''''''''''' '''' ''''' '''''''' ''''''''' '''''' ''''''''''''' '''''''' '''''''' ''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''' '''' '''''' '''''''''''''''' ''''''''''''' ''''''''' '''''''''''' ''''''''' ''''''''''' '''' '''''' ''''''''''''''''''' '''' ''''''''''''' ''''''' '''''''''' ''''''''''''''' ''''''' ''''''''''' ''''' '''''''''' '''' '''''''' '''' '''''''''''''' '''''''' ''''''''''''''''''' '''''''' '''''''' '''''''' '''''' ''''' ''''''''' ''''''''''''''' '''''''''

To the question of whether there was enough gas in the gas-supply contracts that ''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''' '''' '''''''''''''' ''''''' ''''''''' ''''''''''' ''''' ''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''' '''''''''' ''''''''''' '''''''''''''''''''''''''''''

• Development plans for the Deep Panuke deposit show it coming ashore through pipelines adjacent to the SOEP one, and landing at Goldboro. Goldboro is the receipt point in the '''''''''''' ''''''''''''''''''''', so they could have been used to move gas purchased from Deep Panuke.

• The '''''''''''''''' '''''''''''''''''''' have the U. S.-Canada border as a secondary receipt point, so gas could have been bought there.

The contracts provided that all M&NP-CA delivery points, including the Tufts Cove Generating Station, could be used on a secondary-firm basis. Liberty posed the following question to NSPI:

Is it not also true '''''''' ''''''' '''''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''' '''' '''''''''''''''' '''' '''''''''''' ''''''''''' ''''''''' ''''''''' ''''''''' '''' '''''''''' '''''' '''''''''' '''''''' ''''''''''''''' ''''''''' '''''' '''''''''''''''''' ''''''''''''''''' '''''' ''''' ''''''''''''''''''''' ''''''''''''''' '''' ''''''' '''''''''' ''''''''' ''''''''''''''''''''' ''''''''''''''' '''''''''' ''''' '' '''''''''''''''''''' ''''''''''''' (Liberty DR No. 296.)

The Company’s answer was yes.

'''''''''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''''

'''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''''''''''''' '''''''' ''''''''''' '''''''''''''''' '''''''''''''''' ''''''' '''''''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''' ''' ''''''''''''''''''' ''''''''''' '''''''' ''''' '''''''' ''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''' ''''''''''''''' '''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''' '''''''''''''''' ''''''''' '''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''' ''''''' ''''''''''''''''' '''''''''''' '''''''''''''' ''''' '''''''''''''''' '''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''' ''''''''''' ''''''''''''''''''' ''''''' ''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''''''''' ''''' '''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''' '''''''''''' ''''''''' '''''''''''' ''''''''''''''''''' ''''''' ''' ''''''''''''''' ''''''''' '''''' '''''''''''''''''' '''' ''''' '''''''''''''''' ''''' ''''''''''''''''' '''''''''''''' ''''''''''''' ''''''''''''''''''''''''' ''' ''''''''''''''''' '''''''''' '''''' '''''''''''''''''''''''''''''''''' ''''' ''''''''''' '''''''''''''''''''' ''''' '''''''' '''''''''''''''' '''''''''''' '''''''''''' ''''''''' '''''''''''''''''' ''''' ''' '''''''''''''''' '''''''''''''''''' '''''''''' '''''''''''' '''''''''''''''''' ''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''''''' '''''''''''' ''''''''''''''' ''''''''''''''''''''''''' ''''' ''''' '''''''' ''''' ''''''''' ''''''''''''''''''''''''''''''' ''''''''''''' '''''' ''''''''''' ''''''''' ''''''''''''''' '''''''''''''' ''''' '''''''''''''''' '''' ''''''' ''''''''''''''''''''' '''''''''''''''''''''



''''''''''''''''''''' ''''''''''''' '''' ''''''''' ''''''' ''''''''''' ''''''''''' ''''''''''''''' '''''''''''''''''''''

'''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''''''''' ''''''''' '''''''''''' '''''''' ''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''' ''''''' ''''''' ''''''''''' ''''' '''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''' '''''''''' ''' '''''''''''''''''''' ''''''' ''''''''''''''' '''' '''''''' '''''''''' '''''''''''''''''''' ''''''' '''' ''''''''''''''' '''''''''' ''''' '''''''''''' '''''''''''''' '''''''' '''''''' '''''''''''''''' ''''''''''' ''''''''' '''''''''''''''''' ''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''' ''''''' ''''''''''''' '''''' '''''' '''''''''''' ''''''''''' '''''''''''''''' '''''''''''''' '' '''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''' '''''' ''''''''''''' '''''''''''''''''' ''''''''''' '''''''''''''''' ''''' ''''''''''''''''''' '''''''''''' ''''''''' ''''''''''''''' ''''''''''''''''' '''''' ''''''''' '''''''''''''' ''' '''''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''' '''''''''' '''''''''' '''''''''''''''''''''''''''''''''''' ''''' '''''''''''' ''''''''''' '''''''''''''''''' ''''''''''''''''''''' ''''''' ''''' '''''''''''''' '''''''''''' '''''''''''''''''''' ''''' ''''''''''''''' '''''''''''''''''''''''''''''' '''' ''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''' '''''''''' '''''''''''''''''''' '''''''' ''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''' '''''''''' '''''''' ''''''''''''''''''' ''''''''''' ''''''''''''''' ''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''''''''''''

∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ '''''''''''''''''' '''''''''' '''''''''' ''''''''' '''''''''''''' '''''''''''' ''''''''''' ''''''''''''''''

'''''''''''' ''''' '''''''''''''''' '''''' '''''''' '''''''' ''''' ''' '''''''''''''''' ''''''''''''''

''''''''' ''''''''''' ''''' ''''' ''''''''' '''''''''''''''''''' ''''''''''' '''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''' Other principal features of the contract include the following:

• '''''''' ''''''''''''''' '''''''''''''' '''''''''' ''''''''' ''''''''''''''''' '''''' '''''''''''''''' ''''''''''' '''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''' '''''''' ''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋

'''''''''''''''' ''''''''' '''''''''''''' '''' '''''''' ''''' ''''''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''' '''''''''''''''''''''''

i. Short-Term Gas Supplies

NSPI realized that it ''''''' ''''''''''''''' '''''''''''''''''' '''''''' '''''' ''' '''''''''''''' '''''' '''''''' ''''' '''''''' ''''''''''''''''''''''' ''''''''''' '''''''''''''''''' '''''''''''''''''' Its estimates of incremental requirements ranged widely, depending on factors such as whether one of the Tufts Cove steam units came back on after an extended outage. ''''''''''''''''' ''''''''''''



''''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''' ''''''' ''''''''' ''''' '''''''''''''''''''''''''' ''''''''''' ''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' '''''' ''''' ''''' ''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''' '''''''' ''''''''''''''''' ''''''''''''' ''''''''' '''''''''''' ''''' ''''''''' ''''' '''''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''''''' ''''''' '''''''''''''''''' ''''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''' '''''''' '''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' ''''''''''' ''''''''''' ''''''''''''''' '''''' '''''''''''''''''''''''' ''''''''''''' '''''''' '''''''''''''''''' ''''''''' '''''''''''''''''''''' ''''''''''''' '''''''' '''''''''''''''' '''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''' ''''''' '''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' ''''' ''''''''''' '''''''''''''''''''' '''''''' '''''''''''' ''''''''''''' ''''''''''''''' ''''''''' '''''''' '''''''''''' ''''' ''''''''''''''' '''''''''' ''''''''''''''''''''' ''''''''' ''''''''''''' ''''' '''''''''''''' '''''''''''''''''''''''''' '''''''''''' '''''''''''''''''''''' '''' '''''''' '''''''''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''' ''' ''''''''''''' ''''''''''''''' ''''''''''''' ''''''' '''''''' '''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''' ''''''''''''''''' '''''''''''''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''' '''''''''''''''''''' ''''''''''''' ''''''''''''''' '''''''''''''' '''''''' '''''''''''''''''' '''''''''''''''' '''''''''' '''''' '''''''''''''''''''''' ''''' '''''''' '''''' '''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' All of the Tufts Cove units were operational, and then-current NSPI forecasts showed gas to be economic relative to coal. '''' ''''' ''''''''''''' ''''''''''''''' '' ''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''''''''' '''''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''' ''''''''''' '''''''''''''''' ''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''''' '''' '''''''''' ''''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''''''''''' '''''''''''''''' ''''' ''''''''''''' '''''''' '''''''''''''''''''''' The next table summarizes the quantities purchased and the prices paid.

Counter-party Term Volume Special Terms Price Date Executed

'''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''''''' '''''''''' ''''' ''''''''''''

'''''''''''''''' '''''''''''''''''''''''''' '''' '''''''''

'''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''

'''''''''''''''' ''''''''' '''''''''''' ''' '''''''''' ''''' '''''''''''''''' '''''''''''''' '''''''' ''''''''''' '''''''''''''''' '''''''''''' '''''''''' '''''''''

'''''''' '''''''' ''''''''''''

'''''''''''' ''' ''''''''''''''' ''''''''''''''''''''''''''''' '''''''' ''''' ''''''''''

'''''''''''''''' ''''''''''''''''''''''''''''' '''' ''''''''''

'''''''''''''''''''''''''' '''' ''''''''''''' '''''''''''''' '''''''''''''''''''''''''''''''

'''''''''''''''' '''''''' '''''''''''' '''' ''''''' '''''''''''''' '''''''''''''''' '''''''''''' ''''''''' '''''''''

'''''''' ''''''' ''''''''''''

'''''''''''' ''' '''''''''''''''' ''''''''''''''''''''''''''''' ''''''''' '''' '''''''''''

'''''''''''''''' ''''''''''''''''''''''''' '''' ''''''''

''''''''''''''''''''''''''' ''''' '''''''''''' '''''''''''' ''''''''''''''''''''''''''''''''''

''''''''''''''' '''''''''' '''''''''''' '''' ''''''' '''''''''''' '''''''''''''''' '''''''''''''' '''''''''' '''''''''

''''''' ''''''' ''''''''''

''''''''' '''' ''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''' '''' ''''''''''''

'''''''''''''' '''''''''''''''''''''''' '''' ''''''''

''''''''' '''''''' '''''''''''''' ''''' '''''''' '''''''''''' ''''''' ''''' '''''''''''' ''''' ''''''''''' '''''''''''''

'''''''''''''' '''''''' '''''''''''' ''' '''''''' '''''''''''''

'''''''' ''''''' ''''''''''''

'''''''''''''' '''' '''''''''''''' '''''''''''''''''''''''''''' ''''''''''' '''' ''''''''''

'''''''''''''' '''''''''''''''''''''''''' '''' ''''''''

'''''''''''''''' ''''''''' '''''''''''' '''' '''''''' '''''''''''''' '''''''''''''' '''''''' ''''''''''

'''''''''''''' '''''''' '''''''''''

'''''''''''' ''' '''''''''''''' '''''''''''''''''''''''''''' ''''''''''''' ''''' ''''''''''''

''''''''''''' ''''''''''''''''''''''' ''' '''''''''

'''''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''' ''''''''''''''''''''''''''''''

''''''''''''''' '''''''''' '''''''''''' '''''''''' '''''''''''' ''''''''''''''' '''''''''''' '''''''''' '''''''''

''''''''''''''' '''''''' '''''''''''

''''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''''''' '''''''''' '''' ''''''''''''

'''''''''''''''' ''''''''''''''''''''''''''' '''' ''''''''''

'''''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''' ''''''''''''''''''''''''''''

'''''''''''''''' ''''''''' '''''''''''' '''''''''' '''''''''''''' ''''''''''''''' ''''''''''''' '''''''''' ''''''''''

''''''''''' '''''''' '''''''''''

''''''''''''' ''' ''''''''''''''' '''''''''''''''''''''''''''''

'''''''''''''' ''''''''''''''''''''''''''''

'''''''''''''''''''''''''''' '''' ''''''''''''' ''''''''''''' ''''''''''''''''''''''''''''''''''

'''''''''''''''' '''''''' ''''''''''' ''''''''''' '''''''''''''' '''''''''''''''

'''''''''''' ''''''' '''''''''''



'''''''''' '''' ''''''''''' ''' '''''''''' '''''''''''''' '''''''''' ''''''''''

''''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''''''' '''''''''' '''' ''''''''''

'''''''''''''' ''''''''''''''''''''''''' '''' ''''''''

''''''''''''''''''''''''''''''' ''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''''''''

''''''''''''''' ''''''''' '''''''''''' '''''''''' '''''''''''''' '''''''''''''''' '''''''''''' ''''''''' '''''''''

'''''''''' ''''''' ''''''''''''

'''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''''' '''''''''' ''''' '''''''''''

'''''''''''''' ''''''''''''''''''''''''''' '''' '''''''''

''''''''''''''''''''''''''' '''''' ''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''

'''''''''''''''' '''''''' '''''''''''''' '''''''''' '''''''''''''' '''''''''''''' '''''''''''' ''''''''' ''''''''''

'''''''''' '''''''' '''''''''''

''''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''''''' ''''''''' '''' ''''''''''''

''''''''''''''''' '''''''''''''''''''''''''' '''' ''''''''''

'''''''''''''''''''''''''' ''''' '''''''''''' '''''''''''' '''''''''''''''''''''''''''''

'''''''''''''''' ''''''''' '''''''''''' '''''''''' '''''''''''' '''''''''''''''' '''''''''''' '''''''''' ''''''''''

'''''''''' '''''''' ''''''''''''

''''''''''''''

'''' ''''''''''''''' '''''''''''''''''''''''''''' '''''''' ''''' '''''''''''

'''''''''''' ''''''''''''''''''''''''''' ''' '''''''''

'''''''''''''''' '''''''''' '''''''''''''' ''''''''''' ''''''''''''' '' ''''''''''''' '''''''' ''''''''''

''''''''' ''''''' ''''''''''

These purchases all resulted from bilateral negotiation, rather than an RFP process. NSPI did so ''''''''''''''''''' '''' '''''''''''''''''''''''''' '''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''' '''' '''''' '''''''' '''''''''' '''''''''''''''''''''' ''''''''' '''''''''''''''''' '''' '''''''' ''''' ''' ''''''''''''''''''' ''''''''''' ''''' '''''''''''''''' ''' '''''' '''''''''''''' ''''''''' ''''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''''''''' ''''''''''' '''''''''' '''' '''''' ''''''''''' ''''''''''''''''' '''''''' '''''''''''''''' '''''''''''''''''' '''''''''''' '''''''''' '''''' '''''''''' '''''''''''''''''''' '''''''''''''''''''''''

ii. Winter 2011-2012 Supplies

''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''''' '''''' '''''''''''' '''''' '''''' ''''' ''''''''''''''' '''''''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''''''''' ''''''''' '''''''''' '''''''''' ''''''''' ''''' '''''' '''''''''''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''''''' ''''''''''''''''''''' '''''''''' ''''''''' ''''' '''''''''''' ''''''''' ''''''''''' '''''''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''' '''''''''' ''''''''''''' ''''''''''' ''''''''''''' ''''''''''''''' '''' ''''''''''''''' '''''''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''' '''''''''''''' ''''''''''' ''''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''' '''''''' ''''''''' '''' '''''''''''''' '''''''' ''''''''''''''''''''' ''''''''''''''''''' ''' '''' ''''''' '''''''''''''' '''''''''' '''' '''' ''''''''' '''''''''''''''

2. Heavy Fuel Oil

a. Commodity

NSPI issued an RFP for a requirements contract for HFO to be delivered in 2010, similar to its 2009 approach. ''''''''' '''''''''' '''''''''''''' ''''' ''''''''' '''''''''''''''''''''''' '''''''''''' '''' '''''' ''''''''''''''''' '''''''''''' ''''''''''''''''' ''''''''' ''''''''''' ''''''''' '''''''''''''''''''' '''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''' ''''''''' '''''''''''' '''''''''''''''''''''''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''' ''' '''''''''''''''''''' '''''''''''''''''' ''''' '''''''''' '''''''''''''' '''''''''''' '''''''''''''''''''''' '''''''''''''' '''''''''' '''' '''''''''''''' '''''' ''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''' '''''' '''''''''''''''''' '''''''''''''''''''''''' ''''''''''' '''''''' '''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''' '''''''''''''''' '''''''''''''''''''''' '''''''''''' '''' '''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''''''' ''''''''' ''''''' ''''''''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''' ''' ''''''''''''''''''''''''' '''' '''''''''''''''' '''''' ''''''''''''''''' ''''' '''''''''''''' ''''''''''''' ''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' '''''''''' '''''''' ''''''''''' ''''' '''''''''''''''''' ''''' ''''''''''''''''' ''''' ''''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''''''''''''''''' '''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''' '''''''''' ''''''''''''''''''''''' NSPI repeated this approach for 2011, issuing an RFP for a requirements contract in October 2010. '''' ''''''''''' ''''' '''''' ''''''''''''''''''''' ''''''''''' '''''' ''''''''''''''' ''''''''''''''''''''''' ''''''''''' '''''''''''''' '''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''''' '''''''''' '''''''''''''''' '''''''' '''''''''''''''' ''''''''''''''' ''' ''''''''''''''''''' '''' ''''''''''''' '''''' '''''''''' ''''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''''''' ''''' '''''''''''''' ''''''''''''' '''' ''''''''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''' '''''''''''''''''''' '''''''' '''''' ''''''' ''''''''''''''''''''''



''''' '''''''''''''''''''''''''''' ''''' ''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''' ''''''''''''''''''''' '''''''' '''''''' '''''''''''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''' ''''''''' ''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''' ''''''''' ''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''' ''''''''''''''' '''''' '''''''''''''''''''' '''''''''''''''' ''''''' ''''''''' '''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' ''' '''''''''''' '''''''''''''''' '''''''''' ''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''' ''''''' ''''''''''''' ''''''''''''''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''' '''''''''''' '''''''''' '''''''' '''''''''''' ''''''''''''''''''''' ''''''''''''''''''''

b. Trucking NSPI issued an RFP for the 2010-2011 trucking contract in October 2009. '''''''' ''''''''''' ''''''''''' '''' '''''' '''''''''' ''''''''''''''''''''' '''''''''''''''''''''' '''''''''' ''''''''''''''''' ''''' '''''''''' '''''''''''''''' ''''''''''''''' ''''''' ''''''''''' '''''''''''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''''''''' ''' '''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''''''' '''''''''' ''''''''' ''' '''''''' ''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''' ''''''''''''''''''''''' ''''''''''''' '''' ''''''''''' ''''' '''''''''''''''''''''' ''''''''' '''''''''' ''''''''''''''''''''' '''''' '''''''''''''''''''' ''''''''''''''' ''''''' ''''''''' '''''''''''' ''''' '''''''''''''' '''''''''''''' ''''''''''''''''''''' '''''''''' '''''' '''''''''' ''''''''''''' ''''''''''''' ''''' ''''''''' '''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''' '''''' ''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''''' '''''''''' '''''''' '''''''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' '''''''''' '''''''' '''''''''''''''''' '''''''''' ''''''''' ''''''''' '''''' '''''''''''''''''' '''''''''''''''''''''

3. Light Fuel Oils NSPI had extended the previous contract for LFOs through March 31, 2010. NSPI conducted a new competition in February 2010. NSPI’s Procurement group conducted the RFP for FERM, as was true for the previous competition. Liberty reviewed the tender, the responses by the bidders, and the evaluation of the offers. The competition included the same four products (furnace oil for steam boiler start-up, diesel fuel for combustion turbines, low sulfur diesel for plant vehicles, and furnace oil for office heating) from the prior LFO competition. The RFP solicited supply for one year, with an option to extend for a second year. Product specifications were vetted with the NSPI locations using the products prior to sending the tender documents. NSPI requested pricing relative to published price benchmarks. The Company based estimated quantities of each product on historical and forecasted volumes. Estimated total value of the tender came to ''''''''' '''''''''''''''''. ''''''''' ''''''''''' '''''''''''' ''''' ''''''''' '''''''''''''''''' ''''''' ''''''''''''' ''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''' '''''' ''''''''''' '''''''''''''''''' ''''' '''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''' '''''''''''''''''''' '''''' '''''''''''''''''''''''''' '''''''''''''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''' '''''''''''''''''' '' ''''''''''''' ''''''''''' '''''' ''''''''' '''''''''''''''' ''''' '''''''' ''''' '''''''' '''''''''''''''''''' ''''''' ''''''' '''''''''''''''''''''''''' '''''''''''''''''' ''''''' ''''''''' '''''''''''''''' ''''''''''''''

4. Hedging

a. Changes in NSPI Hedging Objectives and Targets NSPI resold substantial amounts of the gas available under the ''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''' ''''''''''''''''' '''''''''''''''''''' Comparatively low HFO prices for much of that contract’s duration principally drove the availability of gas for resale into the Northeast U. S. Gas Market. NSPI at that time thus used hedges for two reasons:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋



The end of that contract eliminated the potential for large resale volumes, after which the hedging program’s focus turned to what most utilities address; i.e., purchase-price protection. '''''''' '''''''' ''''' '''''''' ''''''''''' '''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''''''''''' '' ''''''''''''''''''' ''''''''''''''' ''''' ''''''''''' ''''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''' '''''''''''''''' '''''''''''''' ''''' '''''' ''''''''''''' ''''' '''''''''''' ''''''' '''''''''''''''' '''''''''' ''''''''''''''''' '''''''' ''''''''''' ''''' ''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''' '''''''''' '''''''''''' ''''''''''''''''''''''' ''''' '''''''' ''''''''''''' '''''''''''' ''''' '''''' '''''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''' ''''''' '''''' '''''''''''''''' '''''''' ''' ''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''' '''''''''''''''' ''''' ''''''''''''''''' '''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''' '''''''''''''' '''''''''''''''' '''''''''''''''' '''' ''''' '''''''''''''''''' ''''''''''''''''''''' '''' '''''''' ''''''''''''' ''''' ''''''''''''''''''''''''''''' '''' ''''''''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''' ''''' ''''' '''''''' ''''' '''''''''''''''''''''' '''''''''''' ''''''''' ''''' ''''''' ''''''''''''''''''''''''''' '''''' '''''''''''' '''''''''''''''''' '''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''''' '''''''' '''''''''' '''''''''''' '''''''''''''''' ''''' '''''''''' ''''' '''''''''''''' ''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''' '''''''' ''''''' '''' '''''''''''''''''' ''' ''''''''''''' ''''' ''''''''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''' ''''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''' ''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''''''' '''''''''''''' '''''''' '''''''''''''''''''''' ''''' '''''''''''''''''' '''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''''''' '''''''''' '''''''''''' '''''''''''''''''''''' '''''''''' ''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''' ''''' ''''''''''''''''''''' '''''''' '''''''''''''' '''''' '''''''' ''''''''''' ''''''''''''' ''''' ''''''''''''''''''''''' ''''' '''''' '''''''''''''' '''''''''''' '''''''' '''''''''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''' ''''''' ''''''''''''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''' '''''''''''' '''''''' '''''''''''''''''''''''''''''' '''''''''' ''' ''''''''''''''''''''''''' ''''' '''''' '''' '''''''''' ''''''''''''''''' '''''''''''' ''''' ''' ''''''''''''''''''''''' ''''' '''''' ''''' ''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''''''' ''''''''''' ''''''''' ''''''''''''''''''''''' ''''''' '''''''''''''''''' ''''''' '''''''''''''''''''''' ''''''' ''''''''''''''''''' ''''''' '''''''''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''' '''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''' ''''' '''''''''''''''' ''''''''''' '''' ''''''' ''''''''''' ''''' ''''''''' '''''''''' '''''''' '''''''''''''' ''''''''''''''' ''''' '''''''''' '''''''''''''''' ''''''''''''' ''''''''' ''''''''''' ''''''''' '''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''''' '''''''''''''' '''''''''''''''' ''''' ''''''''''''''''' '''''''''''''''' ''''''''' '''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''''''' '''''''''' '''''''''''' '''''''''' '''''''''' ''''''''''''''''' ''''' '''''''''''' ''''''''''''''' ''''' ''''''''''''' ''''''''' '''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''''' ''''''''''' '''''''''''''' ''''''''''' '''''' '''''''''''''' ''''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''' '''''''''''''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''''' ''''''''' ''''''' ''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' '''' '''''''' '''''''''''''' '''''''' ''''' '''''' '''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''' ''''' ''''' '''''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''' ''''' '''''' ''''''''''''''''' ''''''' ''''''' ''''''''''' '''''' ''''''''''''''''''' '''''''' ''''''''' ''''''''''''''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''' ''''''''' '''''''''''' ''''''''''''''''''''''''''''''''''''' '''''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''' ''''''''''''''''''''''' ''''''''' ''''''''''''''''' ''''''''''' ''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' ''''''' '''''''''''' ''''''''''''''''' '''''''' '''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''' '''''' ''''''''''' '''' ''''''''''''' ''''' '''''''''''''' ''''' '''''''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''' ''''''''''''''''''''''''' '''' ''''''' '''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''' ''''' ''''''''''' ''''' ''''''''''''''''''''' '''''''' ''''' '''''''''''''''' '''''''' ''''''' ''''''''''''''''''''''''

b. Natural Gas Hedging Gas-fired generation at NSPI has increased from about 10 percent of the total in 2008 to 20 percent of the total in 2011. The 2011 proportion would have comprised an even higher portion, but for: (a) failure of one of the gas turbines at Tufts Cove in August, and (b) the Company’s inability to use the new Tufts Cove 6 heat recovery steam generator as early as anticipated. The Company has used fixed-for-floating swaps at Henry Hub across this entire time period to hedge the purchase price for gas. Specifically, NSPI purchases the “fixed-price” side of the



swap. '''''''''''''' '''''''' '''''''' '''''''''''' ''''''''''''''' '''''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''' ''''''''''' ''''''''' ''''' '''''''''''''''' '''''''''''''' ''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''' '''''''''' '''''''''''''''''' '''''''''''''''''' '''' '''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''''' '''''''' ''''' ''''''''''''''' ''''' ''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''' '''' '''''''''' '''''''''''' ''''''''''''''''''' '''''''''' ''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''' ''''''''''' ''''' ''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''' '''' ''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''' ''''' '''''' '''''''''''''''''' ''''' ''''''' ''''''''''''''' ''''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''''''''''''''' ''''''''''''''''' '''''''''''' ''''''''' ''''''''' ''''''''''' '''''''' '''''''''''' '''''''''' '''''' ''''''' ''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' ''''''' '''''''''''''''''''''''' '''''''''' '''''' ''''''''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''' ''''''''''''''' '''''''''' ''''''''''''''''' ''''''' ''''''''''' '''''''''''' ''''''''''''''''' '''''''''''' ''''''''''''' '''''''''''' ''''''''''''''''''''''' '''''''' ''''''''''''' '''''''''''''' '''''' ''''''''''''''''''''' '''''''''''''''' '''' ''''''''' ''''''''''''''''' '''''''''''''' ''''' '''''''''''''''''' ''''' '''''''''''''' ''''''''' '''''''''''''''' '''''''''''''' ''''''''''''' '''' ''''''''''''''''''''' ''''''''''''''''' ''''''' ''''''' ''''' '''''''' '''''''''''''' '''''''''''''''''' '''''''''' '''''''''''' '''''''''''' '''''''''''''''''''''' ''''''''''' '''''''' ''''''''''''''''''''''' ''''' '''''''''''''' The differences in price between the Henry Hub location, where the NYMEX futures contract settles, and various market-area locations are known as “basis differentials.” The differences per se do not raise concern; the problem for gas market participants is that they can be volatile. Instruments therefore exist to manage the volatility risk. NSPI had protected this interest by transacting in basis hedges, but ceased that practice in the winter of 2006-2007. NSPI had used basis hedges to protect the price of resale gas against variation occurring in the difference between prices at the Henry Hub location and prices in markets where NSPI resold gas; i.e., the Northeast U. S. NSPI also used swing swaps, which sought to reduce exposure to the difference between a first-of-the-month price and the average of daily prices. NSPI also stopped buying such instruments for the resale gas after March 2007. ''''''''' ''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''' '''''''' '''''''''''''''''''''''''''''''''''''' '''''''''''''' ''''' '''''''' '''''''''''''''' ''''' '''''''' '''''''''''''''''''''''' ''''''''' ''''''''''' ''''' '''''''''''' '''''''''''''''''''''' ''''' ''''''''''''''''''' ''''' '''''''''''''' ''''''''''''''''''''''' ''''' ''''''' '''''''' ''''''''''''''' ''''''''''''' '''''' ''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''' '''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' '''''''''''''' '''''''''''''' '''''''''''''' '''''''' ''''''''''' '''''''''''' ''''''' ''''''''''''' '''''''''' ''''' '''''''''''''''' '''''''''''' ''' '''''' ''''''' ''''''''''''''' '''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''' '''''''' ''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''' ''''' ''''''''''''''''' '''''''''''''' ''''''' '''''''''''' ''''''''''' '''''''''''''' '''''''' ''''' '''''''''''''''' '''''''' '''''''' '''''''' ''''''' '''''''''''''''''''''' '''''''''' '''''''''' '''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''''''''' ''''' '''''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''' '''''' ''''''''''''''''' ''''''''''' ''''' ''''''''' ''''''' ''''''''''''''''''''' ''''''''''''' '''''''' ''''''' '''''''' ''''''''''''' '''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''''' '''' ''''''' ''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''' ''''' ''''''' '''''''''''''' ''''''''' ''''''''' '''''''''''' ''''' '''''''' ''''''''''''''''''''' ''''' '''' ''''''''' ''''''''''''''''' '''''''''''''' '''''''''''' '''''''''''' '''''''''''''' ''''' '''''''' '''''''''''''''' ''''' ''''''''''''''''''''''''' ''''''' '''''''' '''''''''''''''''''''''''' ''''''' ''''''''''''' ''''''''''''''''' '''''''' '''''''' '''''''''''''''''''''''' ''''''' ''''''''''' ''''''''''''''' '''''''''''''''' ''''''''''''''' '''' ''''''''' '''''''''' '''''''''''''''''''''''' '''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''' ''''''''''''''' ''''' ''''''''' ''''''''''''''''''''''''''''''''''''' ''''''''''''' '''''' '''''' ''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''' ''''' '''''''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''' '''''' '''''''''''''''' ''''' ''''' '''''''''''''''''''''' ''''''''''''''' ''''''''''''' '''''''''''''''''''' ''''''''''''' ''''' ''''''' '''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''' '''' '''''' '''''''''''''''''''' '''''''''''''''''''' ''''''''''''' ''''' '''''''''''''' '''''''''''''''''' '''''' '''''''' ''''''''''''''''''' ''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''''''''''''' ''''' ''''''''''''''' '''''' '''''''' ''''''''''''' ''''''' ''''''''''''''''''''''''' '''' '''''''' '''''''''''' ''''' '''''''''''' '''''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''''''''' ''''''' ''''' ''''''' '''''''''''''''' ''''''''''' '''''''''''''''''''' ''''' ''''''''''' ''''''' '''''''''''''''''''''' '''''''' ''''''' '''''''''''''''' ''''' '''''''''''' ''''''''''''''' '''''''''''' '''''''''''''' '''''''''''' '''''''''''''''''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''' ''''' ''''''' '''''''''''''''' ''''' '''''' ''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''' ''''' ''' '''''''''''' '''''''''''''


July 9, 2012 (Revised Redactions 9/12) Page V-14 The Liberty Consulting Group

'''''''''' ''''''''''''''''''''' '''''' ''''' ''''''''' '''''''''''''''' ''''''''''''''''''''''''''''' ''' '''''''''''' '''''''''''''''''''''''' '''' ''''''''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''''''' '''''' '''''''' ''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''' '''''''''' ''''' ''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' '''''''' '''''''''''' ''''''''''''''''' '''' '''''''''''''' '''''''' ''''''''' ''''''''''' ''''''''''''''''' '''''''''''''''''''''''' ''' ''''''''''''' ''''''''''''' '''' ''''''''''''''' '''''''''''' '''''''''''''''' '''''' ''''''''''''''' '''''''''' '''''''''''' ''''''''''' ''''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''' ''''''' ''''''''''''''''''''' ''' '''''''''''''''''''''''''' '''''''''''''''' ''''''''' ''''''''' '''''''''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''''' '''''' '''''''''''''' ''''''''' '''''''''''''''''''''''' ''''''''' '''''''''''''''''' ''''' ''''''''''''''''''' '''''' ''''''''''''''' '''''''''''' '''''''''''''''''' ''''''' '''''''''''''''''''''''''

∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ''''''' '''''''''''' '''''' '''''''''''' '''''''''''''

'''''''''''''''''''''' ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋

∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ '''''' ''''''''''''' '''''''''''' '''''''''''''' '''''''''

'''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' '''''''''' '''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' ''''' '''''''''''''''''''' ''''''''''''' ''''''''''''' '''''''''' '''''''''' '''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''' '''''''' '''''''' ''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''' '''''''''''''''''''''''' '''''' ''''''''''''' '''''''' ''''''''''''''''''''' ''''' ''''''''''''''''' ''''''' ''''''''''''''''''''''' '''''''''''''' ''''''''' '''''''''' '''''''''''''' '''' ''''''''''''''' ''''''' '''''''''''''''''''''' '''' '''''''''''''''''' '''''''''''' ''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''''' ''''' '''''' ''''' ''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''' ''''''' '''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''' '''''' '''''''''''' '''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''''''''''' ''''''''''' '''''''''''' ''''''''''''''''' '''' '''''''''''''' ''''''''''''''''''' ''''''''''''''

c. Fuel Oils NSPI hedged relatively small quantities of HFO until the end of 2009. The Company both bought and sold fixed-for-floating swaps. They matured in January and February of both 2010 and 2011. The quantity hedged in both years netted to zero. NSPI has never hedged LFOs, considering the quantities required too speculative.

C. Conclusions

1. NSPI lost the benefit of an attractive natural gas offer from ''''''''''''' due to the inappropriate entry of its affiliate into discussions initiated by NSPI. (Recommendation #1)

The events of 2008, involving NSPI’s and its affiliate’s dealings with ''''' '''''''', served to preclude NSPI’s access to favorably-priced gas. Emera should operate under rules that preclude affiliates from closing on offerings initiated by NSPI. At the least, Emera should, by appropriate apportionment of the total benefits resulting from transactions entered, place NSPI in a position no worse than would have occurred in the absence of the co-opting. We interpret this standard to be measured by the difference between the price of ''''' offer to NSPI (Dracut full netback) and the price of the gas contracted by NSPI following withdrawal of the ''''' ''' ''''' offer.



2. NSPI rejected the ''''''''''' contracts on an unsound basis, with the result that natural gas costs became higher. (Recommendation #1)

The market construct under which NSPI rejected the ''''''''''''''' offerings is unconvincing and it caused NSPI to incur excess costs. NSPI rejected the contracts on the basis of two arguments:

• That the contracts’ secondary delivery rights to the Tufts Cove Generating Station jeopardized the reliability of gas deliveries to that station

• That the decline of the supply available under the supply contract (SOEP production) suggested that there would not be enough gas to ship under the transportation contracts for their full duration, creating the risk that NSPI’s customers would have to pay for pipeline capacity for which there was no supply.

The two arguments are inconsistent on their face; moreover, they do not stand up under careful examination of facts that NSPI knew, or should have known, at the time that it made the decision to reject the contracts. The consultant for M&NP referenced in the Findings section of this chapter presented late-2007 estimates of throughput on the pipelines Canadian and U.S. segments. Those estimates show M&NP-CA flows to be limited by flows of regasified LNG into the U.S. segment. Even after pipeline expansion to support future Deep Panuke volumes, occupation of M&NP-US by regasified LNG would prevent Canadian segment flows from exceeding about 400,000 MMBtu/day. These flows would leave enough spare capacity to reduce to minimum levels NSPI’s interruption risk. NSPI would have to use '''''''''''''''''' M&NP-CA transmission rights to get gas delivered. Those rights would be secondary, but without a material risk of other flows filling the Canadian segment, such rights would be sufficient to make price, not delivery risk, the key variable in determining the competitiveness of the ''''''''''''' offer. The detailed analysis of the pipeline’s consultant supports a conclusion that there would exist little risk of interruption of NSPI deliveries to and from secondary receipt and delivery points. NSPI’s view, as contrasted with the conclusions of the pipeline’s consultant, is much less analytical, appearing more anecdotal in nature. The consultant’s estimates considered gas production from “conventional” sources in the Maritimes as being available for transportation via M&NP-CA. These sources included coalbed methane in Nova Scotia. NSPI adds to those sources potential production from an independent producer’s development of shale gas near Halifax. NSPI characterized this source as a “promising potential source,” but acknowledged it as “unproven.” In other words, NSPI was obliged to include speculative shale gas to reach the determination that the potential to fill the M&NP-CA capacity was sufficiently high-risk to overcome the price advantages of the '''''''''''''' offer. NSPI’s construct also did not take account of another important consideration regarding '''''''''''''''''' M&NP-CA transportation rights. NSPI expressed concern about SOEP as the source of supply for the ''''''''''''''' offering. The '''''''''''''' contracts could have been used to move other gas supplies, however. EnCana’s Deep Panuke Field is expected to deliver to Goldboro, which is the primary receipt point in the '''''''''''''' contracts. Moreover, NSPI’s response to an audit data request agrees that those contracts support movement in a reverse-flow direction. Specifically, should SOEP



and Deep Panuke volumes become depleted, NSPI could use the Canadian transport rights to move gas from M&NP’s connection to M&NP-US at the U. S.-Canada border to any delivery point on M&NP-CA, including Tufts Cove. Thus, receipts and deliveries to secondary points would be reliable at the time when flow would be reversed. This point runs counter to rejecting the contracts due to lack of supply. The risk-of-interruptions argument is also weak. First, the primary delivery point on the contracts was the ''''''''''''''' '''''''''''' ''''' ''''''''' '''''''''''''''''''''''''''''. NSPI’s Point Tupper Generating Station is '''''''''''''''' ''''''''' '''' '''''''' ''''''''''''' ''''''''''''' Today, NSPI is studying the use of gas as a fuel at that station, so the gas could have been used there if M&NP-CA became sufficiently full that there was a risk of supply interruptions to the Tufts Cove Station. NSPI points out that, at the time that the ''''''''''''''' contracts were being considered, the price of gas was much higher relative to coal than it is today, so using gas there was not economic. In fact, at that time, NSPI either was well aware of the Province’s interest in the increased use of natural gas for power generation, or should have been aware of that interest. NSPI also was either aware, or should have been aware, of Federal and Provincial concern over carbon-dioxide (CO2) emissions. Further, NSPI either was aware, or should have been aware, of co-firing of natural gas with coal as an option for reducing CO2 emissions. In spite of these possibilities, NSPI did no analysis of any of them in reaching its decision to reject the '''''''''''''''' contracts.

3. The prices obtained under NSPI’s purchase and sale transactions as the end of its long-term gas supply agreement approached termination reflect market conditions that NSPI has failed to contest appropriately, and that have benefited affiliated non-utility operations. (Recommendation #1)

NSPI issued on the same day RFPs seeking to: • Secure additional gas following the October 31, 2010 expiration of the '''''''''''''''''''''' '''''''''''''

'''''''''''''''''' '''''''''''''''''''' • Sell NSPI’s excess gas available under that '''''''''''''''''''''''''''' '''''''''''''''''''' for the last full year of

its term (November 1, 2009 through October 31, 2010).

The contract awarded under the first RFP went to ''''''''''''' ''''''''''''''''', and covered base-load supply beginning on November 1, 2010. NSPI agreed to pay '''''''''''' '''''''''''''''''' ''' '''''''''''''''''' ''''''''''''''''''''' '''''''''''' ''''''' '''''''''''''''' '''''''''''' '''''''''''''''' '''''' '''''''''''''''''' '''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''' ''''''' ''''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''''''''''' ''''''''''''' '''' ''' ''''''''' ''''''''''''''''' '''''''''''''' '''''''''' '''''''''' ''''' ''''' '''''''''''' '''''''' '''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''''' '''''''''''' '''''''''' '''''''''''''''''''''''' ''''' ''''''''''''''''''''''' '''''''' '''''''''''' '''''''''' '''''''''''''''''''''''''''' '''''''''''' '''''''''''''' ''' '''''''' '''''''''''''' ''''''' '''''''''''''''''' '''''''' '''''''''''''''''' '''''''' ''''''''' ''' '''''''''' ''''''''''''''''' '''''''''''' '''''''''''''''' ''''''' '''''''' '''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''''''''' '''''' '''''''''''''''''''' ''''''' '''''''' '''''''''''''''''''' '''' ''''''''''''''' ''''' ''''''''' ''''' ''''''''''''' ''''''''''' '''''''''' ''''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''''' ''''' '''''''''' '''''''''''''''''''''' ''''''''' '''''''' '''''''''' '''''''''''''''''''''''''''''''' ''''' '''''''''''''''' '''''''' '''''''' ''''' '''''' ''''''''' '''' ''''''' ''''''''''' '''''''''''' '''''''' ''''''''''''''' ''''' ''''''''' ''''''''''''''''''''' '''''' ''''''' '''''''''' '''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''' ''''''''''''''' '''''''''''' ''''' '''''''' '''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''' '''''''''''''''''''' '''''''''' ''''''''''''' ''''''' '''''''''''''''' ''''''''' '''''''' ''''' '' ''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''' ''' ''''''''''''''''' '''''''''' ''''''''''''''''''''' ''''' '''''''''''''''''' ''''' ''''''''' ''''''''''''''' '''''''''''''' '''''''''' '''''''''' ''''''''''''''' ''''''' '''''''''''''''' ''''''''''''''' ''''''''''''''' '''' '''''''' '''''''''' '''''''''''''''' '''''''''''''' ''''''''''''''''''''''''''''''' '''''''' '''''''''''''''



'''''''''''''' '''''''''''' '''''''''''''''''' ''''' ''''''''''' ''''' ''''''' ''''' '''''''''''' '''' ''' '''''''''' '''''''''''''''' ''''' ''''''''''' ''' '''''''''''''' '''''''''''''''' ''''' ''''''''''''''' '''''''''''' '''''' ''''''''''' ''''''''''' '''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''' ''''''''''''' ''' ''''''''''''' ''''''''' '''''''' ''''''''''''''''''' ''''''''''''''' ''''''' '''''''''''''''''' '''''''''''' '''''''''''''''' '''''''''''' ''''''''' '''''''''''' '''''''''''''''''' '''''' ''''''''''''''' ''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''' '''''''''''''''' ''''''''''''''''''; i.e., buying U.S. segment transportation to Dracut, combining it with its supply, and transacting directly at Dracut. Successfully using this approach would reward ''''''''''' '''''''''''''''''' ''''''''' ''''''' '''''''''''''''' '''''''''''' '''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''''''' '''''''' '''''''''''''''' '''''''' ''''''''''''''''''''' '''''''''' '''''''''''' ''''''''''''''' '''''''''' '''''' '''''''''' ''''' ''''' ''''''''''' '''''' ''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''''' '''''''' ''''''''''' ''''''''' '''' '''''''' '''''''''''''''''' ''''' ''''''''' '''''''''''''' ''''''''''''''' ''''''''''''''''''' who would likely have tried to buy the gas if NSPI had not bought it, was the only source of M&NP-US capacity, but it could not charge more than the regulated price for the capacity. Rather than compete against '''''''''''' '''''''''''''''''' at Dracut for the sale, we expect that ''''''''''''''' '''''''''''''''' '''''''''''''' ''''''' '''''''''''''''' ''''''' ''''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''' '''''''''' ''''''' '''''''''''' ''''' '''''''''' '''''''' ''''''''''''''' ''''''''''' '''''' ''''''' ''''''''''' ''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''

4. NSPI’s gas-supply contract with Repsol Canada also reflects the consequences of market conditions that Emera and NSPI have contributed to or suffered to exist. (Recommendation #1)

NSPI’s '''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''' ''''' ''''''''''''''' '''''''''''''' '''''''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''''' ''''''' ''''''''' '''''''''''' '''' ''' '''''''''''''' '''''''''''''''''' '''''''''''' '''''' ''''' '''''''''''''' '''''''''' ''''''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''' '''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''' ''' ''''''''''' '''''''''''''''''''' ''''''''''''''''''''' ''''''' '''''''''' ''''''''''''''''' ''''''''''''''' ''''' '''''''''' '''''''''''''''''''' '''''''''' ''' ''''''''''''''''''' '''''''''''''' ''''''''''''''' '''' '''''''' ''''''''''''''''''' '''''''' ''''''''''''''' ''''''''''''''''''''''' ''''' ''''' ''''''''''''''''''' '''''''''' ''''' ''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''' '''' '''''' ''''''''''''''''''' ''''''''''''''''''' ''''' '''''''' ''''''''' '''''''''''' '''' '''' ''''''''''''''''''''' ''''' ''''''' ''''''''''''' ''''' '''''''' '''''''''' ''''''''' '''''''''''''''''''' ''''''''''' '''' '''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''' ''''' '''''''''''' ''''''''''''''''''' '''''''' ''''''''''''''' ''''' '''''''''''''''''''' ''''''''''' ''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''' '''''''''''''''''''' ''''' '''''''''''' '''''''''''''' ''' '''''''''' '''''''''''''' ''''''''''''' ''' ''''''''''''' '''''''' ''''''''''''''''''''' '''''''''' ''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''' '''''' ''''' '''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''' ''''''''' '''''''''''' ''''' '''''''''''''''' '''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''''''' ''''''''' '''''''''''' '''''''''' '' '''''''''''''''''''''''''' ''''''''''''''''''''' '''''' ''''''''''''''''' ''''''''''' ''''''''''''' ''''''''''''' '''''''''''''''''''''' '''''' '''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' '''''' ''''''' '''''''''''''''''''' ''''''''''' '''''''' ''''''''''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''''''' '''''''' ''''''''''''''''''''''''''' '''''''''''' '''''''''''' ''''' ''''''''''''''''''''''' ''''''''''''''''''''''''' In the market environment in which ''''''''''''''' '''''''''''''''' '''''''''''''''''''''' ''''' ''''''''''''''''''' ''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''' ''''' '' '''''''''''''' '''''''''''' as it wanted. One would expect in such a case a review of all possible markets, followed by nomination of the quantity it thought it could sell. In this analysis, ''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''''''' ''''' ''''' ''''''''''''''''''' '''' ''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' ''''' '''''''' ''''''' ''''''' '''''' '''''''''''''''''''''''''' ''''' '''''''''''''' Making a sale in Canada would not be taking gas out of M&NP-US, so there would be no reason to link the price of NSPI’s monthly-variable volumes to M&NP-US charges. '''' '''''''''''''''' '''''''''''''''' '''''''' ''''''' '''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''' '''''''''''' '''' '''''''' '''''''''''' ''''' '''''''''''''''''''''''''' '''' ''''' ''''''''''''''''''''' '''''''''' ''' ''''''''''''' ''''''' ''''''''''' '''''''''''''''' ''''''' '''' ''''''''''''''' ''''''''''' ''''''' ''''''''''''''''''' '''''''' '''' '''''''''''''''''' '''''' ''''''''''''' '''' ''''''''''''''''''''''''' '''''''''''''''''' ''''' '''''' ''''''''''''''''''' ''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' ''''''''' '''''' '''''''''''''''''''' ''''''''''''''''''''' ''''''''' '''''''' '''''''''''''''''''' '''''''''' '''''' ''''''''' ''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''' '''''''''''' '''''' '''''''''''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''' '''''''' '''''''''''''''''''''' ''''' '''''' ''''''''



''''''''''''' '''''''''''''''''''''''' ''''''''''''' ''''''' '''''''''''''''''''''''' '''''''''''''' ''''''''''''''' ''''''''' ''''''' '''''''''''' ''' ''''''''''''''''''''''''''' '''''''''''''''' '''' ''''''' ''''' ''''''' '''''''''''''''' ''''' ''''''''''' ''''''''''''' ''''''''''''''''''''' ''''''''''''' ''''' ''''''''''''''''''''' ''''' ''''' '''''''''''''''''''' ''''''''''''''''''''' ''''' ''''''''' '''''''''''''' '''''''''''''' '''''''''''''' '''''' '''''''''''''''''''' '''' '''''''''''''''''' '''''''''''''' '''''' '''''''' '''''''''''''''''' '''''''''''''''''''' '''''''''''' ''''''''' '''''''''''' ''''' ''''''''''''''''''' ''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''' ''''''''''''''' ''''''''''''''' ''''''''' '''''' ''''''''''''' '''''''''''''''''' '''''''' ''''''' ''''''''''''''' '''''''''''''''''''''''''''' ''''' '''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''''' ''''' ''''''''''''''''' '''''''''''''''''' The contract has other provisions characteristic of a market subject to artificial restrictions:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋

These restrictions are not consistent with a natural gas market functioning normally.

5. Events through the winter of 2010-2011 show steadily worsening market conditions for NSPI as one of the Province’s largest gas buyers. (Recommendation #1)

''''''''''' '''''''''''' '''''''''' ''''''' '''''''''' '''' ''''''''' ''''''' '''''' '''''''''''''''''''''''' ''''' '''''''' ''''''''''''' '''''''''''''''' ''''''''' '''''''''' ''''' ''''''''''''''''' '''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''' '''''' '''''''''''''''''''''''''''''' ''''' ''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''' '''''''''' '''''''''''''''' '''' ''''''''''''''' '''''''' '''''''''''''''''''' ''''' '''''''''''''''' ''''''''''''''' '''''''''''''' '''''''''''''''''''''' ''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''''''''''' '''''' ''''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''' '''''''''''' ''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''' ''''''''''' ''''''''''''''''' ''''''''' '''''''''''' '''''''''''''''' '''''''''''''' '''''' '''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''''' ''''''' ''''''''''''''''''''''' '''''''' '''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''' '''''''''''''''' '''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''''' ''''''' '''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''' '''''''''''''''' '''''''''''''''' ''' ''''''''''''' '''''''' '''''''' ''''''''''' '''''''''''''''

6. NSPI undertook sound HFO commodity and trucking procurement actions during the Audit Period.

RFPS were well constructed; bidders’ lists were appropriate; the selections appeared objective and proper. Presentations to the FST were proper and complete, and authorities sought fit the circumstances. The results of the competitions covered the Company’s requirements, while preserving the flexibility to supply those requirements in the most advantageous manner. Documentation of results was satisfactory.

7. LFO procurement comprised a particular strength during the Audit Period. NSPI conducted a very well-structured tender process. Tender documents were clear and NSPI effectively and thoroughly analyzed its offers. It appears that someone from NSPI’s Procurement group called the firms that were invited to bid but did not submit to ask why they did not submit. This is an important indication, to those firms and to Liberty, of the Company’s interest in vigorous competition for its requirements. The presentation of the results of the competition to the FST was also impressive. The analysis of the bids was thorough and complete, and details of the procurement process (purchase orders against signed contracts) formed part of the file, to give the FST a complete presentation regarding the procurement, but also to record, for anyone who might not remember, details of the process as it was configured at the time of the award.

8. NSPI’s natural gas costs for November and December 2010, and at least January 2011, were unreasonably high due to the Company’s failure to hedge Northeast Market basis. (Recommendation #2)



NSPI’s internal analysis of the basis blowout and ICFI’s analysis of possible basis hedging strategies state that NSPI’s Fuel Manual is '''''''''''' '''''' ''''''''''' ''''''''''''''''''. Certainly, the words “''''''''''' ''''''''''''''''' do not appear in Appendix D to the Fuel Manual, which addresses '''''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''''''''''''''' That absence lies far from the substantive issue, however. Appendix B specifically ''''''''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''' ''''' '''''''''''''''''''' ''''''''''''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''. Basis risk is ''''''''' ''''''''''''' ''''' ''' '''''''' ''''' ''''' '''''''''''''''''' '''' ''''''' '''''''''' ''''''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''' ''''''' '''''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''' (See page 18.) More importantly, the Fuel Manual states in a number of places that ''' '''''''''''''''''''' ''''''''''''''''''''' ''''' '''''' '''''''''''''''''' ''''''''''''''''''' '''' ''''''''''''''''''' '''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''''''''' '''''' ''''''''''''''''''''' '''' '''' ''''' '''''''''''''''''''

'''''''''' '''''''' ''''''''''''' ''' ''''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''' ''''' ''''''''''''' '''''' '''''' ''''''''''''' '''''' '''''''''' '''''''''' '''''''''' ''''''' ''''''''''''' '''''''' (Emphasis added)

Elsewhere, the Fuel Manual states ''''''''' '''''''''''''''''' ''''''''' '''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''''''''''' ''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''' '''''''' '''''''' ''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' It has long been observed that the Northeast U. S. Gas Market generally exhibits considerably more volatility than does the Henry Hub. Exceptions have arisen in special circumstances, such as the California Energy Crisis in 2000-2001 and the consequences of the 2005 hurricanes. One must conclude that the Fuel Manual, not to mention prudent management, contemplate the use of basis hedges, where appropriate. We find no NSPI analysis of the relative volatilities of the Henry Hub and the Northeast U. S. market centers. NSPI asked ICFI to analyze some potential hedging programs, however, and to compare NSPI’s gas costs under those programs with its costs without hedging. ICFI found that some basis hedges, combined with swing swaps at the same locations, would reduce expected costs. Reduced cost, however, does not comprise a sound, primary objective for a utility hedging program. Reduced exposure to low-probability outcomes with high costs should drive the program. In effect, the objective of hedging is to narrow the probability distribution of possible outcomes. As NSPI has found in its other hedging studies, an optimal hedging program is one that delivers the largest change in fuel cost stability risk relative to the increase that it causes in fuel costs. In partial explanation of its decision not to hedge basis, NSPI noted “… when we did do basis swing swaps … Liberty was very critical and did not support this activity.” This statement is not correct. The Liberty observation referred to came in Liberty’s 2007 audit of NSPI’s relationships with its affiliates, which concluded, quite differently, that:

• NSPI has not sufficiently analyzed the effectiveness of swing swaps it transacts with its affiliate Emera Energy.

• NSPI did not conduct an effective process for determining to select its affiliate Emera Energy as a long-term swing-swap counter-party.

A concern about transactions with affiliates on a basis that has not been cost-justified by sound analysis neither expresses nor implies concern about such transactions, per se. That is why we recommended that NSPI “Perform a structured analysis of the value of swing swaps, as a



condition of their continued use.” We did not recommend or suggest that NSPI use them with no one. An NSPI consultant did perform an analysis of swing swaps later that same year. That analysis found considerable reduction in Value at Risk (VaR) by moving the location of swing swaps from Henry Hub to a Northeast location. The following table takes information from the consultant’s report. Notwithstanding the results of that analysis, NSPI stopped using any swing swaps in March 2007.

Monthly VaR, 2002-2006 Period Result

No Swing Swap

Henry Hub Swing Swap

Tetco M3 Swing Swap

Dracut Swing Swap

''''''''' ''' ''''''''''''''''' '''''' '''''''' ''''''''''''''''''' '''''''''

''''''''''' '''''''''''''' '''' ''''''' ''''''''''''''''

'''''''''''''''' ''''''''

'''''''''''''

''''''''

''''''''''''' '''''''

''''''''''''' ''''' '''''''''''''' '''''''' ''''''''' ''''''''''''''''''' ''''''''''

'''''''''''' '''''''''''''' ''' ''''''' ''''''''''''''''''

''''''''''''''''' '''''''

'''''''''''''

'''''''

''''''''''''''' ''''''''

'''''''''' '''''' ''''''''''''''' ''''''' '''''''' ''''''''''''''''''' '''''''''

''''''''''' '''''''''''''''' ''' ''''''' '''''''''''''''''

''''''''''''''''' ''''''''

''''''''''''''' '''''''

'''''''''''''' '''''''

''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''' ''''''' ''''' ''''''' ''''''''''''''' ''''''''' '''''''''''''''''''' ''''' '''''''''''' ''''' ''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''' ''''''' ''''''''''''''''''''''''''''' ''''''''''' ''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''' '''''''' '''''''' '''''''''''''''' '''''''' ''''''''''''''' '''''''' ''''''''''''''''''' '''''''''''''''''''''''' '''''' '''''''''''''''''' '''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''' '''''' '''''' ''''''''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''''''' '''' '''''''''' ''''''''''''''' ''''''''' '''''''' '''''''''''' '''''''' ''''''''''''''''''' ''''''' '''''''' ''''''''''''''' ''''''''''''''' ''''''' ''''''' ''''''''''''''''''''''''' '''''''''''''''' '''''''''''' ''''' '''''''''''''''''''''''''''' ''''''''' ''''''' '''''''' ''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' '''''''''''' '''''''''''' '''''''''' ''''''' ''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''' ''''''''''' '''''''' ''''''''''''''''''''' '''''''''' ''''''''' '''''''''''' ''''' ''''''''''''' '''''''''''''''' ''''''''''''' ''''''''''' ''''''''''''''''' ''''' '''''''''''''' ''''''''''''' '''''''''''''' '''''''''''''''''''' '''''''''''' ''''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''''' '''' ''''''''''''''''' '''''''''' ''''''' ''''''''''''' '''' '''''' ''''''''''''' '''''''' ''''''''''''''''''' '''''' '''''''''''''''''' '''''''' '''''''''''' '''''''''''''''''' '''''''''' ''''''' '''''''''''' '''' ''''''''''''''' '''''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''''''''''''' '''''''''''''''''''' ''''''' ''''''''''''' ''''' '''''''''''''' ''''''''' ''''''''' ''''''''''''''''''''''''' ''''''''''''''''' '''''''' '''''''' ''''''''''''''''' ''''''' '''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''' ''''''''''''' '''''''''''''' '''''' ''''''''''' ''''' '''''''''''''''''''' '''' ''' ''''''''''''''''''''''' ''''''''''''''' '''''''''''''' '''''''''''

9. NSPI’s documentation of its oil- and gas-purchasing decisions, including those for hedging, is generally good.

NSPI expends considerable effort documenting its oil- and gas-purchasing decisions, including their presentation to the FST. The quality of the documentation varies somewhat, but Liberty was generally able to find a reasonable level of substantiating documentation for decisions of significant consequence. The documentation materials are generally well organized and easy to follow.

D. Recommendations

1. Deem costs in the amount $6.0 million as having been avoidable, in light of NSPI’s continuing inaction in addressing Maritimes gas market conditions. (Conclusions #1, 2, 3, 4, 5)



Across the two years of the Audit Period, NSPI continued to fail to act in the face of unfavorable market conditions. It should not ask customers to suffer the consequences of that inaction. This recommendation must consider how NSPI may have acted to cause a change in market conditions. To undertake that consideration, one needs to assume an arm’s-length relationship between NSPI and its parent and affiliates. This becomes necessary because what would best serve NSPI and its customers here is not likely to be consistent with what serves the interests of the remainder of the corporate family, which has substantial business relationships with major Maritimes market participants. We have considered developments in the Maritimes Gas Market and the circumstances prevailing at the time that NSPI made or did not make what we view as relevant gas-purchase commitments. For shorter-term purchases, we sought to determine how the Market might have operated, had:

• Buyers at Maritimes delivery points had access to regasified LNG on Brunswick Pipeline via displacement, as envisioned by the NEB in its order authorizing the Brunswick Pipeline

• The price of the regasified LNG would be '''''''''''''''' '''''''' '''''''''''''''''', as specified in the NEB’s decision regarding Repsol Canada’s long-term import and re-export licenses

• LNG would be available to Repsol Canada in accordance with the general supply scheme in its contract with its supplier, Repsol Comercializadora De Gas, S. A; in particular, quantities nominated in accordance with the deadlines in the contract would be assured, but incremental quantities would not

• All Maritimes producers and holders of contracts for Maritimes-produced supply would act as independent sellers.

''''''''' ''''''''''''''''''' ''''' ''''''' '''''''''''''' '''''''' '''''''''''' ''''''''' '''''''' '''''''''''''''''''''' '''''''''''''''''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

'''''' '''''' base-load contract with ''''''' '''''''''' ''''''''' '''''''''''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''''''''' ''''' ''''''''' '''''''''''''' '''''''' ''''''''''''''''' '''' ''''' '''''''''' '''''''''''''' ''''''''''''''''''''''' ''''''' ''''''''''''''''''''''' '''''''''''''''''' ''''''''' ''''''' '''''''' '''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''''' '''''''''''''''' '''' ''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''' ''''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''' ''''''''''''' ''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''' '''''' '''''''''''''''''''''''' '''''''''''' ''''''' ''''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''' '''''''''''''''' '''''''''''''' '''''' '''''''''''''''' '''''' ''''''''''''''''''''' ''''''''''''''''' '''''''' ''''''''''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''' '''''''''' ''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''' ''''''''''''''' '''''' ''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''' '''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''' ''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''' '''''' ''''''''''''''' '''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''''''''''''''''''' '''''' '''''''''' base-load contract with '''''''' ''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' ''''' '''''''' ''''''''''''' '''''''' '''''''''''''''' ''' '''' ''''''' '''''''' '''''' '''''''''''' ''''''''' ''''''''' ''''''''''''''''''''''' '''''''' '''''''''' ''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''''' '''''''' ''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''''''''' ''''''''''''''' '''''''''''''''



'''''''''''' ''''''''''''''''''''' '''''''''''''' ''''''''' '''''' '''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' '''''''''''' ''''''' '''''''''' '''''''''''' ''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''''''''''''' The next table shows the applicable volumes (in MMBtu per day).

Month Volume Month Volume Month Volume

November 2010 ''''''''''''''' April 2011 ''''''''''''''' December 2011 ''''''''''''''' December 2010 ''''''''''''''''' May 2011 ''''''''''''''''' September 2011 ''''''''''''''''' January 2011 ''''''''''''''' June 2011 ''''''''''''''' October 2011 ''''''''''''''' February 2011 ''''''''''''''''' July 2011 '''''''''''''''' November 2011 ''''''''''''''''' March 2011 ''''''''''''''' August 2011 '''''''''''''''

''''''''''''''''''''' '''''''' ''''''''''' ''''''''''''''''''''''''' ''''' '''''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''''''''''''' Monthly purchases We read ''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''' ''''''''''' '''''' '''''''''''''''''' ''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''' '''''''''''''' '''''''' ''''' ''''''''''''''''''' because requirements for them would only become known after the nomination deadline in the contract had passed. '''''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''''''' ''''''''''' ''''' ''''''''''''' '''''''''''' ''''''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''''''''' '''''''''' '''''''''''''''''''' ''''' '''''' '''''' '''' ''''''''''''''''''''''' ''''''''''''''''' '''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''' ''''''''''''''''''''' ''''''''' '''''''''''''''''' ''''' '''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''''' ''''''''' ''''' ''''''''''''''' ''''' '''''''''' ''''''''''''''''''''''''''''' '''''' '''''''' ''''''''''''''''''''''''''''' '''''''''''' ''''''''''''' '''''' ''''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''' ''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''' '''''''' ''''''' ''''''''' '''''''''''''' ''''' ''''''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''' ''''' ''''' '''''''''''''''''''''' '''''''''''''''''' '''' '''''''' ''''''''' ''''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''''' We assume that, in winter, ''''''''''''''' ''''''''''''' ''''''''''' ''''''''''''' ''''' '''''''''''''''''''' ''''''''''''''''''' ''''''''''' '''''''''''''''''''''' '''''''''''''' Thus, in winter (November through March), it would pay only ''''''''''''''' ''''''''' ''''''''''''''''''' for Maritimes gas, because that gas would be ''''''''''''''''''''''' ''''''' ''''''''''''. In summer (April through October), however, '''''''''''''''' '''''''''''''' ''''''''' ''''''''''''' ''''''' '''''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''''''' '''' ''''''''''''''' '''''''''''''' '''''''' '''''''''''' ''''''''''''' ''''' ''''' '''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''' This premium would not be unlimited, however, as ''''''''''''''' '''' ''''''' '''''''''' '''''''''''''''' ''''' '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''' ''''''''''''' ''' '''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''' '''''''''''''''''''''' ''''' ''''''''''' '''''''' '''''''''''''''''''''' '''''''''''''''''''''' '''''' ''''''''''''''' ''''' '''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''

''''''''' '''''''''' ''''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''' '''''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''''''' ''''' '''''''''''''''''''''''''''''''''' '''''' '''''''''''''' '''''''' '''''''' ''''''''''''' ''''''''''''''''''

Month Volume1 NSPI Price Premium2 Excess3 November 2010 ''''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''' '''' '''''''''''''''''''' '''''''''' ''''''''''''''''' January 2011 '''''''''''''' '''''''''''''' '''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''' February 2011 '''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''''''' April 2011 '''''''''''''''' '''''''''''''' ''''''''' '''''''''' ''''''''''''''''' April 2011 '''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''' May 2011 '''''''''''''' '''''''''''''' '''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''''''' June 2011 ''''''''''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''''' July 2011 ''''''''''''''''' '''''''''''''''' '''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''''' August 2011 '''''''''''' '''''''''''''''' ''''''''''' ''''''''''''''''''' ''''''''' '''''''''''''''' October 2011 ''''''''''''''''' ''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''' '''''''''''''''''''



October 2011 '''''''''''' '''''''''''''''' '''''''''' ''''''''' '''''''''''''' 1MMBtu/day 2(US$/MMBtu) 3 (US$)

Seasonal Purchases We applied the same construct to seasonal purchases as we did to monthly purchases. ''''''''''''''' '''''''''''''''' ''''''''''''' '''''''' ''''''''''' '''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''' ''''' ''''''''''''''' ''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''''' ''''' '''''''''''''' ''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''' '''''' '''''''''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''''' ''''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''' ''''' ''''''''' '''''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''''''''' ''''''''''''''' '''''''''''''' '''''''''' '''''''''''' '''''' ''''''''''''''''''' '''''''''''''''''''' ''''' '''''' '''''''''''''''' ''''''''''' '''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' '''''''' ''''''''''''''' '''''''''''''''''''''' ''''' ''''''''''''' '''''''''' '''''''''''''''' ''''''''' ''''''''''''''''''''' '''' '''''''''''' '''''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''' '''''''''''''''''' '''''''''''' ''''' ''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''' '''' ''''' '''''' '''' ''''''''''''''''''' '''''''' '''''''''''''' ''''''''''' ''''''' '''''' '''' ''''''''' ''''' '''''''' ''''''''''''''''''''' '''''''''''''''''

NSPI ''''''''''''' ''''''''''' '''''''''''''''''' ''''''''''''''''''''''' during the Audit Period, '''''''' '''''' ''''''' '''''''''''' '''''''''''''''''' ''''''''''''''' ''''' '''''''''''' ''''''''' '''''''''' ''''''' ''''''' '''''''''''''''' ''''' '''''''''''''''''''''''''', the first two months of which are in the Audit Period. The one for the summer of 2011 was priced at ''''''''''''''' ''''''''''''' '''''''''''''''''''''', which falls close to '''''''' ''''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''''''''''''''' standard. Our calculation of excess costs for this contract is the contract volume, ''''''''''''' '''''''''''''''''''''''''''' '''''''''''' '''''''''''''' ''''''''''''''' '''''''''''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''' ''''''''''''''''''''''''' ''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''' '''''''''' '''''''''''''' ''''' ''''''''''''' '''''''' ''''''''''''''''' '''''''''''''' '''''''' ''''' '''''''''''' ''''''''' ''''''''''''' ''''''''''''''''''''''''''' '''' '''''''''''''' ''''''''' ''''''''''''''''''' '''''''' ''''''''''''''''''' The volume under the second was '''''''''''''' '''''''''''''''''''''''''''' '''' ''''''''''''''''' '''''''''' ''''''''''''''''''''' per MMBtu. The November volume under the lower-priced contract was subsequently withdrawn, but was replaced with increased volume in that month from the higher-priced contract. Our standard price for winter-period seasonal purchases is '''''''''''' ''''''''' ''''''''''''''''''''; therefore our calculation of excess costs for these two contracts for the two months is US$239,350. The total calculation of excess costs for seasonal contracts thus equals US$276,800.

Daily and Intra-Day Purchases We used NSPI’s transaction records to plot the prices that NSPI has paid in daily and intra-day gas-purchase transactions over the years from 2008 through 2011. We “normalized” the data by '''''''''''''''''''''''' ''''''' ''''''''''''''''' '''''''''' '''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''''''', in order to observe changes in price levels due to factors peculiar to the Maritimes Region. Chapter III presented those plots, which we repeat below.



''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' '''''''''' ''''''''''' ''''''' ''''''''' '''''''' (Chart is Confidential)

''''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''''' '''''''' '''''''''' '''''''''''' '''''' ''''''''' '''''''' (Chart is Confidential)

'''''''''''''''''''''''''''''''' ''''' '''''''' ''''''''' ''''''''''''' ''''' ''''''''''''''''' ''''' ''''''' ''''''''''' '''''''''''' ''''''' '''''''''' ''''''''''''' '''''' '''''''''''''''''''''''''''''' ''''''''''''' '''''''''' '''''''''''' '''''''' ''''''''''''''''''' ''''''' '''''''''''''''''''''''' '''''''''''''' ''''''''''''' '''''' '''''''''''' '''''''''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''' '''''''''''' ''''''''' ''''' '''''''''''''''''''''' '''''''' '''''''''''''''''''''''''''''''''''''' ''''''''''''' '''''''''''''''' ''''' '''''''''''''' ''''''''' ''''''''''''''' ''''''''' ''''''''' ''''''' '''''''''''''''''' ''''' ''''''''''''''''' '''''''''''''''''''''''' ''''''' ''''''''' ''''''''''''''''''''' ''''' '''''''''''''''''''' '''''''''''''''''''''' '''''''''



''''''''''''''''''' '''''''''''' '''''''' '''''''' ''''''''''''''' '''''' '''''''''''''''' ''''' '''''''''''' '''''''' ''''''''''''''''''''''''' '''' ''''''''''' '''''''''''''''''''''''' '''''' ''''''' ''''''''''''''''''' ''''' ''''''''''' ''''''''' ''''' '''''''''''''''''''''' '''' ''''''' ''''''''' '''''''''''' ''''' '''''''' ''''''''''''' '''''''''''''''' '''''''''' ''''''''' '''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''''''' ''''''''''''''''' ''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

''''''''' '''''''' '''''' ''''''''''''' ''''''''' '''''''''''''''''' '''' ''''''''''''''''''''''''''''

2. Defer recovery of $12.8 million pending study of what basis hedges would have resulted under a properly designed hedging program for the winter of 2010-2011. (Conclusion #8)

Ample time existed before the expiration of the '''''''''''' '''''''''''''''' '''''''''''''''''''' to study how best to protect its fuel costs from the basis-blowout phenomenon that occurred in mid-December 2010. There is no excuse for not having done so. Thus, Liberty feels that a disallowance for imprudence is called for. We cannot calculate a proper disallowance, however, as doing so would require comparing costs actually experienced with those that would have been incurred if they had been properly hedged. Proper hedging requires study to determine a hedging program designed to produce the maximum reduction in price volatility for the least cost. NSPI began a study of basis hedging after the basis blowout of December 2010. This study does not appear to us to have a responsive focus. Liberty is unable to determine: (a) the proper hedging program for accomplishing the objective (reducing basis volatility at least cost), and (b) the particular financial instruments that should have been bought to implement that program prior to December 2010. We recommend that the NSUARB suspend recovery of some amount, pending identification of a proper hedging program, and the selection of particular hedge instruments that should have been purchased to protect NSPI’s fuel costs from the events of December 2010 and the rest of that winter. At that time, costs actually experienced can be compared with what they would have been with proper hedging, and a disallowance calculated. Liberty produced for the NSUARB a report titled FAM Variance Analysis, and filed it in July 2011. '''''''''''''' ''''''''''''''''''' ''''' ''''' ''''''''' ''''' ''''''' ''''''''''' ''''''''''''''''''''''''' ''''''''' ''''''''''''' ''''' '''''''''''''''''' '''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''' '''''''''''''' ''''''''''' '''''''''''''' '''''' ''''''''''''' ''''' ''''''''' '''''''''''''''' ''''' '''''''''''''''''''''''' ''''''''' '''''''''''''''''''''' '''''''''''' '''''''''' '' ''''''''''''''''''' ''''' '''''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''''''' '''''''''''' '''''''''''''''''''''' '''''''''''''' ''''''''''' '''''''' '''''''''''''''''' '''''''' ''''''''''''''''' '''''''''''''''''' '''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''' '''''''''''''''' '''''''''''' ''''' ''''''''''''''''''''''''''''' ''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''''''''' ''''' '''''' ''''''''' '''''''''''''''' ''''' '''''''' '''''''' ''''''''''''''' '''''''''''''''' '''''''''''''' '''''''''' ''''' ''''''''''' '''''''' '''''''''''''' '''''''''''''''' ''''''''''' ''''''''''''''''''''''''' ''''' '''''''''''''' '''''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''' ''''''' ''''''' '''''''''''''' '''''''''''''''' ''''' ''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''' '''''''''''''''' ''''''''''' '''''''''' ''''' ''''''''' ''''''''''' ''''''''''' ''''''''''''''''''''''' ''''' ''' ''''''''''''''''''''''''''''''''''''' '''''''''''' '''''''''''''''''''' '''''''''' ''''''' ''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''' '''''''''''''' ''''''' '''''' '''''''''''''''''''''''''''''''''' ''''''''' '''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' ''''' ''''''''''''''''''''' '''''' ''''''''' ''''''''''''''''''' ''''''''''' ''''''''''''' ''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋



We would anticipate a joint report from Liberty and NSPI presenting the results of the recommended effort to the NSUARB, at which time consideration of FAM recovery could be further considered. In making this recommendation, we use the amount of $12.8 million as a place-holder. The actual amount of excess costs, if any, may prove higher or lower. Using such a place-holder will incent NSPI to work expeditiously to complete the required analysis.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) VI. Solid Fuel Supply Management

July 9, 2012 Page VI-1 The Liberty Consulting Group

VI. Solid Fuel Supply Management

A. Background This chapter addresses the following areas related to fuel supply management:

Receipt Information

Weighing, Sampling, and Analysis

Contract Administration

Inventory Management

B. Findings

1. Receipt Information NSPI uses Fuelworx, a solution offered by Sungard Financial Systems, as its fuel-tracking system for managing solid fuel receipt information at generating stations. NSPI’s Fuelworx system contains a data base of contract information, coal weights received, coal analysis, and shipping information. NSPI collects solid fuel receipt and unloading information, and solid fuel weights in the coal unloading area, where personnel record it on paper logs. Plant staff enter the coal types and weights unloaded at the plant site into Fuelworx. The Contract Administrator enters the vessel numbers and vessel information into Fuelworx. Data for each vessel is also received in hard copy, as well as electronically, and includes the volume received. Contract-administration personnel in the headquarters office building will already have entered the shipping information into the Fuelworx system. NSPI therefore can match solid fuel received at the stations with solid fuel shipped by coal suppliers. The Fuelworx system contains a complete record providing quantities of solid fuel shipped by supplier, solid fuel received at the stations and waiting to be unloaded, and solid fuel unloaded. Solid fuel unloaded at the Sydney International Pier transships either to the Lingan or Point Aconi generating stations by rail. An NSPI management contract with Logistec covers unloading activities at the pier. '''''''''' ''''''''''''''''''' Logistec Services Agreement has an expiration date of ''''''''''''''''''''' '''''''' '''''''''''''. Logistec’s Sydney Coal Railway (“SCR”), formerly a subsidiary of Quebec Rail, serves the Sydney International Pier. SCR delivers coal from the International Pier to Lingan Generating Station. SCR moves solid fuel from the pier to Lingan in leased 21 car trains. Each rail car can hold approximately 85 tonnes of fuel. NSPI provides rail owner Logistec with a weekly delivery schedule. Normal deliveries comprise about 35,000 tonnes per week, shipped by four unit trains per day, five days per week. NSPI has also made provision for additional premium deliveries: (a) on weekends, and (b) for more than four daily trains during weekdays. The parties established rail rates during the negotiation of the service agreement. The rates remain subject to an ''''''''''''''''' ''''''''' '''''''''''''''''''''''. ''''''''''''''''''' '''''''''''''' ''''''' ''''''''''''''''''''''''''''''' '''''''' '''''''' ''''''''' ''''''''''''''''''''''' '''''''''''' ''''''''''' '''''''' ''''''''''' '''''''''''''' ''''''' '''''''''''''' '''''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''''''' '''''''''' '''''''''''''''''' '''''''''''''''''''' '''''' '''''''' ''''''''' '''' ''''''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' '''''' ''''''''''' ''''''''''''' ''''' ''''''''''''''' ''''''''''''' ''''''' ''''''''''''''' ''''' ''''''''''' ''''''''''''''''''''''' '''''''''' ''''''' '''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''''' ''''''''''''''''



NSPI unloads coal at the Lingan Station with a rotary dumper, after which it moves the unloaded coal to the units or to reclaim piles. The various Lingan coal types require segregation into six station reclaim piles. NSPI also maintains a long-term dead storage pile at Lingan (LTDS). This pile can hold approximately 330,000 tonnes of coal. Solid fuel unloaded at the PTMT moves directly to the Pt. Tupper station by conveyor and to the Trenton station by rail. A management contract between NSPI and Savage covers fuel unloading activities at the pier. The Pt. Tupper station has no inventory pile of its own, but relies on coal stored at the PTMT, from which the station directly receives coal by a conveyor system. The Cape Breton and Central Nova Scotia Railway (a subsidiary of Rail America) delivers coal to Trenton from Point Tupper Marine Terminal, under the terms of ''' '''''''''''''' '''''''''''''''''''' agreement. The parties established rates for these movements during negotiation of the service agreement. Those rates adjust '''''''''''''''''' ''''''''''''' ''' '''''''' ''''''''''''''''' ''''''''' ''' '''''''''''''''''''''''''''''' '''''''''''''''''''''''''' '''''''' ''''''''''''''. The agreement ran through ''''''''''''''''''''''''' ''''''' ''''''''''', but had provisions ''''''' ''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''. The parties renewed the agreement for '''''' '''''''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''' ''''''''''' '''''''''''''''''''''''' '''' ''''''''''''' '''''''''''''' '''''''' ''''''''''''''''''' NSPI provided '''''''' ''''' rail cars used for these shipments under a ''''''''''' ''''''''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''''' '''''''''''''''. That agreement expired on '''''''''''' '''''''' '''''''''''' NSPI has executed a new agreement with '''''''''' '''''''''''''''' ''''''''' '''''''''''''''''''''''''''' to cover the ''''''''' '''''''''' years. The cars under this agreement have a capacity of approximately ''''' '''''''''''''''' (the railway limit is '''''''''''''''''''' '''''''.). Two modes of rail delivery exist for Trenton. The first consists of dedicated deliveries of 25 to 30 cars daily, five days per week. A dedicated train crew loads and delivers the cars. This mode requires two sets of cars. General freight comprises the second rail transport mode for Trenton. It consists of adding coal cars to the daily general freight train. This mode provides daily deliveries of 18-20 cars, and requires three sets of cars. NSPI has also provided for additional, premium deliveries to cover days outside the standard five-days per week. NSPI makes efforts to use the lower cost rate provided by the dedicated cars. NSPI runs the dedicated trains almost exclusively during the winter months because they are faster and the coal will not freeze in the cars prior to arrival at Trenton. NSPI provides the railroad with a delivery schedule for the coming two weeks. Rotary dump cars carry the coal, but they are bottom-dumped at Trenton. Coal unloaded at the Trenton station goes directly to the units or to reclaim piles. Two reclaim piles are designated for Trenton 5, and four reclaim piles are designated for Trenton 6. NSPI has detailed procedures to address the unloading of ocean-going vessels at the PTMT. Such procedures have been developed in close coordination with Savage, Inc., which serves NSPI as the contractor responsible for management of PTMT operations. NSPI does not have specific procedures for unloading ocean-going vessels at the Sydney International Pier. Those operations fall under NSPI’s port-management contract with Logistec. NSPI does not have specific procedures applicable to moving solid fuel by rail from either of the two piers to its generating stations, or for loading and unloading trains. The Company relies on the experience of its personnel for effective operation of the overall transportation system, including loading and unloading operations.



2. Weighing, Sampling, and Analysis

a. Weighing Solid fuel weight and quality information for NSPI’s international contracts comes from weights, samples, and analyses performed by the suppliers at the time of fuel loading. Vessel draft surveys conducted at the loading ports determine solid-fuel weights. NSPI contracts for the services of third parties to observe vessel loading at the load ports, both in South America, and for Great Lakes shipments. The observations of these third parties include oversight of the cargo sampling conducted by the supplier during vessel loading, a check of the cargo holds, and a check of proximate and CV analysis of the contractual sample. '''''''''''''''' ''''''''''''''' performs South America services, ''''''''' '''''''''''' '''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''') serves Great Lakes shipments. '''''''''' ''''''''''''''''' ''''''''''''''' ''''''''' ''''''''''''' provide NSPI, for each vessel loading, a report that addresses all of the weight and quality parameters monitored. The reports also provide commentary on overall loading processes and conditions. These contracted third parties use lab services provided by ''''''''''''''''''' '''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''''' '''''' '''''''''''''''''''' '''''''''''''' '''''''. in the U.S. Conduct of vessel draft surveys is certified, in accordance with The Code of Practice for Draft Surveys. Reports are e-mailed directly to NSPI’s Scheduling & Logistics Coordinator. Liberty’s review of the reports provided by NSPI’s third party contractors did not reveal the problems encountered during the last audit. Only minor problems related to vessel hold contamination were reported. In these cases, the vessel hold was cleaned prior to accepting the solid fuel product destined for NSPI. Certified truck scales at the mine sites determine coal weights for domestic coal delivered from ''''''''''''' '''''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''''' '''''''''''''. The truck scale certifications will be submitted to the NSPI Contract Administrator on an annual basis, and after any repair or modification to the scale. Should the mine site scale become inoperable, there have been occasions where the certified generating station truck scale provided the transactional weights for a short period of time. The alternative would have been to stop deliveries pending site scale repair/calibration. Lingan, Point Aconi and Trenton stations randomly weigh (loaded and empty) some trucks delivering domestic coal. The plant truck scales take these weights. NSPI compares results of these random weigh checks to the supplier-provided weights on a monthly basis. The comparison of the mine site and plant scale weights for these loads of domestic coal undergo statistical analysis submitted to the Contract Administrator. Action is taken as warranted. The generating station truck scales undergo annual certification, and after any repairs or modifications.

b. Sampling and Analysis The governing samples for all NSPI international solid-fuel purchases take place at the loading facilities and by suppliers. The suppliers have responsibility for analyzing the samples, whose results they e-mail to NSPI for use in contract administration and for entry into NSPI’s Fuelworx system. The suppliers use ASTM-certified sampling systems for both coal and Petcoke and they take samples during vessel loading. ASTM International operates as one of the world’s largest voluntary standards development organizations. It specializes in the development of technical standards for materials, products, systems, and services. ASTM was known, at its founding more than 100 years ago, as the American Society for Testing and Materials. ATSM’s open



membership policy has produced over 30,000 members, consisting of technical experts representing producers, users, consumers, government and academia from over 120 countries. ASTM is a globally recognized source and “the standards forum of choice” for technical standards in a wide range of areas, including solid-fuel testing. Following the preceding FAM Audit, NSPI developed a new set of procedures for solid fuel sampling and analysis during 2010. The Company implemented the new procedures at the beginning of 2011. Determination of the transactional samples and analyses for domestic coal forms the primary focus of these procedures. They do specify that all transactional analyses for domestic coal, as burned at Lingan, Point Aconi and Trenton, will be performed by the NSPI laboratories at these locations. Some confusing aspects of these procedures, however, require more clarity of presentation. In addition, these new procedures incorporate random sampling and analysis by '''''''''''''''''''''' of international shipments. A local firm, ''''''''''''''''''''''''' provides a number of sampling and analysis for NSPI:

• Random sampling and analysis of selected vessel cargoes • Random sampling and analysis of domestic coal deliveries (monthly or quarterly) for

deliveries to Lingan, Point Aconi and Trenton • Proximate and calorific value (CV) analysis of the sample splits taken from selected

cargoes at the load ports • Sample composting and analyses, for both proximate and CV analyses, of samples for

the mercury program. In conjunction with the first listed service, ''''''''''''''''''''''' takes periodic samples of coal being offloaded from international ports. The quality measurements of these samples undergo cross-checking against measures taken at the load port. In addition, '''''''''''''''''''' monitors the product being discharged in Nova Scotia, and has responsibility for reporting any anomalies or contaminants observed. The second and third services listed above have the purpose of cross-checking solid fuel quality parameters against results from samples taken at the loading locations. In conjunction with the last '''''''''''''''''''''''' service listed above, NSPI also used the external laboratory ''''''''''''''''''''' '''''''''''''''''''''' to provide analytical services for the analysis of coal, fly-ash and bottom ash samples (mercury, carbon, chlorine and total metals) received from '''''''''''''''''''''' for the mercury program. Liberty cross-checked reports provided by ''''''''''''''''''''' for all of the above services, and found them to be appropriate. The new procedures for sampling and analysis of domestic coal deliveries applied for all of 2011. They comply with ASTM procedures. These procedures require manual sampling of truck deliveries to be performed by truck drivers at the NSPI stations. '''''''''''''''''''''' trains the drivers. NSPI site personnel at Lingan, Point Aconi and Trenton, with training by ''''''''''''''''''''', also provide quality control observations of the sampling conducted by the truck drivers.



Samples from Nova domestic coal deliveries to Trenton come from the coal unloaded from each truck. Personnel seal sample bags in the Security Building. The bags then go to the Westville laboratory, and are stored in the Nova lab building. These individual samples are prepared the following day at the Nova lab facilities to produce three representative daily composite samples. One sample is delivered to the Trenton site, one is used by Nova for daily process control and the third is saved to produce a weekly composite sample. The weekly composite sample is then delivered to Trenton and analyzed at the Trenton lab to produce the weekly transactional analysis results. For '''''''''''' domestic coal deliveries to Lingan and Point Aconi, the coal unloaded from each truck is sampled. The samples are taken to the plant Security Building where they are sealed and stored. At the end of the day, plant lab staff collects the individual truck samples, and prepares from them a daily composite sample. These daily composite samples are saved and composited to produce a weekly sample for transactional analysis conducted by the plant lab staff. The difference in handling of coal samples between Trenton, Lingan and Point Aconi derives in part from to the contract between NSPI and Nova. Moreover, the Westville mine operation (serving Trenton) requires prompt feedback on delivered coal characteristics, in order to ensure proper quality control. This prompt feedback proves especially important in light of the use of four different coal seams to achieve specified quality delivery to NSPI. This procedure has also enabled Trenton to operate with fewer coal handling staff than it would otherwise have. For many years, NSPI did not have an ASTM-certified solid fuel sampling system at any generating stations. The Company therefore did not have a sound method for determining accurately the quality of solid fuel being burned. It relied on samples and analyses taken by solid fuel suppliers at loading ports. The lack of accurate solid-fuel quality information had led to inaccuracies in NSPI’s calculations of heat rate information and of the quantity of fuel in inventory. Heat rate and quantities-consumed calculations become inaccurate if either the applied Btu content or the assumed moisture content of solid fuel suffers inaccuracy resulting from poor sampling techniques. Such inaccuracies can cause coal pile surveys to require consumption adjustments, which will ultimately affect the heat rate. When NSPI finds a coal pile to have experienced a consistent variance in two subsequent quarters, a coal consumption (or unconsumption) adjustment is made. That adjustment produces an automated adjustment to heat rate to correct for the variance. The results of such adjustment can have a significant impact on heat rate. NSPI has addressed the issue. It gained approval in 2010 for the capital expenditures to install an ASTM-certified fuel sampling system at Lingan. A coal belt sampler (2010 ACE Plan CI#38851) was approved, and the new coal belt sampling system installed at Lingan became operational on January 1, 2011. It remains too early to determine the broader system impact of having certified NSPI solid fuel sampling systems at its generating stations. Still the first year of system operation at Lingan has brought useful knowledge. NSPI has determined that solid fuel picks up moisture on its way to Lingan. Measurements at Lingan show that the moisture content of coal is on average two percent higher than as measured at the coal loading ports.



NSPI has its own fuel analysis laboratories at the Lingan, Point Aconi and Trenton generating stations. NSPI uses these labs for analysis of solid-fuel samples, which provide the transactional analyses for domestic coal deliveries used for contract administration purposes. None of these labs has ASTM certification. NSPI conducts a quarterly, round-robin series of analyses among its labs to confirm and maintain accuracy of sample results. In addition, at random intervals through the year, NSPI delivers weekly samples from the NSPI labs to ''''''''''''''''''''.

c. Station Feeder Calibrations Measurement of the fuel actually fed to station boilers provides an important link in relating solid fuel received under contract with solid fuel inventories. Gravimetric feeders measure fuel fed to station boilers. These feeders essentially measure the weight of coal being fed into the boilers. They receive coal from the station bunkers, and feed it into the station coal mills (pulverizers) prior to injection of pulverized coal into the boilers. Liberty examined the Audit Period’s calibration records for the gravimetric feeders for each station. The records varied greatly among stations. They displayed significant inconsistency in frequency of calibrations. These factors make the records difficult to audit, and certainly do not support a consistent standard of expected performance among stations. Only Point Tupper Station displayed consistent semiannual calibrations. Point Aconi and Point Tupper use the same calibration forms. These computerized forms are formally printed, and the calibration data appears to be kept on computers. The forms for Lingan are also computerized. They are also formally printed, but are different from the forms for Point Aconi and Point Tupper. There is no standardization between Lingan and the other two stations. The forms for Trenton contained considerable calibration data, but again displayed significant differences from the forms of the other stations. Moreover, all data entered on the forms was handwritten, with no computerization of data apparent. Calibration frequency from station to station also displayed significant inconsistency. Notation on the forms indicated a calibration cycle of twice per year. The data on the forms did not indicate such consistency of calibration. The Point Tupper forms provided no actual calibration data. They contained only a brief description of what calibrations had been performed. It appeared that calibrations for most of the multiple feeders at Point Tupper took place twice per year. Trenton can provide a large quantity of calibration data, but we observed blank entries for the categories of Initial RPM, Roller Alignment, Adjustment of Belt Tracking and Tension, Cal-Factor-Tare & Belt Speed, Cal-Factor-Span Factor, and Self Test data. None of the Trenton feeders had been calibrated twice per year. The Lingan forms also provide considerable calibration data. In most cases, however, for the multiple feeders, there had only been one or two calibrations over the two year Audit Period. In no cases had there been the required semi-annual calibrations.



The Point Aconi form, the same one as for Point Tupper, provided no calibration data. No station feeders had been calibrated twice per year.

3. Contract Administration The Solid Fuels Manager, who reports directly to the Director, FERM, administers solid-fuel contracts for NSPI. During late 2010, the name of this position changed to Senior Manager, Fuels Strategy and Performance. Day to day contract administration activities within FERM fall under a variety of individuals within the FERM organization. The Scheduling & Logistics Coordinator, Solid Fuels reports directly to the Senior Manager, Fuels Strategy and Performance. This Coordinator daily administers international solid fuel contracts, and provides regular input of fuel information into the Fuelworx system. This Coordinator schedules and monitors international vessel shipments, and monitors the quantities and qualities of fuel shipped on each of these vessels. This Coordinator works out of the main NSPI office, but regularly visits installations and meets with field personnel to keep up to date on status at those locations. Such visits include each of the two NSPI unloading ports twice per year, and meetings with Savage and Logistec quarterly. In March 2010, the Scheduling and Logistics Coordinator accompanied the Director, FERM, on a trip to Colombia, South America for visits to coal mines and meetings with coal supplier personnel. In November 2010, a visit was paid to the domestic Stellarton mine. In early 2011, the person in this position made a visit to three different coal mines in Columbia, South America. At the beginning of the Audit Period, two Contract Administrators–Field also reported directly to the Solid Fuels Manager. Each maintained primary office space in the field. One had responsibility for contract administration related activities for the International Pier at Sydney, administration of the Logistec contract, and deliveries to the Lingan and Pt. Aconi Stations. This individual used an office in Sydney. The second of these two Administrators had responsibility for contract administration activities for the Point Tupper Marine Terminal, administration of the Savage contract, and associated deliveries to the Pt. Tupper and Trenton Stations. This second Administrator worked from Pt. Tupper Station. NSPI eliminated one of these two positions during the Audit Period. The remaining Administrator assumed field management activities for both positions, and maintained his office in Sydney. The primary responsibility for this combined position has been to manage solid-fuel inventory levels at the two port facilities and at the associated generating stations. The Contract Administrators–Field used individually prepared Excel spreadsheets for certain parts of the administration process. These spreadsheets form the basis for field contract administration, as well as input of certain data into Fuelworx. NSPI uses the Fuelworx system for collection, storage, and presentation of fuel contract information as related to quantities, qualities and scheduling. Fuelworx contains all of the necessary contract information to monitor quantity and quality requirements, and to examine actual quantity and qualities of coal delivered and the timing of deliveries. NSPI daily holds what it terms the 9:30 AM Fuel Meeting. This conference phone call includes representatives from the generating stations and FERM personnel. The group discusses overall



system status, fuel prices, and daily scheduling issues. Prior to this call, a daily 9:00 AM call addresses specific solid-fuel scheduling issues for the day. The 9:00 AM call participants include the Solid Fuels Manager, the (now one) Contract Administrator – Field, and the Scheduling and Logistics Coordinator. FERM fuels management personnel also remain in daily contact (using both phone and e-mail) with the Contract Administrator – Field and generating station personnel on issues of scheduling and delivery of solid fuel, in order to ensure the delivery of required fuel to the stations on the proper schedule.

4. Contract Compliance

a. Quantity Administration NSPI experienced good overall 2010 delivery performance under its solid fuel contracts. That performance improved in 2011. NSPI experienced four 2010 instances of failure to deliver the quantity of solid fuel within the contractually specified band. Three deliveries varied by delivering more than the contractually specified quantity. The fourth involved delivery of less than the required amount. The next two tables show actual 2010 and 2011 delivery volumes of solid fuel, compared to contract quantity ranges, and indicate the variations.

Actual Solid Fuel Contract Deliveries – 2010 (quantities in metric tonnes)

Supplier Contract Base

Contract Maximum

Contract Minimum

Actual Tonnes

Amount Over/Under

Limit

Contract Specification

'''''''''''' '''''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''' ''''''''''''''''

''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''' '''''''''''''' '''''''''''''' '''''''''''''''''''''

'''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''

'''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''''''''''''''

''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''' '''''''''''''''

'''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''

''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''''''''

'''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''

''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''' '''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''''''''''

'' '''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''' ''''''''''''''''''' ''''''''''' ''''''' ''''''''''' '''''''''''''' '''''''''''''''''''''''''

''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''' ''''''''''' ''''''''''''''''''''''



Actual Solid Fuel Contract Deliveries – 2011 All quantities in metric tonnes

Supplier Contract Base

Contract Maximum

Contract Minimum

Actual Tonnes

Difference Over/Under

Limit

Contract Specification

''''''''''''' '''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''''''' '''''' '''''''''' '''''''''''''' '''''''''''''''''

'''''''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''' ''''''' '''''''' '''''''''''''''' ''''''''''''''''''''''''

'''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''' ''''''' '''''''''''' '''''''''''''''''''''

'''''''''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''' ''''''' '''''''''' '''''''''''''''

'''''''''''''''''''''''''

'''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''

'''''' ''''''''''' '''''''''''' '''''''''''''''''' '''''' '''''''''''' '''''''''''''' '''''''''''''''''''''''

'''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''''''''

''''''' ''''''''''' '''''''''''' '''''''''''''''''' '''''''' '''''''''' '''''''''''''' '''''''''''''''''''''''

''''''''''''''''' '''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''' ''''''' ''''''''''' '''''''''''''' '''''''''''''''''''''

''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''''' '''''' '''''''''''' ''''''''''''''' '''''''''''''''''''''

'''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''' '''''''' '''''''''' ''''''''''''''''''''

''''''''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''''''' '''''''' '''''''''' '''''''''''''''''''''''''

''' ''''''''''''' ''''''''''''' ''''' ''''''''''''''' ''''''''' ''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''' Three suppliers ''''''''''''''''' '''''''''''''''' ''''''''' '''''''''') delivered more than the allowable contract quantity in 2010. NSPI’s solid-fuel inventory ran above the upper level target for the majority of the Audit Period. Conditions of excess inventory call for particular vigilance in managing physical deliveries. NSPI demonstrated for each of the three suppliers who delivered more than contractual quantities that it actively monitored, managed, and consciously accepted deliveries. NSPI actively managed '''''''''' '''''''''''''''''''''''' during all of 2010. NSPI obtained transportation savings by making use of a gearless bulk carrier, rather than a belted self-unloading vessel, in the first quarter of 2010. Later deliveries used '''''''''' larger self-unloading vessels, all delivered to PTMT. The total transportation savings from selection of the larger vessels was estimated at USD '''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''' vessels were nominated for all remaining shipments to the International Pier, requiring more NSPI vigilance on actual tonnages delivered. As the last vessel was being readied for loading, NSPI saw that normal delivery tonnages would put total annual deliveries approximately 4,000 MT over the maximum allowable contractual quantity. NSPI determined this over-delivery to be acceptable. The open position for low sulphur coal for 2011 ran at over ''''''''''''''''''' '''''''''. The excess coal could be credited against that future open position. The '''''''''''' '''''''''''''''''''' price for '''''''''''''''''''''' ''''' ''''''''''''' was ''''''''''''' ''''''''' a basis differential of '''''' '''''''''', resulting in a settlement price of '''''''''''''''''''''''''''''' for the added 4,000 tons in '''''''''''. The estimated coal market prices for 2011 were ''''''''''''' ''''''' '''''''''''' '''''''''''''''''''''' Had NSPI taken the 4,000 tons ''''



''''''''''''', the total price would have been ''''''' '''''''''''''''' '''''''''''''''' '''''''''''', plus the extra dead freight costs for not taking this coal in ''''''''''' of '''''''''''''''''''''''. The total of the '''''''''/MT plus the '''''''''''''''''''''''' was greater than the '''''''''''''''''' actually paid by NSPI. NSPI took excess petroleum coke from '''''''''''''''' ''''' '''''''''''' because NSPI was short on petcoke supplies and the current price was less than the forecast market price for additional Petcoke in ''''''''''. At the time of this decision, inventories at Point Aconi, where Petcoke is used primarily, were lower than normal for that time of year heading into the winter months. The overall forecast savings of taking the extra tonnes in '''''''''''', instead of purchasing that quantity in 2011, was estimated at ''''''''''' '''''''''''''''''''. NSPI used the same rationale for taking the extra-high Btu ''''''''''' '''''''''' ''''' '''''''''''''''' '''''''''''''''''''''''''''' '''''''''''' i.e., crediting against an open '''''''''''' position and reduction in coal price. The contract price for the '''''''''''''''''''''' ''''''''' in ''''''''''' was '''''''''''''''''''. Limiting tonnage on the last vessel for 2010 (versus the actual tonnage of 76,940 MT) would have caused additional dead freight costs of ''''''''''''' '''''''' ''''''''' NSPI projected '''''''''''' market prices at ''''''''''''''''''''. Even before dead freight costs, therefore, it was more economical to take the relatively small amount of extra coal in 2010. NSPI did not take any coal deliveries from suppliers above contract maximums in 2011. The coal market had reversed, with future prices projected to be lower than current ones. Accordingly, the Company’s analysis of the net costs of taking added coal showed it more economical to '''''''' '''''''''' ''''''''''''''' '''''''''''' ''''' '''''''''''''''' ''''''''''''''' ''''''''''''''''''''''''

b. Quality Administration International fuel suppliers met fuel quality requirements at a notably high level during the Audit Period. NSPI monitored solid fuel quality closely during the Audit Period, and made several adjustments with suppliers when quality of fuel delivered was not as required. NSPI reached an agreement with '''''''''''''''''''''' in 2010 to receive a cargo of high-Btu low sulphur “diluted” with low-Btu low sulphur coal, rather than risking a ''''''''''''''''''''' declaration of force majeure, due to a '''''''''''''''''''' ''''''''''''' '''' '''''' ''''''''''''' '''''''''' ''''' ''''''''''''''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''' ''''' '''''''' ''''''''''' ''''''''''''''''''''''' ''''''' '''''''''''''''''' ''' ''''''''''''' '''''' '''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''' '''''''''''''''''''' '''''' ''''''''''''' '''''''''' '''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''' ''''' '''''' ''''''' ''''''''''''''' ''''''''''''' NSPI agreed with '''''''''''''''''''' '''''' ''' '''''''' ''''' ''' '''''''''''''''''''''' ''''''''' '''''''''''''''''' ''''''''' ''''''''''' ''''''' ''''''''''''''' '''''''' '''''''''''''''''' '''''''''''''''' ''''''''''''''' ''''''''' '''''''''''' '''''''''''''''''''''' ''''' ''''''''''''''''' ' ''''' '''''' '''''''''' ''''''''''''' ''''''''''''''' '''''''''''''''''''' adjusted the commodity price for the difference in calorific value, and credited NS Power '''''''''''''''''''''''''''''' for the increase in transportation cost of transporting a lower heat-value product. Liberty confirmed the calculation’s propriety.

Vessel Supplier Quality Parameter Minimum Maximum Actual '''''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''' '''''''''''''''''''''' ''''''' '''''''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''

NSPI rejected a 2011 cargo of low sulphur Colombian coal ''''''''''''' ''''''''''''. It did not meet the minimum calorific value specified in the contract, shown in the next chart. The parties settled the matter with compensation above the price adjustment specified in the contract for low calorific value. NSPI received ''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''''''''' '''' ''''' ''''''''''''''' '''''''''''''



''''''''' '''''''' ''''''''''' '''''''' '''''''''''''' ''''''' '''''''''''' '''''''''''''' '''''' ''''''''''''''''' ''''''''''''''' ''''''' ''' ''''''''''''''''''''''''' '''''''''''''' ''''''' ''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''' ''''''' ''''''' '''''''''''''''''' ''''' '''''''''''''''''''''''' '''''''''''''' '''''' ''''''''''''''''''''''''' '''''' '''''''''''''''''''' ''''''''' '''''''''''''''''''' '''''''' '''''' ''''''''''''''' '''''''''''''''''' '''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''' ''''''''' ''''''''''''''''' '''''''' ''''''' ''''''''''''''''' '''''''''''''''''''''''' '''''' ''''''''''''''''' '''''''''''''''' '''''''''''''''' ''''' ''''''''''''''''''''' ''''''''''''' Liberty’s review of the calculations found them satisfactory.

Vessel Supplier Quality Parameter Minimum Maximum Actual ''''''''''' ''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''' '''''''''''''' '''''''''' ''''''''''' ''''''''''''''''''' ''''''''''''''' '''''''''''' ''''' ''''''''''''' '''''

NSPI reached a 2011 agreement ''''''''' '''''''''''''''''''' to swap a contracted vessel of ''''''''' ''''''''''''''''' ''''''''''''''''''''''''' '''''''''', in order to secure one of higher calorific value for use as a winter seasonal fuel for Lingan l. The swap took place at '''''' '''''''''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''. NSPI understood that the higher calorific value, low sulphur cargo could contain ''''''''''''''' '''''''''''''''''' '''''''' ''''''''''''''' ''''''' than specified in the contract, as shown in the next chart. NSPI found these “lesser” attributes acceptable, because the higher Btu product would perform better at the station, and because room remained available in the annual sulphur cap to accommodate the alternate coal. The higher Btu product would also generate savings in transportation costs. Liberty found this NSPI tradeoff appropriate.

Vessel Supplier Quality Parameter Minimum Maximum Actual ''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''' '''''''''''''' ''''''''''''''''' ''''''''''''' '''''''''''' ''''''''''''''''''''''' '''''''' ''''''''''' ''''' ''''''''' ''''' '''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''' '''''''''' '''''

In addition to the preceding adjustments, NSPI also adjusted the price for solid fuel deliveries in six cases, exercising contract rights to address out-of-specification fuel deliveries. The next chart summarizes them (in US dollars).

Vessel Supplier Quality out of Spec

Specification Actual Adjustment Min Max ''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''''''''''''' ''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''' '''''''''''''''' ''''''''''''''''''''' '''''''''''' '''''''''' '''''''''''''''''''' ''''''''' '''''''''''''' '''''''''''''''''''''''''''' '''''''''' '''''''''''''''''''''' '''''''''''''''''''' '''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''''''''''''''''''''

''''''''''''''''''''' ''''''''' deliveries in the Audit Period routinely failed to meet specifications on an overall basis. A majority of deliveries failed to meet at least one of the parameters (Btu, Ash, Sulphur or Moisture). The notable exception occurred in 2010 when deliveries to Point Aconi from the '''''''''''''' ''''''''''''' exceeded quality specifications. Adjustments were made monthly, and were not always in the same direction. The tables below indicate whether adjustments for Btu, Ash, Sulphur and Moisture were positive (favorable) or negative (unfavorable). Deliveries in 2010 were of somewhat better quality than deliveries in 2011.



2010 ''''''''''''''' '''''''' Quality Adjustments Station Btu Ash Sulphur Moisture Total - $ Trenton 6 + - - + ''''''''''''''''''''''''''''''' Pt. Aconi + + - - ''''''''''''''''''''''''' Lingan - + - - ''''''''''''''''''''''''''''''''

2011 '''''''''''''' '''''''' Quality Adjustments

Station Btu Ash Sulphur Moisture Total Trenton 6 - - + + '''''''''''''''''''''''''''''''''' Pt. Aconi - - - - ''''''''''''''''''''''''''''''''''' Lingan - - - - ''''''''''''''''''''''''''''''''''''

The following two tables show the coal quality averages for deliveries of ''''''''''''''''''''' ''''''''' to each of the three NSPI locations, for both 2010 and 2011:

2010 '''''''''''''' ''''''' Quality Averages Station Btu Ash Sulphur Moisture Trenton 6 ''''''''''''''''' ''''''''''' ''''''' '''''''''' Pt. Aconi ''''''''''''''' ''''''' '''''''' '''''''''' Lingan '''''''''''''''' ''''''''''' ''''''' ''''''''''

2011 '''''''''''''''' '''''''' Quality Averages

Station Btu Ash Sulphur Moisture Trenton 6 '''''''''''''''' ''''''''''' ''''''' '''''''''' Pt. Aconi ''''''''''''''''' ''''''''''' '''''''' '''''''''' Lingan '''''''''''''''' '''''''''' '''''''' ''''''''''

Shipments to Trenton from the Nova Stellarton Open Pit Mine had the following contractual quality specifications:

Parameter Minimum Typical Maximum Moisture % ''''''' Ash % ''''''''''' Volatile % '''''''''' Sulphur % '''''''''' Calorific Value Btu/lb '''''''''''''' Size ''''' '''' '''' Grindability (HGI) '''''

Shipments to Lingan, Point Aconi, and the International Pier were from the Pioneer (Prince) Surface Mine, and had the following contractual quality specifications:

Parameter Minimum Typical Maximum Moisture % ''''''' Ash % '''''''' '''''''''' Sulphur % ''''''



Calorific Value Btu/lb ''''''''''''''' ''''''''''''''''' Chlorine % ''''''''' Mercury mg/kg '''''''''

5. Coal Inventory

a. Targets NSPI applies a range '''''' ''''' ''''' days (of average daily burn forecast) as its system solid-fuel inventory target. The calculation considers as inventory all solid fuels located at transfer terminals and at the power generating stations. This range reflects an estimate of the replacement time for a lost vessel. NSPI uses this guideline because the majority of its solid fuel arrives by ocean-going vessel. The next table shows the forecast levels of consumption used in calculating average daily burns for the generating stations.

Calculation of Average Daily Burn (tonnes) Location Forecast Daily Burn Lingan ''''''''''''''''''''''''' ''''''''''''' Point Aconi '''''''''''''''''''' ''''''''''''' Point Tupper ''''''''''''''''' '''''''''''' Trenton 5 '''''''''''''''''' '''''''''''' Trenton 6 ''''''''''''''''''' ''''''''''''' Total '''''''''''''''' '''''''''

The NSPI solid fuel inventory targets for its generating stations do not address specific unit requirements, except for Trenton 5 and 6. Coal use there differs enough to require individual targets. Trenton 5 burned '''''''''''''''''''''''' '''''''''''''''' ''''''''' during the Audit period, and Trenton 6 burned '' ''''''''''''''''''''''''''''' '''''' '''''''''''''''''''''''' ''''''''''''''''''' '''''''''' '''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''''''''' ''''''''' making up by far the largest percentage of solid fuel burned. NSPI also treats coal inventory as existing for emergency purposes only. It does not apply a “surge bin” approach, under which delivered coal flows into inventory on receipt, and then gets taken back out of inventory as required. NSPI adopted its approach because sending coal directly to the units from vessels and trucks proves more economical. We found this approach consistent with our experience in the utility industry. NSPI bases its inventory targets on a number of factors, including its historical experiences in inventory management, the likelihood of ocean vessel delivery interruption, vessel unloader outages, the inventory of critical unloader parts, the experiences of other utilities and industrial coal users, and the availability of off-system power purchases at times of low coal inventory. NSPI believes that it has chosen the range of inventory values in a manner that optimizes all of these considerations. Currently NSPI has contracted with Energy Ventures Analysis (EVA) to conduct a study on solid fuel inventory levels in order to determine the optimum levels of inventory, considering NSPI’s unusual situation related to both location and to the complexity of solid fuel mix. This study will include estimates of the carrying cost of inventory, evaluation of the risks of running out of coal using probability analysis, cost/benefit analyses of various levels of coal inventory, and Monte



Carlo simulations to determine the optimal inventory target for each type of fuel at each station. It is anticipated that this study will be completed later in 2012.

b. Audit Period Inventory NSPI’s solid fuel inventory remained above the maximum target inventory level for the majority of the Audit Period. NSPI had difficulty forecasting inventory levels from one quarter to the next. Generally, actual solid fuel inventories from quarter to quarter were greater than those predicted in the previous quarter. Only in the third and fourth quarters of 2011 did actual coal inventory for the quarter fall under the forecast made in the previous quarter. Solid fuel burns continually under-ran forecasted amounts. The reduction in solid fuel use came in significant part because gas units proved very often more economical than solid fuel units. In addition, NSPI experienced a significant drop in load when a major industrial customer shut down in August 2011. This customer represented approximately 13 percent of NSPI annual generation. Increasing coal inventories had required NSPI to store coal at an outside facility called Bear Head as of the previous Audit Period, and at the long-term dead storage area at Lingan. Bearhead is located about 3 kilometers from Point Tupper. The logistics associated with solid fuel delivery ports and the generating stations nearest to these ports has caused NSPI to group inventory monitoring into two distinct locations. One location consists of inventory at the International Pier, Lingan and Point Aconi. The second location consists of inventory at the Point Tupper Marine Terminal (PTMT), Pt. Tupper, Bear’s Head, and Trenton 5 & 6. The following figures display the 2010 and 2011 solid fuel inventory at each of these locations. Inventory at each location ran for much of the Audit Period above the maximum target level of 75 days, or 11 weeks of inventory.

''''''''' ''''''' ''''''''''''''''' ''''''' '''''''' '''''''''''' ' ''''' ''''''''''''''''''



''''''' ''''''' ''''''''''''''''' ''''''''''' ''''' ''''''''''''' '''''''''' ''''''''' '''''' ''''''''''''''''''''

''''''''' '''''''' '''''''''''''''' ''''''' ''''''' '''''''''' ' ''''' ''''''''''''''''

'''''''' '''''''' '''''''''''''''''' '''''''''''' ''''' ''''''''''''' '''''''''' ''''''''' ''''''' '''''''''''''''''''''''

NSPI experienced difficulty in bringing solid fuel inventory between the low to high target levels because of several factors. Coal requirements decreased during the Audit Period because of lower than anticipated system loads. Coal requirements also decreased because of increased use of natural gas rather than coal as a fuel for power generation. The resulting reductions in expected generation from coal produced hard to manage solid fuel inventory levels, especially considering existing contracts under which the Company was obligated to take certain tonnages. The following table shows how in most quarters of the Audit Period the actual inventory from



quarter to quarter was higher than the inventory forecast in the previous quarter. The inventories in this table are the combined solid fuel inventories for the two locations shown in the graphs above. For example, at the end of the fourth quarter of 2010, the actual inventory was ''''''''' ''''''''''''''''' greater than the forecast for inventory as of the third quarter of 2010. Finally for the last two quarters of 2011, even though inventory was higher than the upper target level, the inventory levels were actually less than the forecasts for these periods.

Solid Fuel Inventory – Difference Between Quarterly Forecast and Actual Quarter Ending

Forecast from Previous Qtr

Actual for Current Qtr

Difference Percent Difference

6/30/2010 ''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' '''''''''' 9/30/2010 '''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''' '''''''''

12/31/2010 ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''' 6/30/2011 ''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''' 9/30/2011 ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''

12/31/2011 '''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''''''''' Note: The percent difference is the percentage above/below the forecast. Units are in metric tonnes.

Difficulty in managing solid fuel inventories did not distinguish NSPI from the experience of other major North American utilities with high levels of coal generating assets. Coal inventories in the U.S. have been predicted to peak in May of 2012, soaring to more than 210 million tons. Coal inventories are predicted to remain at such historically high levels through at least the end of 2013. Coal inventory trends in the U.S. result from some of the same factors that have affected NSPI. Increased use of natural gas as a power plant fuel comprises a primary one. The next graph shows showing the continuing rise in U.S. coal inventories from the year 2004 onward.

Considering all of the factors at play, and also considering the trends forecast for U.S. coal inventories, we do not find fault with NSPI’s methods, starting in the fourth quarter of 2010, to



seek to reduce solid fuel inventories. Through 2011, NSPI has been able to keep total inventory levels below the maximum levels experienced in September 2010, and hold late 2011’s increases to moderate levels. We have criticized the negative impacts of personnel changes in FERM during the Audit Period. In the case of inventory levels, we believe those changes have likely had a positive impact. NSPI brought to the top two vacated FERM management positions persons with significant power plant management experience. After it did so, not only did inventory begin to fall, but fuel forecasting accuracy improved. These beneficial changes have held through early 2012. The total solid fuel inventory for the month ending January 2012 had fallen to 778,893 tonnes. This level is less than it was at any time during the Audit Period. NSPI paid attention to the economics of continuing to accept coal as required by its contracts. FERM analyzed storage costs for inclusion in fuel choice decisions; i.e., effectively making burn versus store decisions for coal. NSPI calculated incremental costs of ''''''''''''''''''''' ''''' '''''''''' ''''''''''''''''''''' for moving coal into and out of storage at the Bear Head location. NSPI concluded that these total movement costs would remain at ''''''''''''''''''''''''' through 2009 and 2010. For 2011, NSPI increased the Bear Head costs (to '''''''''''''''''''''''' for moves in and to ''''''''''''''''''''''' for moves out). This increased in total round trip cost to ''''''''''''''''''''' for 2011 resulted from increased ''''''''''''''''' '''''''''''''. The Bear Head coal storage area has a total capacity of approximately 112,000 tonnes of coal. NSPI operated at inventory levels that were roughly '''''' '''''''''''''''''' of this capacity for most of the Audit Period, leaving NSPI with a reasonable margin for dealing with storage-related contingencies. Lingan Station (LTDS) storage capacity is approximately 330,000 tonnes. NSPI reached this limit in the third quarter of 2010. Levels have since come down somewhat. Lingan costs to put coal into this storage were '''''''''''''''''''''; removal costs were '''''''''''''''''''''''''. These costs have not changed through 2011. The FAM does not include carrying charges on coal in inventory. However, the FAM does include the handling into/from storage costs '''''''''''''''''''''''''' for Bear Head; '''''''''''''''''''''' for Lingan LTDS).

c. Blending Requirements NSPI uses as complex a set of solid-fuel blends as Liberty has ever seen for an electric utility of its size. The complicated blends result because of a number of factors, including NSPI’s location, the types and vintages of NSPI generating facilities, the variety of solid fuels available on an economic basis, the large spread in prices between various available fuels such as Petcoke, high sulphur domestic coal, low Btu/low sulphur PRB coal and international coal, and the applicable environmental regulations addressing emissions of SO2 and mercury. One result is the need for a large number of inventory piles. These inventory piles comprise: Lingan Generating Station

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋



∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋

Point Aconi Generating Station ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋

Point Tupper Marine Terminal (PTMT) ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

Trenton 5 Generating Station ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

Trenton 6 Generating Station ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋

One of the challenges of so managing inventory piles at each location, and in the limited spaces available, arises from the need to maintain distinction between the boundaries of each. Liberty’s inspections of generating station operations discovered many cases where inventory piles run together, clouding the boundaries between coal with different attributes. This situation makes proper inventory accounting more difficult. We discuss that issue in more detail in the next section of this chapter. The situation also complicates the ability to produce the precision needed to optimize station operation through proper fuel blending.

6. Physical Inventory Measurements NSPI conducts quarterly physical surveys of solid fuel stockpile inventory levels. The surveys employ data collected at the coal pile surface, density testing, and moisture analysis to quantify stockpile quantities. NSPI’s Fuel Manual guides the measurement of physical volumes of solid fuel inventory. The provisions for accounting adjustments to the physical inventory, based on survey results, provide that, if the physical inventory (by quality and type) is less than 95 percent or greater than 105 percent of the book inventory for two successive three month periods, an adjustment must be made to book inventory and corrective actions taken as outlined. The adjustment must equal the difference between physical and book inventory. Adjustments must be made when physical inventory falls more than 5 percent in either direction from book inventory.



The Fuel Manual also specifies the corrective action for certain adjustments as follows: If the physical inventory calculation for any stockpile or heavy fuel oil tank is less than 95 percent or more than 105 percent of the book inventory, the Sr. Manager, Fuels Planning and Performance, will initiate evaluation of potential sources of discrepancies including weight scales, quality determination, heat rate calculations, and station security and make a recommendation to the Executive VP and COO who is responsible for implementing corrective actions. Corrective actions will be implemented.

Variations sufficient to require accounting adjustments under NSPI’s policy occurred in each quarter during the Audit Period. The Sr. Manager Fuels Planning & Performance sent to the NSPI COO each quarter a detailed description of the results of the most recent survey, of corrective action taken, and of future actions planned. Beginning with the fourth quarter of 2010, and continuing throughout the Audit Period, this report went also to the General Manager Power Production. The Sr. Manager Fuels Planning & Performance has assembled a team of individuals for regular consultation on matters related to solid fuel inventory, inventory measurement and inventory adjustments. This “Inventory Team” consists of representatives from FERM, Fuels Planning & Performance, and Station representatives. The group meets by phone after each quarterly set of solid fuel inventory measurements to discuss causes of inventory variation and corrective actions. NSPI developed a formal charter for this team following the preceding FAM Audit, in order to bring routine, detailed focus on solid fuel inventory measurement results, and identify any needed corrective action. NSPI has adopted adjustment practices beyond those of the Fuel Manual. For example, NSPI will only make an adjustment to inventory if the inventory variation runs in the same direction for two successive quarters. NSPI has also established another, additional adjustment practice. Where inventory variation does run in the same direction for two successive quarters, NSPI applies an adjustment equal to the lesser of the two variations. For example, assume a Q1 variation of 5,859 MT and a Q2 variation of 12,609 MT. NSPI will first make a Q2 adjustment of 5,859 MT. It will then carry forward the difference between the figures from the two quarters (12,609 – 5,859= 6,750 MT) to the next quarter as a possible adjustment quantity if the survey for the next quarter indicated a variation in the same direction. Continuing with this example, it would not matter whether the two applicable variance quantities were reversed. The actual adjustment for Q2 would still only equal the lesser of the two amounts, or 5,859 MT. These additions to inventory adjustment procedures are sound. Liberty observed that NSPI routinely and properly follows them. These adjustment calculation additions and NSPI action on a recommendation from the preceding FAM Audit have led to proposed updates to the Fuel Manual. We found NSPI’s proposed language appropriate. The new language will undergo Small Working Group review during 2012. Upon approval by the Small Working Group, the package of substantive Fuel Manual changes will be forwarded to the NSUARB for formal review and approval.



The following tables show the quarterly inventory adjustments for each of NSPI’s solid fuel fired generating stations.

Lingan Inventory Adjustments

Adjustments '''''''''''' ''''''''''' ''''''''' '''''

'''''''''' ''''''''' '''''''''' ''''''

'''''''''''''' ''''''''''' '''''' '''''''' '''''' ''''''''

Q1-2010-MT (7,423) Q1-2010-$ (909,194) Q2-2010-MT (25,701) Q2-2010-$ (2,907,349) Q3-2010-MT 11,299 (27,355) Q3-2010-$ 1,180,140 (2,992,616) Q4-2010-MT (5,964) 894 Q4-2010-$ (690,674) 65,137 Q1-2011-MT 948 Q1-2011-$ 51,175 Q2-2011-MT (203) Q2-2011-$ (22,766) Q3-2011-MT 128 (21,480) 2,110 211 Q3-2011-$ 14,939 (2,516,557) 117,407 23,594 Q4-2011-MT (10,428) 2,010 7 Q4-2011-$ (1,220,996) 109,079 625

Pt. Aconi Inventory Adjustments

Adjustments '''''''''''' ''''' ''''''''''''' ''''''

''''''''''' ''''' '''''''''''''' '''''''

'''''' '''''''' '''''' '''''''' '''''''''

'''''''''''' Q1-2010-MT (503) Q1-2010-$ (29,831) Q2-2010-MT (25,701) Q2-2010-$ (2,907,349) Q3-2010-MT 11,299 (27,355) Q3-2010-$ 1,180,140 (2,992,616) Q4-2010-MT (5,964) 894 Q4-2010-$ (690,674) 65,137 Q1-2011-MT 948 Q1-2011-$ 51,175 Q2-2011-MT (203) Q2-2011-$ (22,766) Q3-2011-MT 128 (21,480) 211 2,110 Q3-2011-$ 14,939 (2,516,557) 23,594 117,407 Q4-2011-MT (10,428) 7 2,010 Q4-2011-$ (1,220,996) 625 109,079



Trenton 5 Inventory Adjustments Adjustments ''''''''''' '''''''''' ''''' ''' '''''''''' '''''' Q1-2010-MT Q1-2010-$ Q2-2010-MT (10,914) 472 Q2-2010-$ (1,370,864) 57,563 Q3-2010-MT Q3-2010-$ Q4-2010-MT Q4-2010-$ Q1-2011-MT (2,151) Q1-2011-$ (284,949) Q2-2011-MT Q2-2011-$ Q3-2011-MT Q3-2011-$ Q4-2011-MT Q4-2011-$

Trenton 6 Inventory Adjustments

Adjustments ''''''''' '''''' '''''''''''''' '''' '' ''''''''' ''''''' ''''''''''''''''' ''''' ''''''''''

''''''''''''''''' '''''' ''''''' ''''''''''''''

Q1-2010-MT Q1-2010-$ Q2-2010-MT (2,716) 2,044 (2,709) Q2-2010-$ (169,226) 85,425 (491,904) Q3-2010-MT (971) 182 Q3-2010-$ (56,308) 7,610 Q4-2010-MT (5,022) Q4-2010-$ (666,526) Q1-2011-MT (4,833) (4,079) Q1-2011-$ (325,765) (584,868) Q2-2011-MT Q2-2011-$ Q3-2011-MT 188 Q3-2011-$ 22,829 Q4-2011-MT 295 1,931 Q4-2011-$ 43,414 208,707



PTMT/POT Inventory Adjustments Adjustments ''''' ''''''''''' '''''''''' ''''' Q1-2010-MT Q1-2010-$

Q2-2010-MT Q2-2010-$

Q3-2010-MT Q3-2010-$

Q4-2010-MT Q4-2010-$

Q1-2011-MT Q1-2011-$ (2,768)

Q2-2011-MT (261,051) Q2-2011-$

Q3-2011-MT Q3-2011-$

Q4-2011-MT Q4-2011-$

The preceding tables evidence a number of trends. Adjustments at Lingan Station for '''''''''' '''''''''''''''' ''''''''''' ''''''''''''' '''''''''''''''' '''''''', always ran in the same direction. The physical coal piles proved larger compared to the data in Fuelworx. This means that, for five of the eight Audit Period quarters, physical surveys demonstrated that Lingan burned less low sulphur coal than suggested by Fuelworx data. This continues the trend first noted in the preceding FAM Audit. Adjustments for all other Lingan coals, except for one, exhibited less frequently and multi-directionality. This exception, '''''''''''''''''''' '''''''''''''' ''''''''''''' coal also exhibited variances uniformly running in the same direction. For three of the Audit Period’s eight quarters, Lingan burned more coal of this coal than suggested by the data entered into Fuelworx. Point Aconi experienced inventory adjustments very similar to those at Lingan, in terms of frequency and direction of adjustments. Adjustments for ''''''''' '''''''''''''''''' '''''''''' '''''''''''''' '''''''''''''''' ''''''''' always ran in the same direction, with the physical coal piles showing more coal than did Fuelworx. Other adjustments at Point Aconi were not as frequent, and ran in both directions, with ''''''''''''''' '''''''''''' ''''''''' again the exception. As for Lingan the adjustments were unidirectional. In four of the Audit Period quarters, more ''''''''''''''' '''''''''' was actually being burned than suggested by Fuelworx. Trenton 5 only experienced three adjustments over the eight month Audit Period, and they were not consistent between qualities of coal. Trenton 6 experienced consistent inventory adjustments for two different fuels. '''''''''''' ''''''''''''''''''' coal was adjusted three times over the eight quarter Audit Period, with all adjustments being in the same direction, and indicating that less coal was being burned than indicated by Fuelworx. The ''' ''''''''''''''' '''''''''''''''''' experienced three small adjustments in the same direction over the eight quarter period, and indicated that more coal was actually being burned than indicated by



Fuelworx. This was in the opposite direction of the trend established in the previous Audit Period. PTMT/POT experienced only one small adjustment over the eight quarter Audit Period. Liberty summarized the total (all locations combined) of all solid-fuel adjustments for each of the eight quarters examined, as the next table shows. The total of all inventory adjustments each quarter, with one small exception, was always in the same direction, showing that surveys indicated more fuel was on the ground than indicated in Fuelworx, demonstrating consistently that less fuel had been burned than indicated by the data in Fuelworx. Theoretically, this could be caused by one of three factors:

• NSPI is putting more solid fuel into inventory than shown by procurement records • NSPI is taking less solid fuel out of inventory than shown by consumption records

(Fuelworx) • There is a consistent bias in solid fuel physical survey measurements.

Summary of Inventory Adjustments Quarter Metric Tons Dollars Q1-2010 (7,926) (939,025) Q2-2010 (32,378) (4,222,326) Q3-2010 (16,845) (1,861,174) Q4-2010 (10,093) (1,292,062) Q1-2011 (12,883) (1,405,458) Q2-2011 3,402 375,828 Q3-2011 (15,420) (1,948,280) Q4-2011 (9,994) (1,302,635) Total (102,137) (12,595,132)

The other notable fact in these inventory adjustments was that ''''''''''''''''''''''''''' ''''''''''''' dominated the trend just discussed. The majority of '''''''''''''''''' '''''''''' adjustments went in the opposite direction, with the exception being adjustments at Trenton 6, which went in the same way as '''''''''''''''''''''''''''' '''''''''''''' Liberty discussed with NSPI personnel the desirable frequency of conducting physical surveys, and asked if there were a desire to conduct physical surveys less often. NSPI personnel were consistent in the feeling that quarterly surveys are appropriate. This is, however, contrary to a recommendation from a recent, outside audit, which suggested that annual surveys were more appropriate. Liberty believes that quarterly surveys should continue. Annual surveys would only make sense if adjustment trends were in opposite directions from quarter to quarter. However, as the data shows, the trends seem to be in the same direction. Annual surveys would therefore tend to produce particularly large adjustments. Quarterly surveys and adjustments will keep inventory accounting more in line with actual physical inventory status.



C. Conclusions

1. NSPI processes and procedures for the weighing, sampling and analysis of international solid fuel shipments delivered to its generating stations have been improved, and are sufficient.

NSPI provides for appropriately controlled sampling and analysis of fuel delivered to NSPI’s Point Tupper Marine Terminal and the Sydney International Pier under ASTM procedures conducted by the suppliers at the loading ports. Solid fuel weights are determined through vessel draft surveys, also conducted at the loading ports. NSPI has satisfactory representation on site at loading locations through its contractor. NSPI uses '''''''''''''''''''''' appropriately to cross-check the weights of vessels through independent draft surveys in Nova Scotia. NSPI also uses ''''''''''''''''''''' to take ASTM samples of solid fuel as it is unloaded from ocean-going vessels as a cross-check on samples taken at the loading ports.

2. NSPI has developed new and appropriate procedures for sampling domestic coal, however, they are sometimes confusing and could be made more clear. (Recommendation #1)

NSPI’s new procedures for sampling domestic coal deliveries now comply with ASTM requirements, and are a distinct improvement over previous procedures. However, the procedures are sometimes confusing and not always clear. For example:

• The distinction between domestic procedures and international procedures is not clear. • Page 3 of the procedure (Section 2) states that weight of domestic coal delivered by truck

is determined by certified truck scales at the supplier’s mines. Under some circumstances, when these scales are inoperable, such weights are actually determined by the certified scales at the generating stations. This is acceptable, but not provided for by the procedures.

• The last paragraph of page 2 states that the Nova Westville Lab will prepare samples for use in transactional analysis for domestic deliveries. Based on this paragraph, it could be assumed that sample analysis for transactional purposes is done at Westville for Trenton samples. However, such is not the case. Also, the procedural steps for Trenton versus the steps for Lingan and Point Aconi are different, but because everything is run together in the same paragraph, it implies that the procedures are the same for all locations.

• The first sentence of page 3 (Section 3) states that transactional analyses are performed by the generating station laboratory staff, but it does not say to which generating station laboratories this statement applies.

3. NSPI has effectively administered its solid fuel contracts. Administration of solid fuel contracts is a complex and demanding business. Contracts must be managed in ways that ensure delivery of the appropriate quantities and qualities of solid fuel in accordance with agreed upon schedules, while at the same time maintaining appropriate relationships between the Company and its many coal suppliers. The job requires experience and skill, and good communication. Overall, NSPI has demonstrated that it has been effective in all aspects of solid fuel contract administration during the Audit Period.



NSPI has acted appropriately to manage the various quality provisions of its coal contracts, and has taken action as necessary to monitor quality and assess penalties, or award premiums, when coal quality variations have warranted such actions. NSPI’s vigilance in monitoring solid fuel contract quality has been apparent. When there were unusual quality situations, NSPI was effective in negotiating with suppliers to obtain settlements which were beyond the normal solid fuel contract provisions, and which resulted in benefit to ''''''''''''' NSPI has also been effective in monitoring and administering the quantity provisions of its solid fuel contracts. Even though there were three situations in 2010 when there were deliveries in excess of contract maximum quantities, NSPI had conducted the appropriate economic analysis justifying acceptance of such deliveries. Essentially, current deliveries at low prices were maximized in order to avoid higher prices for solid fuel required in the future.

4. NSPI has installed an ASTM-compliant system for sampling the coal actually fed to Lingan generating units for consumption.

NSPI has recognized an inability to determine the quality of solid fuel actually sent to its boilers. It therefore obtained approval for a capital expenditure to install an ASTM sampling system on the Lingan Station. A coal belt sampler, 2010ACE Plan CI#38851 was approved, and the system was fully operational as of January 1, 2011. NSPI developed in 2011 a data base portraying differences between coal samples as measured by suppliers and coal samples as measured at Lingan. Currently this data base is showing that coal measured at Lingan tends on average to be approximately two percent higher in moisture content than coal measured by suppliers. It is too early to determine ultimate action on these results, and any action at other NSPI generating stations will be based on further analysis of the results from the sampling system installed at Lingan.

5. The next substantive update of the Fuel Manual will incorporate NSPI’s expanded procedures relating to adjusting book value of inventory as a result of physical measurements of solid fuel inventory.

NSPI has expanded the procedures in the Fuel Manual by detailing how to make inventory adjustments as a result of physical surveys of solid fuel inventory. For example, NSPI will only make an adjustment to inventory if the inventory variation is in the same direction for two successive quarters. NSPI has also established an additional component of adjustment procedures such that if the inventory variation is in the same direction for two successive quarters, then the actual adjustment will be the lesser of the two variations. Revised procedures have been prepared and approved by Liberty as a result of the previous audit. It is anticipated that such new procedures will be incorporated in the next revision of the Fuel Manual expected in late 2012.

6. NSPI’s contract for an evaluation of NSPI solid fuel inventory levels and targets is appropriate, given the generally high inventory levels over the Audit Period.

NSPI has contracted for an outside evaluation of solid fuel inventory levels and targets. It is anticipated that this study will be completed later in 2012. This action is appropriate, given that solid fuel inventory levels were at high levels over the Audit Period, and above the upper target levels for the majority of the time.



7. Calibration records for the coal gravimetric feeders at the generating stations were not standardized from station to station, displayed considerably different formats, were used under different data management practices, and did not indicate consistent calibration. (Recommendation #2)

Coal gravimetric feeders at the generating stations comprise the primary link in measurement of the quantity of coal burned. As such, they are also vital in accounting for coal inventory levels as well as correlating overall solid fuel contract requirements with coal burned. Therefore, consistent and standardized calibrations of these coal feeders are critical to an effective overall process of solid fuel management. Liberty’s examination of feeder calibration records indicated that they are not standardized between stations, with the exception of Point Aconi and Point Tupper. There appear to be different calibration approaches, different data management practices, and that calibrations are not performed on a consistent basis twice per year. The Point Tupper and Point Aconi forms displayed no actual calibration data. The information on the forms was computerized; however, there was only a brief description of what calibrations had been performed. Point Tupper was the only station where calibrations had been performed twice per year. The forms for Trenton contained considerable calibration data, but were very different than any of the forms for the other stations, and all data on the forms was handwritten, with no computerization of data apparent. There were also multiple blank spaces on the forms, indicating an incomplete calibration process. The forms for Lingan contained considerable calibration data, and it appeared the data was computerized, but the format and content of data was completely different than for any of the other stations.

8. The conduct of quarterly solid fuel inventory surveys, with quarterly adjustments continues to be the most logical frequency.

Liberty believes that quarterly solid fuel inventory surveys, with accompanying adjustments, should continue. Surveys less often, such as annually, would only make sense if adjustment trends were in opposite directions from quarter to quarter. However, as the data shows, the trends over the previous audit period, and over the current Audit Period, are in the same direction from quarter to quarter, such that if surveys were only conducted annually, with annual adjustments, such adjustments would be very large. Thus, quarterly surveys and accompanying adjustments will keep inventory accounting more in line with actual physical inventory status, and should be continued.

9. The positive direction of solid fuel inventory levels, with gradually decreasing total solid fuel inventory quantities, beginning with the fourth quarter of 2010, reflect positive management action.

Liberty believes that the gradually decreasing solid fuel inventory levels, beginning with the fourth quarter of 2010, reflected the positive impact of the plant management experience in two



top FERM positions. Inventory levels began to fall toward the end of the fourth quarter of 2010. These inventories reached a peak of 1,068,470 tonnes in July 2010, and came close to this peak with an inventory of 1,052,982 tonnes in September 2010, but have come down to 884,108 tonnes as of the end of the Audit Period. This trend continued into 2012, inventory coming to a level lower than it had been during the entire Audit Period. In the third and fourth quarters of 2011 inventory forecasting also became better.

10. Solid fuel inventory adjustments exhibit common characteristics that make more attention to them appropriate. (Recommendation #3)

Solid fuel inventory adjustments for international fuels have consistently produced negative adjustments. These negative adjustments seem to happen regularly from quarter to quarter. This pattern reflects that the physical coal piles have proven to be heavy compared to the data in Fuelworx. Said another way, in five out of eight quarters of the Audit Period, the physical surveys demonstrated that less coal was actually being burned than implied by the data entered into Fuelworx. Such consistency in adjustments reflects a bias in some part of the inventory consumption, management and measurement process. If there were no bias, the adjustments from quarter to quarter would not have a consistent direction, but would be random, either positive or negative.

D. Recommendations

1. Revise the new procedures for “Quality Assurance for Sampling and Analysis” produced during the Audit Period in order to make them more clear. (Conclusion #2)

NSPI needs to revise the subject procedures in order to make them more clear, with specific attention to the following:

• Reformat the procedures so that the initial section relating to domestic coal procedures is more distinct and separate from the second section relating to international coal procedures.

• On page 3 of the procedure, Section #2, add a provision that provides for use of the certified truck scales at the generating stations when the certified truck scales at the suppliers mines are out of calibration or inoperable.

• In the last paragraph of page 2, clarify and expand the procedures to make it clear where samples are taken, where samples are prepared, and where the transactional analyses of these samples are actually conducted. It would make the procedures more clear if this paragraph were split into two paragraphs, one for Trenton, and a second for Lingan and Point Aconi, since the actions for the two locations are different.

• On page 3, Section 3, expand and clarify the first sentence so that it specifically names to which generating station laboratories this sentence applies, when it says, “transactional analyses are performed by the generating station laboratory staff.”

2. Standardize the calibration process and forms among generating stations for solid fuel feeders, develop and adhere to a consistent calibration schedule. (Conclusion #7)

NSPI must standardize the calibration process between generating stations for solid fuel feeders, to include the following:

• Standardized procedures for all stations,



• Standardized forms for all stations • Computerized storage of calibration data • Requirement for semi-annual calibration of feeders.

FERM management must be involved in this process and establish mechanisms to ensure that the process becomes standardized in a way that will use the expertise of personnel at all generating stations to incorporate optimum features of all calibration methods. Also, management must ensure that there is an ongoing method for monitoring and enforcing reliable calibration schedules.

3. Conduct a detailed study to determine the source, or sources, of the bias in solid fuel inventory measurement which has consistency resulted in negative inventory adjustments. (Conclusion #10)

Since the previous Audit Period, adjustments to the solid fuel inventory have always been negative, suggesting that a bias, or more than one bias, exists in some part of the process for measurement of additions to inventory, subtractions from inventory or actual physical surveys of inventory quantities. Therefore, NSPI should conduct a detailed study to determine the source, or sources, of the bias in this overall inventory management process. The study team formed should be broad enough, with sufficient disciplines from multiple parts of the NSPI organization, to provide necessary understanding of all of the dimensions of inventory management, as well as to provide the opportunity for creative thinking.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) VII. Natural Gas and Fuel Oil Supply Management

July 9, 2012 Page VII-1 The Liberty Consulting Group

VII. Natural Gas and Fuel Oil Supply Management

A. Background This chapter examines how NSPI has managed its fuel oil and natural gas supplies. Fuels management involves different activities for the different fuels:

• Natural gas: supply contract management, including measurement of quantities received, nominations and scheduling of pipeline capacity, daily and monthly gas purchases and sales to match supply to requirements, management of pack-and-draft capacity on the pipeline

• Heavy fuel oil (HFO): supply contract management, including quantity measurement and quality assessment, inventory management, and transportation management

• Light fuel oils (LFO): (same as HFO).

Some NSPI generating units burn only natural gas; the three steam units at the Tufts Cove Generating Station can burn gas or HFO. Fuels management must accommodate occasional switching between natural gas and HFO. The fuel decisions for those units change as prices of the two fuels move relative to each other. Natural gas prices declined so much during 2009 that gas-fired units began to displace significant amounts of coal-fired generation. This circumstance continued through 2010 and 2011. Fuels management also involves management of hedge positions. NSPI generally places hedges consistent with its fuel-supply contracting commitments pursuant to schedules specified in the Fuel Manual. Changes in load and other factors, however, cause corresponding changes in the quantities of fuel required during particular time periods. These changes in turn can cause financial instruments acquired to hedge a fuel price no longer to remain in a valid hedging relationship. Hedge positions then require adjustment.

B. Findings

1. Natural Gas

a. Prior to November 1, 2010 '''''''''''''''''' ''''''''''''''''' ''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''''''' ''''''' ''' '''''''''''''''''''''''' ''''''''''''''''' ''''''''' ''''''''''' ''''''''''''''''' '''''' ''''''''''''''''' '''''''''''''''''''''''''''' ''''''' ''' ''''''''''''' ''''''''''''''''''''''' ''''''''''' ''''''''''''''''''''' '''''''''' '''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''' '''''''''''' ''''''''''''''''''''''''''''''' '''''' ''' ''''''''''''''''''''''''''''''''' ''''''''''''''''''' ''''''''''' ''''''''''''''''''''' '''''' ''''''' ''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''' ''''''' ''' ''''''''''''''''' '''''''''''''''''''' '''''''''''' ''''' ''''''''''''' '''''''' ''''''''''''''' '''''''' ''''''''''''''' '''''''''''' ''''''''' ''''' ''''''''' ''''' ''''''''''''''' '''''' '''''''''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''''' ''''''''' ''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''' ''' '''''''''''''''''''''''''''' '''''''''''' ''''''' ''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' ''''' ''''''' ''''''' ''''''' ''''''''''''''''''''' '''''''''' ''''''''''''''' '''''''' ''''''''''''' '''''''''''''''''''' ''''''''''''''' ''''''''''''''' '''''''''''''''''''''' ''''''''''''''' '''''' '''''''''''''' ''''' '''''''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''' ''''''''' '''''''' ''''''''''''''''''' '''''''''''''''''''''''''''''' '''''' ''''''' ''''''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''' '''''''''''''''''' '''''''' '''''''''''''''''''' ''''' ''''''''''''''''' Managing these resources involved several operations:

• Obtaining from the suppliers their estimates of quantities to be supplied each day



• Maintaining coordination with the power desks to adjust estimated fuel requirements appropriately for each day’s generation

• Nominating to the pipeline the quantities to be delivered to Tufts Cove, and to the delivery point for any resale gas

• Buying or selling gas each day in order to balance supplies with requirements at Tufts Cove

• Tracking and adjusting hedge positions to maintain the desired level of price stability. NSPI’s Day-Ahead power desk created a day-ahead power-supply forecast to balance provincial load with in-province generating units and power imports. The day-ahead forecast includes a Tufts Cove generation forecast. NSPI nominated gas to Tufts Cove to supply the forecast generation, with the balance available under the contracts nominated to a resale point. The Tufts Cove generating units have very frequently operated at the margin for NSPI. This status as the most expensive operating units has often required output changes at the units as load changes or as problems occur at other sources of power, for example. Consequently, NSPI has often required intra-day gas purchases or sales to meet changed generation requirements. Any difference between quantities delivered and quantities consumed remained on the pipeline as “pack” (quantity delivered in excess of quantity consumed) or “draft” (quantity delivered less than quantity consumed). NSPI sold its excess gas as “firm” volumes and “swing” volumes. Firm volumes have the same value on each day of a month, but swing volumes vary daily. Prices for firm and swing volumes differ. Buyers frequently prefer the constant daily quantities associated with firm volumes, but market factors may drive prices for swing volumes above firm for short periods. NSPI can hedge the prices of the firm volumes more easily. Many more counter-parties offer financial instruments for monthly, versus daily, hedging. NSPI estimated the amounts of gas that it would have available for sale before it issued Requests for Proposals (RFPs) used to select buyers for its resale gas. The RFPs selected buyers for a year at a time. NSPI prepared these estimates about six months in advance of the first sales, and almost 18 months before the last ones under each resale contract. The exact quantities were nominated at the end of the month preceding the month of flow for firm sale quantities, and the day before the day of flow for swing quantities. NSPI structured the contracts to provide it with as much flexibility as possible to adjust the volumes available for sale in response to: (a) changes in the relative prices of natural gas and HFO, and (b) changes in NSPI’s requirements for generation.

b. After October 31, 2010 '''''''' '''''''''''' '''''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''' '''''''''''''''''''' '''''' '''''''''''' ''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''' '''''''''' '''''''' ''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''' ''''''' '''''''''' ''''''''''' '''''' ''''''''''''''''''''''''''' ''''''''''''''''''''' '''''' '''''''''''''''''''' '''''' ''''' ''''''' ''''''''''''''''' '''''''''''' ''''''''''''' ''''''''' '''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''' '''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''' '''''''''''''''''' ''''''' ''''''' '''''' ''''' ''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''' '''''''''''' '''''''''''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''''' '''''''''''''''''''' ''''' '''''''' '''''''''''''''''' '''''' '''''''' '''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' '''''''' ''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''''''' '''' '''''''' ''''''''''' '''''''''' ''''' '''' ''''''''''''''''''' '''''' ''''''''' '''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''' '''''''' ''''''''' ''''''''''' '''''''''''''''' '''''''''''''''''''''''' ''''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''''''' ''''''''



''''''' ''''' ''''''' '''''''''''' ''''''''''''' '''''''''''''''''''''''''' '''''''''''''''' '''''' '''''''''' '''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''' '''''''''''''''' '''''''' ''''''''''''''''''' '''''''''''' ''''''''''''' '''''''' ''''''''''''''''''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''' ''''''' ''''''''''''''''''''''''''''' NSPI’s last resale contract also expired on October 31, 2010. NSPI continues to buy and sell gas on a daily basis, in order to make delivered quantities equal to quantities required for generation. NSPI undertakes some of these so-called “balancing” transactions on an intra-day basis, when load or system conditions change after the pipeline’s deadline for nominations. NSPI enters these transactions with a variety of counter-parties active in the Maritimes Gas Market, depending on who has or needs gas on a particular day.

c. Quantities in 2010 and 2011 The transporting pipelines generally assess quality of the fuel. Each pipeline has, as part of its approved tariff, quality standards that the gas must meet in order to be eligible for transportation. Pipeline operators assess gas quality at the points where it enters the pipeline. Gas quantities, bought, sold and consumed, are determined by the pipeline’s meters. The tables below show the quantities of gas bought and sold in 2010 and 2011, and the resale margins for each of the two years. The substantial differences between Budgeted quantities and actual quantities reflect the fact that relative fuel prices changed between the time that the Budgets were prepared (generally in August prior to the year being forecast) and the time the fuel was consumed. NSPI updates its forecasts four times during each year for the purpose of adjusting its commitments for fuel supplies, adjusting its hedge positions, etc. The Fuels Budget used for FAM reporting is not updated, however.

NSPI Gas Transactions Purchases and Sales (MMBtu)

2010 Q1 Q2 Q3 Q4

Gas Bought Budget '''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''' Actual '''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''''''''

Gas Sold Budget '''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''' Actual ''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''

Resale Margins Budget '''''''' '''''''''' ''''''''''' '''''''''''' Actual '''''''' ''''''''''' '''''''' ''''''''''''

2011 Q1 Q2 Q3 Q4

Gas Bought Budget ''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''''''''' Actual '''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''

Gas Sold Budget '''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''' Actual ''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''

Resale Margins ($M) Budget '''''''''' ''''''''''' '''''''''' '''''''''' Actual '''''''' '''''' '''''''''' ''''''''''''

The Budget data evidences the anticipated ''''''''''''''''''''''' ''''' ''''''' ''''''''''''' ''''''''''''''''' '''''''''''''''''''' in the fourth quarter of 2010. Budgeted purchase quantities and sale quantities reflect that expectation. The



table below shows the change in fixed pipeline transportation charges that accompanied the expiration of the companion ''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''''' ''''''''''' ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''' '''''' ''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''''' '''''''' '''' '''''''''''''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''

NSPI Gas Pipeline Transportation Charges 2008 2009 2010 2011 Fixed transportation (Reservation Charge) '''''''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' Variable transportation '''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''''' Pipeline imbalance fees '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''' Pack and Draft penalties ''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''' '''''''''''''''''''

Variable gas transportation charges represent additional transportation purchased in excess of firm transportation.

2. Heavy Fuel Oil NSPI uses HFO to power the steam units at Tufts Cove when it is less costly than gas. HFO also supplements solid fuels at other generating stations in three circumstances:

• If a coal-fired generating unit is unable to achieve full design load on coal, but is able to do so with the addition of HFO, NSPI’s Generations Operations dispatch software (GenOps) will call for injecting a quantity of HFO into the unit. GenOps only calls for the use of HFO if it is the most economic solution when compared with other choices.

• The Supervisor of a coal-fired generating unit may determine that HFO is required to provide additional stability to the unit based on current operating conditions. In that circumstance, the amount of HFO is determined by the Supervisor based on his/her assessment of what is required to provide the additional stability.

• The Nova Scotia System Operator (Ragged Lake) may determine that HFO is required to provide additional stability or to satisfy current system load requirements. In that circumstance, the amount of HFO is determined by the amount necessary to provide the additional stability or the additional output to satisfy the system load requirements.

Tufts Cove consumed '''''''''''''' barrels (bbl) of HFO in the fourth quarter of 2010 and '''''''''''''''' bbl in the first quarter of 2011. Natural gas proved the economic choice for most of those two years. HFO consumption at the solid-fueled generating stations totaled ''''''''''''''' bbl in 2010, and ''''''''''''''''' bbl in 2011. Tufts Cove has HFO storage capacity of 420,000 barrels. Commercial-size vessels for delivering the product contain about 275,000 barrels. When Tufts Cove is using a lot of HFO, NSPI’s rule of thumb for ordering additional product is to order in a delivery window wherein the forecasted usable inventory is about 100,000 barrels on the first two days of the delivery window. Storage capacity at the other stations is as follows:

Lingan: 122,000 bbl Trenton: 35,800 bbl Point Tupper: 45,000 bbl.



Meters on the storage tanks measure volume daily, and the information is stored electronically. For inventory-control purposes, a third-party contractor performs a physical dip of the level of fuel in the tanks each month. Inventory at the solid-fuel plants is monitored daily. If there is a need to move some product from Tufts Cove to one of those stations, one of the Gas/Oil Marketers at FERM coordinates the transfer with Tufts Cove, the respective solid-fuel plant, and the trucking company that NSPI has under contract for this purpose. In both 2010 and 2011, NSPI was able to buy HFO from '''''''' '''''''''''''''''' ''''''' ''''''''''''''''''' '''' '''''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''' '''''''''''' ''''' ''''''''''''''''''''''' '''''''' '''''' '''''''''''''''' '''' ''''''''''''''' '''''''''''''''''' '''''''''''' ''''''' ''''''''' '''''''''' ''''''''' ''''' '''''''''''' '''''' '''''''''''''' ''''''''''''''''''' '''' '''''''' ''''''''''''''''''' '''''''''''''''''''''' '''''' ''''''''''' ''''' '''''''''''' ''''''' '''''''''''''''''' ''''' '''''''''''''' '''''''''''''' ''''''''' '''''''' ''' '''''' ''''' ''' ''''''''''' '''''' ''''''''''''''''' ''''' ''''''''' ''''' ''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''' '''''''''''' product has typically been of better quality than NSPI requires (about one percent sulfur, against a requirement of no more than 2.2 percent), but has been offered ''''' ''''' '''''''''''''''''''''' '''''''''''. NSPI has continued to issue RFPs for larger-size lots periodically, however. A management challenge for this fuel is to keep enough on hand for generation if required, but to avoid maintaining excessive inventory. The '''''''''''''''''''''''''' ''''''' ''''''' ''''''''''''' '''''''''' ''''''''''''''''''''' when that plant wants to sell, rather than when NSPI wants to buy. Thus, NSPI tries to maintain sufficient space in its tanks to be able to buy '''''''''''''' '''''''''''''''''' ''''''''''''' ''''' '''''''''. NSPI monitors the forward prices of coal, HFO and natural gas, delivered to marginal generating units. It prepares updates at the end of each month; they address the next 24 months. Observing these comparisons, NSPI conducts its hedging activities, but also watches for potential fuel-switch opportunities. The next table provides an example of this calculation, prepared March 2011, for April 2011 through March 2013. If fuel-switching is indicated, then increasing the level of inventory in anticipation of the switch may also be indicated. NSPI’s standard contracts for its fuel purchases contain quality specifications. For HFO in the larger vessels, fuel quality is sampled and tested at the load port using established ASTM procedures. NSPI contracts with a quality control and assurance company to witness the loading and sampling of each vessel, and requires that company to report on the results of the quality tests before the product arrives at NSPI’s facilities. For product obtained from the ''''''''''''''''''''''''' '''''''''''''''''' testing is done at '''''' ''''''''''''''''''.



''''''''''''''' '''''''''''''' ''''''''' ''' '''''''' ''''' '''''''''''''''' '''''''' '''''''''''' ''''''''''''' ''''''''''''''

The next tables show purchases, consumption and ending inventory for 2010 and 2011.

HFO Purchases and Consumption 2010 (barrels) Q1 Q2 Q3 Q4 TUC Purchases '''''''''''''' '''' '''' '''' TUC Consumption '''' ''' ''' ''''''''''''''''' Transfers to Other Stations '''' '''' ''' ''' Ending Inventory at Tufts Cove ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' Purchases at Other Stations '''''''''''''' '''' '''' '''''''''''''' Consumption at Other Stations ''''''''''''' '''''''''''''' ''''''''''''''' ''''''''''''' Boiler Grade Oil '''''''' '''''''' '''''''''' '''''''''' Transformer/Waste/Fish Oil '' '' '' Ending Inventory at Other Stations ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''' '''''''''''''''''''

HFO Purchases and Consumption 2011 (barrels) Q1 Q2 Q3 Q4 TUC Purchases ''' '''' '''' ''' TUC Consumption '''''''''''''''' '''' '''' '''' Transfers to Other Stations '''' ''' ''' ''' Ending Inventory at Tufts Cove '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' Purchases at Other Stations '''' '''''''''''''' '''' '''' Consumption at Other Stations ''''''''''''''''' ''''''''''''' '''''''''''' ''''''''''''''' Boiler Grade Oil '''''''''' '''''''' '''''''' '''''''''' Transformer/Waste/Fish Oil '' '' '' '' Ending Inventory at Other Stations ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''



3. Light Fuel Oils Management challenges for light fuel oils (LFOs) are similar to those for HFO. LFOs have a limited, but essential role in maintaining power supplies. Tufts Cove, Lingan, Trenton, Point Aconi and Point Tupper all use furnace oil for the following purposes:

• Start up and shut down of fuel milling systems • Start up and shut down of HFO systems • Support energy for the boiler during combustion • Fuel supply to auxiliary boilers • Fuel supply to air pre-heaters • Fuel to small auxiliary equipment • Fuel to boost power output up to the Machine Continuous Rating (MCR) of each

generating unit. Point Aconi has no HFO capability; therefore, it uses furnace oil for start-up and shut-down of the main boiler, in addition to the uses noted in the preceding list. Diesel fuel powers the four combustion turbines at Burnside, the one at Tusket, and the two at Victoria Junction. The combustion turbines provide rapid-start generation when necessary for peak-shaving or back-up of other generation. The following tables show purchases, consumption and use of the two fuels in 2010 and 2011.

Furnace Oil Purchases and Consumption 2010 (Gallons) Q1 Q2 Q3 Q4 Purchases ''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' Consumption ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''' Ending Inventory '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''

Furnace Oil Purchases and Consumption 2011 (Gallons) Q1 Q2 Q3 Q4 Purchases ''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' Consumption '''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''''' Ending Inventory ''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''

Diesel Fuel Purchases and Consumption 2010 (Gallons)

Q1 Q2 Q3 Q4 Purchases ''''''''''''''''''' ''' ''''''''''''''' '''''''''''''''''' Consumption '''''''''''''''''''' ''''''''''''''' '''''''''''''''''''' ''''''''''''''''' Ending Inventory ''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''''

Diesel Fuel Purchases and Consumption 2011 (Gallons) Q1 Q2 Q3 Q4 Purchases ''''''''''''''''' ''' '''''''''''''' ''' Consumption ''''''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''' Ending Inventory '''''''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''



The following table shows the amount of LFO storage capacity at each location using those fuels (in terms of volume and of days of consumption at maximum usage).

LFO Storage Fuel/Location Volume Days

Furnace Oil Tufts Cove '''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''' Lingan '''''''''''''''''''' '''''''''''' '''''''''' Trenton 5 ''''''''''''''''' ''''''''''''' ''''''''''' Trenton 6 '''''''''''''' '''''''''' '''''''''' Point Aconi '''''''''''''''''' '''''''''''' '''''''''''' Point Tupper ''''''''''''''' '''''''''''''''''' ''''''''''''''' '''''''' Diesel Fuel Burnside '''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''' '''''''''' Tusket ''''''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''' Victoria Junction ''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' '''''''''

Furnace oil tanks are sized to meet start-up requirements, including start-up at the commissioning of the plant, which is the time of heaviest use. Plants with multiple generating units have tanks sized to meet full plant requirements. For the combustion turbines, tank sizes ensure that the generating units at each location can perform at their intended capacities. Inventory management differs among the plants:

• Tufts Cove: Inventory is metered each night at midnight and recorded in the shift supervisor’s log book. A manual dip is taken at the end of each month.

• Lingan, Trenton, Point Tupper: Tank levels are read daily and recorded at the plant. A manual dip is taken at least quarterly.

• Point Aconi: The tank is metered and the level tracked in the control system. Daily readings are recorded on an inspection sheet.

• Combustion turbines: Operations staff take physical measurements daily. These measurements are compared to measurement equipment on each tank. A manual dip is taken at least quarterly.

Suppliers provide supply measured on a delivered basis. Day-ahead delivery supply contracts exist to maintain continuous supplies. If unexpectedly high usage occurs before the scheduled delivery, local suppliers remain on call to provide at least some supply within four hours. Each plant’s shift supervisor places orders. Each plant has slightly different “rules of thumb” for ordering product, due to the differing tank size and logistics of product delivery:

• Tufts Cove: Product orders issue when inventory gets to ''''''''''' ''''''''''''''' litres. • Lingan: Shift supervisors order product when required. If total inventory drops below

11,990 imperial gallons, an alarm sounds in the Control Room. • Trenton: Product orders issue when the tank at Unit 5 gets '''''''''''''' '''''''''''''' litres; for the

tanks at Unit 6, product orders issue when each tank gets ''''''''''''' ''''''''''''''''' litres. • Point Tupper: Product orders issue when the tank is below '''''' ''''''''''''''' ''''' ''''''''''''''''''''.



• Point Aconi: Product orders issue when the inventory level '''''''''''''' ''''''''''''''' ''''''''''''''''''' litres (60 percent of capacity).

• Combustion turbines: Product orders issue when tank levels approach a specified minimum. Each specified minimum is determined based on the following: o Estimated hours of running based on weather and plant status o Total turbine numbers at the location (Burnside, 4; Victoria Junction, 2; Tusket, 1) o Time of year o Minimum usable amount of fuel in the tanks (5 to 6 percent) o Minimum levels required to prevent starvation of operating units o Scheduled tank or fuel-line maintenance.

Generation by the combustion turbines has run at low levels, when compared to budget (68 percent 2010 and 38 percent in 2011). Consequently, LFO consumption ran considerably below Budget as well.

4. Hedging NSPI’s hedge positions for fuel require active management, just as the supplies themselves do. Two circumstances give rise to a requirement to adjust those positions:

• Changes in the estimate of load: requires more fuel for increased load or less fuel for reductions in estimated load. A requirement for more fuel could require additional hedges, while a downward adjustment in fuel requirements could result in “excess” hedges.

• Changes in the relationship between HFO prices and natural gas prices: a change large enough to cause a fuel-switch at Tufts Cove causes NSPI to adjust its hedge positions accordingly.

Hedge positions remain subject to quarterly adjustment for changes in effectiveness. NSPI examines hedge positions each quarter to ensure that they remain effective in providing the protections for which the Company acquired them. Accounting tests apply, and effectiveness adjustments occur as appropriate. Effectiveness adjustments occur in response to changes in fuel quantities required, and in forward prices for fuel commodities, not as a result of NSPI management decisions. FERM manages NSPI’s hedge positions for fuel commodities. Company Treasury personnel acquire and manage exchange-rate hedges for fuel commodities bought in currencies other than the Canadian dollar. The U.S. dollar is the primary other currency involved. A finding of excess or insufficient hedges, if one occurs, would happen as part of the quarterly update of the fuel forecast. When one occurs, FERM takes the finding to the FST, with a recommendation for corrective action. Changes in the relationship between HFO prices and gas prices can happen at any time. If that occurs, FERM would call a special meeting of the FST, for its consideration of a recommended course of action. NSPI’s preferred method for dealing with surplus hedges is to purchase offsetting hedges, in order to fix any loss that might be incurred from the original hedge. Surplus hedges are not usually carried to maturity without action, nor are short positions not covered, as to do otherwise would constitute speculating on fuel prices.



a. HFO '''''''''' ''''' '''''''' '''''''''''''''''''''' ''''' ''''''' ''''''''''''' ''''''''''''''''' '''''''''''''''''''', NSPI had two forms of exposure to fluctuation in the price of HFO:

• Price fluctuations for HFO that is going to be consumed in generating plants (recall that the solid-fuel plants use some HFO, as well as the steam units at Tufts Cove)

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋

The latter of those two activities ended with the ''''''''''' ''''''''''''''''' '''''''''''''''''', with the last of those hedges settling in September 2010. The other HFO hedging activity also ended, because the Company’s requirements for the product have declined to such a low level. Pursuant to the schedule in the Fuel Manual, NSPI bought some fixed-for-floating swaps scheduled to mature in January and February of both 2010 and 2011. NSPI subsequently revised the estimated requirements so far downward that it decided to sell hedges for both periods.

b. Natural Gas NSPI’s Fuel Manual provides a schedule for natural gas price hedging that ''''''''''''''''''''' ''''''' ''''''''''''''''''''''''' '''' '''''''''''''''''' ''''''''''''''''''''''''''''''' ''''''''''''''' '''' ''''' ''''''''' ''''' '''''' ''''' ''''''''' '''''''''''''''' '''''''''''' ''''' ''''''' '''''''''''''''' '''''' '''''''''''''''''''''''''''. Liberty’s 2010 FAM Audit Report recommended that NSPI explore with its stakeholders whether, and under what circumstances, those targets should be reduced. In late 2010, one of NSPI’s consultants on hedging also recommended reducing the targets, due to the increased variability in natural gas consumption accompanying the introduction of wind power into the Company’s generation mix. Reducing the targets was discussed at the December 2010 meeting of NSPI’s Small [Stakeholder] Working Group (SWG). Members of the SWG who expressed an opinion were generally in favor of reducing the targets. '''''''''''' '''''''''' '''''''''''''''''' '''''''''''''''''''' '''' ''''''''''''''''' ''''' ''''''' '''''''''''''' '''''''''''''''''''''''''''. NSPI produces ten-year forecasts of generation and fuels requirements as part of its business planning. These forecasts are used to start the hedging process, '''''' ''''''' ''''''''''''''''' ''''''''''''''''''' ''''' ''''''' ''''''''' '''''''''''''''' '''''''''''''' '''' '''''' '''' '''''' ''''''''''''''' '''''''''''' '''' ''''''' '''''''''''''''' '''''' ''''''''''''''''''''''''''''''' Fuels Budget preparation occurs in August of the year before consumption, using fuel prices observed on July 31. NSPI “refreshes” the fuels forecast in January of the year of consumption, using prices observed on December 31. It is then updated three more times: in April, using March 31 prices; in July, using June 30 prices; and in October, using September 30 prices. The Company adjusts hedge positions after each re-forecast. The next two tables show forecasted gas purchases, the quantity hedged and the proportion hedged at the time of the Fuels Budget and each of the updates for 2010 and 2011. The quantities hedged, and thus the proportions hedged, are net of two reductions:

• Part of the gas purchased under the ''''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''' ''''''''''''' '''''''''' '''''''''''''''' ''''' '''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''' ''''''''''''''' ''''''''' '''''''''''' ''''''''''''''''''''''''''

• Quantities expected to be resold were not hedged. That gas was bought from ''''''''''' ''''''''''''''''' '''' ''' '''''''''''''''''''''''' '''''' ''''' ''''''''' '''''''''''''''' ''''''''''''', but it was resold into that same market.



Thus, the resale price hedged the purchase price. NSPI referred to this as a “natural” hedge.

The effect of these adjustments can be seen in the quantities and proportions hedged for 2010. NSPI’s Fuels Budget for 2010 anticipated reselling more than half of the gas purchased from ''''''''''' ''''''''''''''''' in the second and third quarters of that year. Thus, the quantity to be hedged was less than half of that purchased. Moreover, of the quantity to be hedged, '''''''''''' ''''''''''''''''''''''' '''''''''' '''''''''''''''''' ''''''''' '''''''''' ''''''''''''''''''''''''' The data for 2011 does not show as large an impact. The ''''''''''''' '''''''''''''''''' contract had expired, but NSPI, for all four quarters, initially forecast less gas purchased and more resold than turned out to be the case. The table shows forecast purchases increasing with the First and Second Quarter Updates, and hedged quantities increasing with them. By the time of the Third Quarter Update, however, NPPH had shut down the Port Hawkesbury paper manufacturing plant, thereby reducing the demand for power, and Tufts Cove Unit 5 had experienced a major failure, reducing NSPI’s capacity to generate with gas.

2010 Forecasted Purchases (Gbtu)

Forecast Effective Date Q1 Q2 Q3 Q4

Budget July 31, 2009 '''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''''' Budget Refresh December 31, 2009 '''''''''''''''' '''''''''''''' ''''''''''''''' '''''''''''''''

Q1 Forecast March 31, 2010 '' ''''''''''''''' '''''''''''''''' '''''''''''''''' Q2 Forecast June 30, 2010 '' '' '''''''''''''''' ''''''''''''''''' Q3 Forecast September 30, 2010 '' '' '' ''''''''''''''

Quantity Hedged (Gbtu) Forecast Effective Date Q1 Q2 Q3 Q4

July 31, 2009 '''''''''''''''' ''''''''''''''''' '''''''''''''' '''''''''''' December 31, 2009 ''''''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''' March 31, 2010 '' '''''''''''''''' ''''''''''''''' '''''''''''''''' June 30, 2010 '' '' ''''''''''''''''' ''''''''''''''''' September 30, 2010 '' '' '' ''''''''''''''''

Proportion Hedged (%) Forecast Effective Date Q1 Q2 Q3 Q4

July 31, 2009 '''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''' December 31, 2009 '''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''''''' March 31, 2010 '' '''''''''''''' ''''''''''''''' '''''''''''''' June 30, 2010 '' '' '''''''''''''' '''''''''''''' September 30, 2010 '' '' '' '''''''''''''

Settlement of Hedges ($M) Q1 Q2 Q3 Q4

(Gain) or Loss '''''''''' ''''''' '''''' '''''''



2011 Forecasted Purchases (Gbtu)

Forecast Effective Date Q1 Q2 Q3 Q4 Base Gas Cost July 31, 2010 ''''''''''''''' ''''''''''''''''' '''''''''''''' ''''''''''''''

Base Cost Reset December 31, 2010 '''''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''''''''' Q1 Forecast March 31, 2011 '' ''''''''''''''''' '''''''''''''' '''''''''''''''' Q2 Forecast June 30, 2011 '' '' '''''''''''''''' ''''''''''''''''' Q3 Forecast September 30, 2011 '' '' '' ''''''''''''''''

Quantity Hedged (Gbtu) Effective Date Q1 Q2 Q3 Q4 July 31, 2010 '''''''''''''''' ''''''''''''''''' '''''''''''''''' '''''''''''''' December 31, 2010 ''''''''''''''' ''''''''''''''' '''''''''''''''' ''''''''''''''' March 31, 2011 '' '''''''''''''''' ''''''''''''''''' '''''''''''''''' June 30, 2011 '' '' '''''''''''''''' '''''''''''''''' September 30, 2011 '' '' '' '''''''''''''''''

Proportion Hedged (%) Effective Date Q1 Q2 Q3 Q4 July 31, 2010 '''''''''''''''' '''''''''''''' ''''''''''''''' '''''''''''''' December 31, 2010 ''''''''''''''''''' ''''''''''''' ''''''''''''' '''''''''''''' March 31, 2011 '' '''''''''''''' '''''''''''''' ''''''''''''''' June 30, 2011 '' '' ''''''''''''' '''''''''''''' September 30, 2011 '' '' '' '''''''''''''''''

Settlement of Hedges ($M) Q1 Q2 Q3 Q4 (Gain) or Loss ''''''''''' '''''' ''''''' '''''''

The next graph shows the effect of the gas hedging activity for the two years of the Audit Period. The Swap Trade Price is the price that NSPI “bought” with fixed-for-floating swaps. The Expiry Price, or Settlement Price, is the price at which the hedge settled. For natural gas, NSPI generally uses financial instruments that settle on the last-day settlement price of the NYMEX gas futures contract. Note that this hedging activity was all done at the Henry Hub.



C. Conclusions

1. NSPI has continued to conduct natural gas supply management effectively. The next charts show how closely delivered volumes (both consumed and sold) matched nominated volumes in 2010 and 2011. Differences between nominated quantities and delivered quantities are referred to as “imbalances.” Pipelines assess imbalance fees, pursuant to a tariff schedule, when substantial imbalances occur. Imbalances and imbalance fees had declined considerably from 2008 to 2009, as NSPI experienced less variability in gas use. Those measures declined further from 2009 to 2010, then remained about the same in 2011 as in 2010. Gas use continued at high levels during this time. Fees were 15 percent higher in 2011 than in 2010, as gas use tapered off late in the year with the loss of the Tufts Cove 5 generating unit.

''''''''''''' '''''''''''''''' '''''''''''



'''''''''''' '''''''''''''''' '''''''' ''''''''''

'''''''''''''' ''''''''''''''''' ''''''''''

'''''''''''' '''''''''''''''' ''''''' '''''''''''

2. NSPI has continued to manage fuel oils effectively. Comparison of HFO consumption and inventory data for Tufts Cove shows that, even though consumption has declined considerably from what it was in 2009, inventories have not risen. Similarly, at the other stations, inventories have not risen even though use has varied over the two years of the Audit Period. These measures are indicative of effective management. The same observation holds true for the LFOs. Consumption varied considerably over the Audit Period, but inventories have stayed within a narrow range.

3. NSPI conducted effective natural gas hedging at Henry Hub; substantial drops in market prices caused NSPI’s natural gas hedging to prove costly during the Audit Period.

Hedging provides benefits when prices are increasing, but increases costs when prices are falling. As natural gas prices fell through much of 2010 and 2011, hedges added considerably to natural gas costs in those two years: $28.8 million in 2010 and $31.1 million in 2011. NSPI can



be faulted only if it failed to follow a structured, sound hedging program designed to reduce volatility. Chapter V of this report, which addresses natural gas contracting, describes how NSPI should have hedged the basis differential between the Henry Hub and the Northeast U. S. In the case of the hedges at the Henry Hub, however, the Company followed its hedging program. We have previously stated our preference for lower hedging targets, due to the uncertainty in gas requirements. Lower targets would have reduced the losses in 2011. Hedge proportions were low in 2010, due to partial hedging with HFO and anticipation of large resales, but losses were still quite large.

D. Recommendations Liberty has no recommendations in this area.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) VIII. Power Plant Performance

July 9, 2012 Page VIII-1 The Liberty Consulting Group

VIII. Power Plant Performance

A. Background Liberty examined plant performance more closely in this FAM Audit because of a number of pre-identified potential issues associated with the NSPI fleet performance. These potential issues included unit efficiencies (heat rates), utilization, outage management and maintenance, all of which can substantially affect energy costs passed on to customers. We sought to determine the degree to and the methods by which NSPI optimizes use of its assets; i.e., operating and maintaining its fleet to get the best results for its customers. In making this examination, we remained mindful of the fact that the operation of electric systems has changed greatly in recent years. Companies like NSPI do not have the same flexibility to run their assets as originally intended. Efficiency, utilization, and other performance measures remain important priorities, and often raise substantial issues. Nevertheless, one must recognize in making such an examination that power plants have become increasingly affected by external factors. Management’s effectiveness in dealing with these forces, today and in preparation for the future, must comprise a primary focus of an analysis of the type we performed. Our examination covered many issues; however, one central theme stood out from the others. It does not override those other issues. Rather its centrality lies in how it illustrates the degree of the operational shift that NSPI and its stakeholders face in a changing operating environment and the magnitude of impending challenges. The central theme is revealed in the accompanying chart, which shows a very marked drop in the overall capacity factor of NSPI’s coal fleet in recent years. This drop reveals a rapid diminishment of the role and value of NSPI’s largest and most critical collection of assets; i.e., its coal-fired power plants. Management faces a new paradigm that complicates power plant operations, and directly affects the management issues central to our study of plant operations. Erosion in the operation of NSPI’s coal fleet raises a host of factors that will drive many NSPI decisions over the next decade.

1. A New Model Electric systems and the way utilities operate them have evolved over many decades. Certain principles, however, have remained constant, but show substantial change recently. First, utilities seek to provide a mix of generation that meets loads optimally. Second, unit economics dictates which assets operate and when, subject to technical limitations of plants or the electrical system. Optimum Mix: An optimum generation mix includes plants designed for base load, which are intended to run as close to 100 percent of the time as practicable. It also includes other



intermediate or peaking units that pick up the load fluctuations during the seasons of the year and the times of day. These two unit classes have tended to have distinct characteristics. Base load units have the lowest fuel costs, begging the question of why other types have merit. There are two main reasons: (a) these units generally have tended to have much higher capital costs, and (b) they are not built to cycle, or change load frequently. Ending up with too much baseload capacity prevents the utility from operating the units as intended. That produces two adverse consequences: (a) under-utilization of an expensive asset, and (b) wearing operation of a complex machine. Economic Dispatch: Utilities have for many decades operated their systems, alone or coupled with other utilities, on the basis of economic dispatch. Cost optimization can never be perfect. One source of compromise consists of units that must run, regardless of their economics, for technical reasons. In addition, most jurisdictions, as a matter of public policy, have from time-to-time encouraged new generators to be built by assuring them of a certain flow of revenue. These generators often involved power purchase agreements (PPAs) that generally require the utility to take defined portions or all of their output. Utilities will therefore run these units first, displacing units that might otherwise be less expensive. The take-or-pay requirements in such PPAs render much of the cost sunk, making their dispatch cost effectively zero. Such units thus displace another base load resource. Nevertheless, it remains a rule of very general applicability that the unit with the lowest cost to produce the next MWh will get the call to do so when needed. These two principles, optimum mix and economic dispatch make strong economic sense; they will likely always play a central role in system design and operation. Nevertheless, other priorities regularly require accommodation. Today’s need for renewable generation provides an example of such a competing priority. Canada, the U.S. and Europe have all added new generation in advance of full consideration of the impacts on system operations, and have adopted substantial policies requiring favored types of resources to run without consideration of their economic order. Such changes place utilities in all these regions in a transition requiring rebalancing generation mixes to better accommodate recent policy changes and the new plants they have brought to the table. Volatility in other, more traditional forces (such as load and fuel prices) continue to complicate the generation-mix challenge, particularly so in very recent times:

• The recession that started in 2008 has had a major impact on load growth; the load that justified placing long lead-time expensive assets simply has not shown up when the assets have.

• Gas prices have fallen to historically low levels, fundamentally altering the economic positions of many production assets.

2. The Impact for Coal-Heavy Utilities The phenomena discussed above have been becoming increasingly apparent. One manifestation is actually “negative” energy prices. They occur when a generator, rather than reduce generation, pays someone to take the energy. More narrowly, the payor actually pays another generator to reduce generation. The notion of too much generation during very low load hours is not new, but the extent to which it now occurs is very much greater. Ontario has perhaps been at the forefront of the phenomenon, while the Northwest U.S. has also regularly been in the news on this subject.



The problem grows in Germany as well, even after shutting down a large number of nuclear units. The impacts of this phenomenon do not appear as severe in Nova Scotia, but the effect has become more visible. The addition of renewable production sources already affects the ability of NSPI’s coal units to operate as base load plants. This impact shows in declining capacity factors, as coal units simply cannot produce the same output as they did in the past. This trend has shown staying power; it does not appear to be at risk of stopping soon. Therefore, it has consequence not just in reducing the use of expensive units built to operate 24/7, but for how their owners need to look at their future fit, as those owners consider what resources it takes to maintain and extend unit lives. The difficult economic times since 2008 have, however, had a particularly strong impact on Nova Scotia, with the loss of NSPI’s biggest customer and the sporadic operation of its second biggest. These losses will hopefully prove temporary, but there is no assurance. NSPI’s most recent load forecast, for example, shows declining peak demand for the next ten years, as illustrated on the accompanying chart. Renewables and load do not comprise all of the major challenges for NSPI coal plants. A third factor makes those challenges much tougher. Low natural gas prices increasingly have moved gas units toward base load status, further displacing coal. In addition, the low and sometimes negative regional prices allow NSPI to import power on a cost effective basis, even after significant additional costs for transmission. Volatility in fuel prices is not a new phenomenon. What is different, however, is the structural dimension that has been causing natural gas to march to a different drummer than other fuels. Very recently the talk of the industry centered on how to get LNG into North America. The new, white-hot focus now centers on how to move from machines built to do that to ones that will get gas volumes off the continent, not onto it. New production techniques, in short, augur a new view of gas availability, giving at least a double meaning to the old saw about “running in reverse.” All these factors put coal at significant operational risk in the short term. Combining them with a strong trend in environmental policy direction turns the threat from operability to survivability over the longer term.



Clearly, answering the question of how well NSPI manages its fleet goes beyond simple operating statistics. The Company finds itself in a difficult situation in which the value of its historically most critical assets has declined and in which it has been becoming increasingly more difficult to operate those assets effectively.

3. Study Scope Power plant performance studies have traditionally been rather straightforward, examining performance in terms of unit availability, utilization and efficiency. The new construct we have described requires a different approach. Lower availability, lower utilization and lower efficiency will be givens, at least for some assets. The challenge for an assessment of this type becomes in major part a test of how NSPI is managing the effects of changing circumstances. We have examined the degree to which NSPI has acted to avoid negative performance characteristics and to mitigate the remainder. We also considered how future investment in assets at risk should be managed. NSPI’s asset mix will certainly look very different 10-15 years from now; the management of that evolution should drive Company thinking to a much more significant degree than has been true in the past. We have organized our analysis in the following categories, which will form the basic structure for our study and this chapter:

• Unit performance • Outage management • OM&G Costs • Plant investment • Tufts Cove 6 Project Management

In conducting this analysis, we visited all five of the large thermal plants, and discussed power plant operations with many plant and home office personnel. We compared the NSPI units with similar units in North America to understand their relative performance. We focused on performance in 2010-11, although occasionally we looked at longer term trends for insights. In addition to plant performance, we also examined operating costs, the capital improvement program, and the degree to which the realities of today’s issues should and do influence future NSPI plans. Finally, we examined the management of the Tufts Cove Unit 6 project.

4. NSPI’s Thermal Fleet This analysis is focused on the large thermal units in NSPI’s generation fleet. The fleet consists primarily of coal units ranging in age from 18 to 43 years. For coal units of this size, this is a relatively young age. Averages of 50 years typify North American experience. Lingan, Nova Scotia’s largest plant, has witnesses the first major impacts of the phenomena we discussed above. Its utilization has dropped in recent years, as it has been displaced in the dispatch order. Declining load and environmental requirements have also substantially affected plant utilization. As a result, two of the units will be operated on a seasonal basis only. All of NSPI’s coal units employ conventional technology with the exception of Point Aconi, which uses a circulating fluidized bed (CFB) in its boiler. This early version of “clean coal”



technology has significant environmental benefits, but entails more complex operations, including the need to feed limestone into the boiler. NSPI originally intended several of the units to burn oil, but converted them as changing fuel economics dictated. The Company converted Point Tupper to coal in 1987. It converted Tufts Cove 1-3 to allow gas firing, as well as oil, in 2000. The low gas prices of recent years have caused the units to depend predominantly on gas. The Tufts Cove 4 and 5 units consist of large gas turbines (GE LM6000) that are in widespread use in the industry. Evolving technology has allowed such units to reach higher efficiencies than in the past and low gas prices led to much higher usage of the turbines recently. All such units, despite their relatively high efficiency, waste considerable energy in the form of exhaust heat. NSPI recently constructed Tufts Cove 6 to recapture some of the energy lost this way. This new unit takes the waste heat from the turbines, and uses it to make steam to run the Unit 6 turbine, essentially with a free energy input for 25 MW. The unit can generate another 25 MW by burning gas to increase the energy in the waste stream. NSPI has made significant environmental investments in recent years in the coal fleet, including low Nox burners on all the units (not necessary at the Point Aconi CFB). In addition, a major refurbishment of Trenton 5 concluded in 2009.

B. Findings

1. Analysis of Unit Performance

a. Performance Data i. Data Sources

The Generator Availability Data System (GADS) and the Equipment Reliability Information System (ERIS) make performance data for power plants available. The North American Electric Reliability Corporation (NERC) manages GADS. The Canadian Electricity Association (CEA) manages ERIS. GADS currently includes some Canadian power plants but not all. NSPI has just recently begun reporting into GADS. Its units will become part of the system in the future. CEA granted us electronic access to the ERIS data base. ERIS contains good data, but the GADS data has more value for analytical purposes. For example, GADS is more granular, and provides data by unit size. GADS also provides a larger amount of data for each unit type and size. We have therefore used GADS primarily in this chapter’s comparative analyses. The table to the right illustrates how the NSPI units fit in the data base. The GADS data fits nicely with the NSPI coal fleet for comparative purposes. One significant exception is average age of the units. That number is about 50 years for the GADS steam units (coal or gas). The

NSPI Unit Capacity GADS CategoryUnits in Sample

Lingan 1 153 Coal 100-199 MW 231Lingan 2 153 Coal 100-199 MW 231Lingan 3 153 Coal 100-199 MW 231Lingan 4 153 Coal 100-199 MW 231

Tufts Cove 1 81 Gas 1-99 MW 106Tufts Cove 2 93 Gas 1-99 MW 106Tufts Cove 3 147 Gas 100-199 MW 94

Trenton 5 152 Coal 100-199 MW 231Trenton 6 155 Coal 100-199 MW 231

Pt. Acont 1 152 Coal 100-199 MW 231Pt. Tupper 2 172 Coal 100-199 MW 231



GADS steam units are thus in the range of 15-20 years older than the NSPI coal units on the whole. We excluded the Tufts Cove gas turbines from the GADS comparisons because the older units in GADS (as well as NSPI’s older combustion turbines) operate in a very different environment. Tufts Cove consists of modern and efficient units that, in light of low gas prices, run far more often than the pure peaking units that dominate the GADS data base.

ii. Performance Factors

Power plants participating in GADS offer substantial data defining their operations. We focused on the basics:

Availability Forced outage rate Capacity factor Heat rate Availability factor (AF) represents the percentage of time the unit was available for service, regardless of load. Finer measures of availability also exist to account for time when the unit is available for only part load. That level of detail did not have significance for our analysis. Many units require an outage of 2-3 weeks every 12-18 months. These outages make an availability factor in excess of 95 percent difficult to attain, and define that level as very good performance. A more attainable target is the lower 90s. Older coal units of the NSPI size generally exhibit Afs in the high 80s. The forced outage rate (FOR) measures the time that the unit is in a forced outage condition when it would otherwise be expected to be running. This means that any time when the unit is shut down for economic reasons, planned or maintenance outages are excluded from the calculation. As a result, the FOR for units that operate infrequently may appear very high, because the denominator is much lower than a highly utilized unit. For base load or near base load units, one should expect low rates, perhaps 5 percent on average. Capacity factor (CF) perhaps supplies the economically most important indicator for a base load unit. Such units are expensive to build, and their effectiveness in justifying the original investment will depend on how much they produce. Large, efficient base load coal plants tend to have capacity factors in the 80 percent range; high performing units can range higher. The nature of coal plants causes them more partial de-ratings than many other types of plants experience. They are therefore unlikely to have capacity factors approaching their availability. The efficiency of a power plant is defined as its heat rate (HR), which measures the amount of energy input to the unit that is required to produce one unit of electricity. Note that HR is inversely proportional to efficiency; i.e., a higher heat rate means a



lower efficiency. HR represents a critical parameter; any change in heat rate has a corresponding change in unit output and fuel cost.

b. Availability In order to fully understand NSPI’s performance in maintaining its fleet as available and ready to run, we looked at several factors:

• The bottom line availability factor • Forced outages and the forced outage rate • Planned outages.

i. Availability Factor

Coal unit availability has generally been good. Most units lie above 90 percent in most years. Despite the aberrant 2011 factor, Point Tupper has actually been a well above average performer. A planned outage in 2011 that went bad accounts for the out-of-character recent performance. We discuss that outage below. Trenton, more specifically Unit 5, is a clear outlier among NSPI’s coal plants. Extended planned outages coupled with multiple extended forced outages made for two bad years, but 2009 was also very bad, and 2012 looks to become even worse. Gas unit performance has been well below the industry averages; however, we caution that those averages can be misleading. Small gas units in the data base are invariably old (50 years on average) peakers with very low capacity factors. NSPI’s gas units, although much younger, have recently had high running rates. One would suspect they would compare less favorably as a result. It must be noted, however that availability on TC 1-3 was also low in earlier years when capacity factors were lower. The next tables illustrate clearly where the availability anomalies exist, which allowed us to focus on those units in the following discussions of planned and forced outages. We have observed recent availability issues as atypical and not consistent with the prior experience. The track record of the plants makes that observation important to keep in mind. Nevertheless, we approached our analysis under the premise that one cannot dismiss potential new trends simply on the basis of inconsistency with the past. It is important to consider the



possibility that the recent movements by several NSPI plants to availability levels below the industry represent a warning signal.

ii. Forced Outages Forced outage rate (FOR) comprised the common parameter we examined. It remains important, however, to consider other factors in the analysis. Lesser-used plants have a lower base number of hours over which to spread outage hours. They therefore tend to have higher forced outage rates. Small gas turbines with single digit capacity factors often have extremely high FORs. This factor makes comparisons difficult in such cases. NSPI Performance Coal units permit easier comparisons of FOR and the industry data converges around an average of five percent. By this standard, NSPI’s units have performed quite well. The tables show that the familiar Trenton 5 problems dominate, as well as the well-known issues with TC 5’s 2011 turbine failure. In addition to FOR, we find it revealing to also examine the number of forced outages and the number of lost hours they cause. In general, NSPI units experience outages less frequently than might be expected. Further, many of these might be considered “nuisance” problems that result in very little time off line.

NSPI also appears to experience a favorable number of total hours lost due to forced outages. All units fall well below the average for the industry, with the notable exception of Trenton 5.



Cost Impact of Forced Outages Forced outages affect utility costs in several ways. Serious failures cause high repair or replacement costs. This tends not to be true for more typical problems, where existing personnel with perhaps moderate outside help can generally address the causes expeditiously. In any event, it is hard to spend a lot of money in a few days, which is the median forced outage duration. The second cause of higher costs is the need to replace the lost output, presumably with more expensive power. Traditionally, this has provided the major penalty source for base load units that, by definition, have the lowest running costs on the system. Whichever unit is called on to replace them will surely be more expensive. We caution, however, not to over-rely on the old paradigm. We have seen that the competitive position of the base load units is eroding quickly. The coal fleet ran on balance at only 63 percent of its capability in 2011. The closer competitiveness of other sources of generation, such as gas, will often make energy lost during an outage cheaper to replace than before. Today’s environment in Nova Scotia often makes the financial impact of forced outages a function of the timing of the outage. Taking a low cost unit off during a period of peak energy costs typically brings hardship. As system costs have declined, however, the need for the base load units has become less urgent. In order to understand financial impacts better, Liberty examined the 16 forced outages in 2010-11 for which NSPI reported replacement costs exceeding $100,000. This sample did not include planned outages which were extended, even if NSPI classified that extension as “forced.” We discuss those extended planned outages and their impacts later. These 16 outages, shown on the accompanying table indicate the 2011 Trenton 5 outage as the most costly, from a replacement power point of view. The table suggests that the timing could not have been worse. This case was clearly an outlier and most of the other outages fared much better. Presented this way, the forced outage “problem” looks severe; however, any judgments need to be made in the context of several important qualifiers:

• We have shown only the worst outages in terms of replacement power costs.



• The 40 other forced outages have a median cost of only about $11,000 each with 17 of those outages having no replacement cost due to then-current energy prices.9

• Most importantly, the fleet’s forced outage performance seems better than average from an industry perspective.

Our examinations, particularly in which forced outage performance is above average, normally study the degree to which the company was successful in restoring the unit to service quickly. The accompanying chart, however, suggests that the duration of an outage does not affect replacement power costs. It appears more logical to conclude that, while duration obviously must play a role, it is much less significant than the seasonal timing of the outage. Such a conclusion draws support from the corroborating notion that one is less likely to drive an outage to completion on a unit that will not run in any event, or on one whose replacement costs are minimal. The conclusion we reach, therefore, is that off-season outages, which have a lower replacement cost penalty will tend to run longer. We thus considered NSPI fleet performance, as measured by forced outage rate, to be sound. Even those incidents of forced outages that do occur have not produced much in the way of cost penalties. This finding, however, does not suggest that the results cannot be better. The number of outages and the preponderance of boiler tube leaks on the “cause” list suggest opportunities for improvement. However, we consider them to be improvements over what appears as an already favorable level of performance.

iii. Planned Outages

The average coal unit normally goes off line for about three weeks per year for planned maintenance and improvements, but large variations exist. Major overhauls, required occasionally, or outages for major capital improvements will require much longer outage durations. A standard for evaluating performance associated with planned outages is how well owners execute them against plans. Of NSPI’s planned 19 outages for 2010-11, the actual duration of nine of them (47 percent) exceeded the planned length by at least a week. NSPI completed the other 10 on schedule or within a week of the planned duration. Utilities scope and plan outages very carefully, but slippage can occur. Unknown problems can surface when equipment is apart, making some delays probable. We chose one week as the cut-off to allow for moderate levels of unexpected slippage. The relatively high number of planned

9 NSPI presented estimates for net savings for these 17 outages. Our assumption is that the units would not have run under such circumstances even if available. We therefore show the replacement costs as zero, not negative.



outages not executed within the one week cushion invites examination into NSPI’s approaches to outage planning and management, which we address in a later section. Another revealing statistic about very long planned outages underscores the importance of that examination. NSPI planned 4 outages of 8 weeks or more during the Audit Period. Three of them experienced extensions of at least four weeks, with the average extension comprising 6.9 weeks. These big outages had some similar characteristics:

• Point Tupper – 2011: This major planned outage started in June 2011. Scheduled for 7.7 weeks, it lasted 20.4 weeks. A planned re-winding of the generator comprised the critical path. The scope also included turbine inspections. NSPI observed during the outage numerous, unanticipated blade cracks. NSPI replaced high and intermediate pressure blades, as well as low pressure erosion shields. The critical path work on the re-winding also expanded significantly, following unexpected findings during the outage work.

• Trenton 5 – 2010: NSPI planned this outage as a major undertaking, and scheduled the work for nine weeks. NSPI discovered turbine issues at this unit as well. The added turbine repairs added only about one week to outage duration. Subsequent startup problems associated with alignment of the turbine-generator caused more significant delays, with the outage eventually exceeding 13 weeks.

• Tufts Cove 3 – 2010: NSPI scheduled this generator re-wind outage for nine weeks. Problems encountered included:

o The Company discovered a short in the generator windings. o Replacement of slot liner insulation was required complicated by the unique

design of the unit. o Balancing and turning gear issues surfaced.

The unit returned to service after an outage of about 13 weeks. The next chart shows the nine planned outages delayed by one week or longer. Outage delays have the potential to penalize a utility in a number of ways. The most obvious is the loss of low cost generation which has to be replaced, potentially at a much higher cost. Second, cost penalties can result from added overtime and contractors. Third, utilities typically coordinate outages across their systems. A lengthy delay at one station can affect plans and timing of another station’s outages or operation. Even though replacement power penalties may not be as great as they used to be, strong outage planning and management remain central elements of effective fleet management.



c. Unit Output Unit output comprises a strong bottom line metric for a power plant, particularly a base load unit. We have observed, however, that declining output of coal units represents a clear industry trend. We considered a sample of 230 coal units of the size and vintage of NSPI’s units. The average net output of each unit declined by 22 percent from 2006 to 2010 (from 769 GWh to 601 GWh). Larger, more efficient units saw a smaller, but still substantial drop over this period. Drops of this magnitude will cause a significant impact on unit economics. The output drop, per se, does not, however tell a full story. Cycling has become a substantial issue. Coal plants, as true of other base load plants generally, were built to run at full load for sustained periods. Some types of plants exhibit flexibility to change operating levels, but most cannot. Operating them in unintended ways degrades both their performance and their mechanical condition.

• They become less efficient. As we discuss later, heat rate is a function of output, and the optimum heat rate, by design, occurs at full load.

• Cycling damages equipment. Subjecting equipment to frequent changes in temperature, pressure, speed, and other operating characteristics of equipment creates stresses. Accepted thinking indicates that such out-of-normal operations take a long-term toll in reliability and on maintenance. The boiler tubes and mills of coal plants appear to be especially vulnerable.

• Having taken off a unit, one must pay the cost and time penalties involved in bringing it back on line.

NSPI already faces the challenges imposed by increased cycling. The economic and technical impacts of these challenges will likely grow greater with time. NSPI has initiated some



initiatives to address the technical impacts. They do not, however, appear substantial at this time. NSPI has directed initial studies at seasonal operation, which reflects sound thinking, given the priority of handling the Lingan shutdowns properly. NSPI also needs to give attention to the effects of daily and weekend cyclic operation on the coal units. Specific subjects meriting examination include the type and extent of unit damage expected and the steps that may prevent or mitigate that damage.

i. Capacity Factor

The accompanying chart displays a remarkable evolution. NSPI’s coal fleet utilization has declined from 88 to 63 percent in only four years. We would be surprised to see so great a change in so short a time anywhere else. Ontario has experienced a similar trend with its coal units, but an aggressive, conscious strategy to eliminate all of its coal-fired plants by a date certain gave great impetus to that change. The next chart below shows that each NSPI coal plant has experienced declining capacity factors, with Trenton 6 affected the least. Lingan has obviously experienced the most dramatic consequences. Lingan generates at considerably less than its capability, despite better than average availability and forced outage rates. NSPI has reduced two of the four Lingan units to seasonal operation as a direct result. They may operate only four months per year.

The Tufts Cove units, on the other hand, have undergone significantly greater use. The recent trends in gas prices have allowed these units to displace some of the energy from coal units. The chart illustrates that all five Tufts Cove units have increased output significantly in recent years. Even Unit 5 shows an increase, despite high 2011 unavailability. Continuation of high gas unit utilization should continue for so long as long as gas remains so competitive with other fuels. Structural changes in the North American gas production business augur well for that continuation.



d. Heat Rate Perceived degradation of heat rates has formed an important topic of stakeholder discussions with NSPI. Heat rates have indeed deteriorated at NSPI’s coal units, and that decline imposes substantial costs. Every percentage point lost in heat rate translates on a one-for-one basis into higher fuel costs for the same electrical output. NSPI believes that the decline in heat rate at the coal units is attributable to the decline in the utilization of the units. This is credible in theory, but cannot be taken for granted as the only reason for heat rate degradation. Our analysis below is focused on understanding heat rate trends at NSPI and the industry as a whole in an effort to better understand the driving forces.

i. Analysis at Two Levels

For our analysis, it is necessary to consider measurement and management of heat rate on two different bases, which we will characterize as macro and micro. On a day-to-day, real time basis, NSPI is unable to measure heat rate with any real degree of precision, and such precision is really not necessary. Rather, operators focus on various components and operating characteristics which they know will impact heat rate and they manage to those characteristics. NSPI’s new tool, PMAX, as did its predecessor, facilitates this by monitoring process values and estimating heat rate, but it is the relative changes, not the absolute value, that is important in this context. We will define this as a micro level approach to measurement and management, where operators are at a level of fine tuning unit performance. In judging overall unit performance, a more accurate heat rate, measured over a defined time period, is required. We will define the calculation and management of this value as a macro approach. Heat rate is calculated after-the-fact, perhaps many weeks, based on an analysis of the quantity of fuel burned and its heat content. Heat rate is then calculated by simply dividing the energy going into the furnace (in the form of fuel) by energy leaving the plant (in the form of electricity).

ii. Degradation of Heat Rates

Many factors drive power plant heat rates. Some are more controllable than others. In evaluating performance, one must therefore understand the cause of heat rate changes, and examine the actions management takes to improve efficiency. We focus on three considerations: (a) operating and maintenance considerations; (b) unit output; and (c) age. Operating and Maintenance Considerations A myriad of operational considerations can negatively affect heat rate; leaky valves to high cooling water temperatures offer just two illustrative examples. NSPI operates a comparatively aggressive program for addressing issues like these. Its features include:

• An annual efficiency action plan at each plant. A high degree of sensitivity to the need for efficiency improvements is manifest. NSPI has made the issue a source of a formal requirement at each unit and a growing part of the operational culture. Our plant inspections evidenced in each case significant actions completed as part of 2010 and 2011 efficiency initiatives.

• Management incentives exist for shift supervisors to monitor and improve heat rate.



• NSPI has instituted a new system (PMAX) for real time monitoring and trending of controllable losses and their heat rate impact. PMAX operates already at two plants and NSPI plans installation in all others soon. The tool has been well-received so far by operators.

• Other new tools and initiatives exist, including specialized testing, steam path audits, leakage tests, equipment tests and optimized condenser cleaning.

The battle to mitigate power plant efficiency declines and to improve heat rate proactively needs to be treated as never-ending. Real effectiveness requires an approach embedded in the organization and the culture. NSPI’s actions and communications clearly go in that direction. Unit Output Effect on Heat Rate Power plants have an optimum operating level, just as cars have a speed at which fuel economy is optimized. Typically, a unit’s rated output represents that level. Deviations from that level reduce the machine’s efficiency. This generally has little relevance for peaking units, because they run less often, and have comparatively higher operating costs in any event. Maximizing the use of baseload plants is a different case, however. They will produce most of the energy for an electric system, giving their efficiency a much higher bottom line impact. Utilities maintain performance curves that define the relationship between generator load and net unit heat rate. These curves will differ by unit, and are non-linear. The efficiency penalty grows exponentially as load decreases. For example, the Lingan units theoretically lose several percentage points of efficiency when operated at three-quarters load, but more than 10 percent loss when operating at half load. Note that the performance curves provide a prediction of instantaneous heat rate when the unit is running at a given level and hence they support a micro analysis. However, our analysis needs to understand the cumulative effects of load over a sustained period of operations at varying loads, or in other words a macro view. The extent to which the performance curves can be adapted to the required macro level will form a key part of our discussion. Age One would intuitively expect efficiency to deteriorate with age, especially for small coal units that are already at an advanced age. This does not appear to be the case, however, as the industry data actually shows a slight improvement over time. There is not likely to be any significance to this “getting better with age” notion other than to prove that there are many other factors impacting heat rates that tend to render charts like our age graph meaningless. This almost random characteristic of actual heat rates is troubling, at least from an analytical point of view, and will surely impact our ability to discern real patterns.



iii. NSPI Heat Rate Trends

The chart below left illustrates the trend in heat rate for NSPI’s coal units in the 2007-11 timeframe. The value reflects a composite of all the coal units weighted by generation. The degree of deterioration does not appear substantial on a relative basis (4.3 percent) but it represents significant dollar value when applied to the entire coal budget.

(Chart is Confidential)

A similar chart for the Tufts Cove 1-3 gas-fired units, in contrast would show virtually no change over the same period. The chart above right shows the same heat rate data as a function of capacity factor. This appears to be a valuable chart in that it demonstrates a pattern very consistent with theoretical expectations while at the same time giving a good indication of the magnitude of the “declining load” impact. (Chart is Confidential) Analysis at the unit level helps to reveal meaningful trends and other potential causes. Consider the Lingan data in the accompanying chart. It utilizes a two year moving average in order to smooth the data. The graph shows a clear and consistent upward (negative) trend. We undertook discussions with station personnel, and found no suggestion of underlying causes other than operation at partial load. (Chart is Confidential) This is a critical observation in that NSPI attributes their efficiency decline to load changes, specifically lower levels of output at the units. The Lingan data seems to support that hypothesis. Data at the other units is more difficult to analyze:

• Trenton 5 was off line for large periods of time.

• Trenton 6 did not have large drops in capacity factors during the period; therefore, its efficiency would not be expected to drop as much as Lingan’s



• The 2011 data point for Point Aconi is inexplicable and will be discussed later. • Point Tupper has consistent heat rates from year-to-year despite declining capacity

factors. We examined more general industry data to see if the Lingan pattern existed there. The results are interesting in their consistency:


The shape of the curves comparing NSPI to the industry data is remarkable. The noticeable difference in value of heat rate is likely explainable given that the industry units are used in more limited circumstances, as opposed to having a key role in the portfolio as they do at NSPI. The age factor may also be at work, as the age difference is substantial. This data is quite compelling in establishing a relationship between heat rate and capacity factor that is similar to NSPI’s experience. The magnitude of the industry change is also encouraging in that it too approximates NSPI’s data.

iv. Analysis of Heat Rate Variations

We examined the actual unit performance results against the theoretical performance curves. Care must be taken here, because the performance curves are assumed to be an instantaneous result based on the unit operating at a given level. Instead, we want to measure net resulting heat rates when the unit operates over a sustained time. Accordingly, we employ a generator output level averaged over time. The time chosen for averaging is limited to only the hours for which the unit was in service, so our formula for output is: Note that it is important to limit the calculation to only those hours when the unit is synchronized. Consider the case where a unit operates at 100 percent for half the year and 0 percent for the other half. If all hours were used, the unit would be shown as operating at 50% average rather than the optimum 100 percent that is correct. With this correction, the question becomes whether it is appropriate to now compare our macro heat rates over the year with the micro performance curves? With an approximation, we believe so. In actuality, the averaging process will err because the lower loads are counted proportionally, yet their impact on heat rate is greater. So the average load we calculate will be slightly high.



(Chart is Confidential) The chart to the right illustrates the Lingan 1 actual results superimposed on NSPI’s performance curves. The heavy line is the “standard” curve used for dispatch purposes and the blue circles are the actual results for the last five years. Again, the comparison is an approximation and it is probably fair to shift the actuals to the left somewhat. The pattern seems to mirror the reduced efficiency hypothesis, but the deviation from the standard line is surprising. We examined the data for Units 2-4 with the very same results. In all cases, the shapes are the same and the actual HR is higher than expected; about 5 percent for Units 1 and 2, more for Unit 3 and less for Unit 4. NSPI attributes higher heat rates to load changes and this data supports that notion. The data also suggests that perhaps other factors are at work driving heat rates still higher. We examined the information further. The next charts show data for Trenton 5 and 6.


The data for these units shows little correlation between heat rate and load. Note that the points generally settle around one load level, but the heat rates vary substantially. Again, however, we see consistently high heat rates compared to the standard. Turning to Point Tupper produces a different pattern altogether. The rates lie again above the standard, but heat rate appears to remain fairly constant over the five year period. The data shows little movement from the 10,000 Btu/kWh level, regardless of load.



Finally, we turn to Point Aconi, which displays a small grouping of four points with a clear outlier. Again, the plant’s values lie well above the standard. We discussed this troubling point, which occurred in 2011, with both plant and home

(Charts are Confidential) office personnel. We received differing feedback. The final answer we received was “the increase in heat rate for Pt. Aconi aligns with the decline in average load at the plant”. That conclusion does not appear to fully explain the Pt. Aconi chart, or the concern that other forces have contributed to the heat rate issue. Analysis of the Tufts Cove did not prove illuminating. Heat rates there ran closer to the standard (lower in the case of Unit 1). We found no pattern to the Unit 1 or 2 data; Unit 3 does exhibit a relationship with load. The table to the right summarizes the comparisons of actual data with the standards. The data show a lack of solid correlation between heat rate and load in all cases. The data also show large deviations above standard for the actual heat rates. An added observation of interest is that, in those few cases where a unit operated at near full load (i.e., the extreme right of each chart), the actual heat rate at that point was the closest of all points to the performance curve. This observation confirms that: (a) load changes make a major contribution to deviations, and (b) the performance curves do not provide much value in predicting the impact of load changes, at least on a macro basis. (Chart is Confidential)

v. NSPI Heat Rate Predictions

NSPI includes in its annual FAM reports predictions of generation and heat rate for each unit. Presumably, NSPI adjusts the projected heat rate as a function of load. We can evaluate the effectiveness of NSPI’s prediction by comparing the predictions for both load and heat



rate with the values that actually resulted. For example, if actual load was 25 percent below the projected load one can ask what actual heat rate would result. One would expect that the resulting heat rate would be considerably higher than the original projection. The previous chart demonstrates that this result in fact applies. Note that three points approach -25 percent. All correspond to an increase in heat rate of about 500 Btu/kWh. This exercise suggests a few things, all of which confirm what we have seen so far. Most importantly, the collective results show strong consistency, but the individual points vary greatly. In those cases where NSPI predicted the load point correctly, heat rate still varied by a great deal, with points varying by as much as nearly 1,500. By contrast with this large variance, the average in such cases was 0, as expected. Similarly, the “best fit” line is very consistent with the magnitude of heat rate changes seen earlier above. This fit defines a relationship almost precisely as the Lingan results would have suggested. Results such as these make understandable NSPI’s confidence that variations in load fully explain heat rate variations. As we have seen, however, not all of the data supports that hypothesis.

vi. Summary Points Regarding Heat Rate

We have examined a large collection of data in an attempt to determine why NSPI’s coal unit heat rates have risen so much in recent years. The Company has advanced a common sense explanation, based on the reduced utilization of the units. Our analysis suggests the following:

• There is no question that heat rates suffer with declining capacity factors. The NSPI experience in this regard is similar to industry results.

• However, it is also clear that other factors affect NSPI heat rates. These unexplained variations are apparent at both the NSPI and industry levels. Recall that even when NSPI predicted the output level precisely, there was an extremely large spread of about 1,500 BTU/kWh in actual heat rates versus the budgeted prediction.



• NSPI’s standard heat rates are suspect. Actual heat rates exceed the standard by a significant amount, begging the question as to how much less the units would run if the “real” heat rates were used in the dispatch stack.

• The performance curves are poor predictors of heat rate at any load, but increasingly so as one moves away from the optimum point.

• The 2011 performance at Point Aconi, with a heat rate nearly 1,000 BTU/kWh above budget, seems incredible, and cannot be explained by operating levels.

Station Use All power plants consume a part of their generator output for auxiliaries. The difference between gross generator output and net unit output is this station use. Levels of station use considered “normal” for NSPI run in the range of 5 to 7 percent of generator output. Point Aconi requires high auxiliary load associated with the CFB technology. Its station use exceeds 10 percent. NSPI reflects station use in the calculated heat rate. Increases in station use will therefore increase heat rate, and reduce efficiency. Variations in station use as a function of load appear to follow the same patterns as heat rate. We observed a gradual growth at Lingan of perhaps 1.5-3 percent. We observed no growth at Trenton 6, where capacity factor remained high. NSPI has published standards to estimate auxiliary load. The sample for a Lingan unit suggests 5.5 percent at 100 percent load and 8.6 percent at half load, with a straight line relationship. This standard is consistent with the data observed over the last five years. Station use is a substantial contributor to heat rate, but it is not clear that station use gets a high level of NSPI attention. For example, it cannot even be measured at Point Tupper because the station service transformer lacks a meter. NSPI has delayed a planned 2011 meter installation to 2012. In addition, our examination of all of the many heat rate initiatives at the plants over the last two years revealed none specifically directed at electric consumption.

2. Outage Management Planning and management of outages has a significant impact on unit availability and operating costs. Utilities vary in their sophistication and level of effort applied to outage management. All use a structured program aimed to prepare for and execute outages as efficiently as possible, however. A unit’s nature in part determines the desired investment in outage controls. For example, completing outages with a minimum of delay represents a very high priority for large base load units. Delays can impose major costs for replacement power. Each day of delay also adds to the risk of even further delays. In such circumstances, rigid standards should apply, with station management held accountable to schedule achievement. These traditional circumstances do not necessarily apply at NSPI, which mitigates the need for particularly aggressive standards for large outages. On the other hand, notwithstanding the uncertainties during long outages, one should still expect a reasonable level of attention to outage performance. NSPI’s four Audit Period outages planned for eight weeks or longer were extended



by an average of more than six weeks. Of 19 total planned outages in that period, nine suffered schedule extensions of more than one week. The significant delays experienced suggested we focus on the causes. Our analysis included detailed review of available outage data, interviews with NSPI personnel, and consideration of prior related studies.

a. Prior Studies Liberty reviewed two formal, extensive external studies of NSPI performance, both of which addressed related topics. First, Kaiser Associates, working for the UARB, produced a revised report on June 19, 2008. Kaiser complimented NSPI on its use of a skilled labor pool during outages, and suggested the need for improvement in work management. The report, however, did not directly address the subject of planned outages and the planning and management processes associated with them. The second study, by UMS Group produced a July 27, 2011, UMS Group final report addressing benchmarking OM&G practices. That report criticized work management processes, and specifically cited “outage optimization” as one of seven opportunities for improvement. The report recommended: ''''''''''''''''' ''' '''''''''''''''''''''''''' ''''''''''''''' '''' '''''' ''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''''' '''''' ''''''''' ''''''''''''''''' '''''''' ''''''''''''''''''''' '''''' '''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''''''''''''' '''''''' ''''''''''''''''' ''''''''''' ''''''''''''''''' '''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''' ''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''' '''''''''''''' '''''''''''''''''' '''''''' '''''''''''''''' ''''''''''''''' '''''' '''''''' ''''' '''''''' '''' '''''' ''''''''''''' ''''''''''''''' The report also observed that: ''' ''''''''''''' ''''''''''''' '''''''''''''' '''' '''''' ''''''''''' '''''''' ''''''''''' '''''''''' '''''''''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''''''' '''''''''' '''''''''''''''' ''''''''''' '''''''''' '''''''' '''''''' ''''''' '''''''''''''' ''''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''' The UMS study, prepared for internal purposes, did not produce responsive NSPI action plans at the time. We understand that the report is back on the table now; NSPI may be taking various actions as a result. We found power plant managers unaware of the study’s findings, and therefore unable to respond to them formally or informally. We will describe later in this chapter, however, some improvement initiatives that are nevertheless underway.

b. Liberty’s Analysis Liberty addressed outage management in some detail because the extent of 2010-11 outage delays and NSPI responses to early data requests indicated possible weaknesses in outage planning and preparation. These data requests sought “formal outage plans” and any reports, including performance analyses. Liberty reviewed the responses to these requests and more detailed outage reports at NSPI’s office. Common practice is to prepare definitive outage plans well in advance of major outages. Liberty considers an appropriate plan to consist of the elements needed to manage and execute the outage effectively. These elements include critical path schedules, resource requirements, scope, budgets, organization and accountabilities, staffing strategies (shifts and overtime), contingency plans as appropriate, management reporting requirements, management controls, and performance targets and expectations. Our review indicated a dual focus for NSPI outage planning; i.e., scope and schedule. NSPI schedules take the form of MS Project schedules. NSPI addresses each focus at a very detailed level, which indicates an extensive planning effort at each plant. We considered them supportive



of effective outage execution. We found, however, weaknesses or gaps in the remaining elements of effective outage planning. Moreover, scheduling information, while strong in detail, offers virtually no summary information or supporting analysis that might help management meet oversight responsibilities. We did not encounter at any level NSPI reports or analyses that present schedule results or explanations of schedule deviations. We considered this absence particularly notable, given the major deviations experienced in many of the planned outages. Each station compiles a full report after the outage. We could not determine, however, whether and how NSPI uses these reports. The reports contain no performance information, no cost data, no resource data (except for one plant), no schedule data (other than start and finish dates), and no indication of the original plan and the degree of compliance with it. We found most striking the lack of any schedule reconciliation and explanation. Outages extended by many weeks produced no indication of cause, or even an indication that delay had occurred.

c. NSPI’s Current Actions These gaps and weaknesses are significant. We found, however, that NSPI has begun to address them, with power plant management implementing new processes. This initiative, characterized as Standardized Shutdown Planning, began in 2011 with the appointment of a committee and subsequent design of a planning requirements document. Key features of the new process include:

• An annual review process centered on a five year OM&G/capital investment plan • A required end of 4Q report with an 18 month look-ahead at planned outages • Completion of a shutdown charter 18-24 months in advance for every planned outage • Completion and submittal of a high level work plan 15-21 months ahead of all planned

outages. This approach begins to address several of the outage planning issues NSPI faces, including the needs for better, more detailed planning and for a more uniform approach across the fleet. It is not clear that it goes far enough; we would describe it as a work in progress. Our principal concern about the initiative is that it addresses planning, but not outage management. The latter remains a significant open issue. The elements of management remaining to be addressed include management of day-to-day outage execution, progress and problem reports, schedule analysis and tracking, budget and staffing performance and subsequent performance analysis of each outage. A large number of problems in NSPI’s outage data complicate the analysis required. We found many instances of inconsistent planned and actual durations and discrepancies in classifications. Effective management and analysis of outage performance requires an unambiguous record of performance versus goals. NSPI cannot make this link sufficiently.

d. Cost Impacts



We consider the degree to which management executes planned outages within budget and on schedule an important measure of effectiveness. The accompanying table lists the cost and schedule results for the 19 planned outages in 2010-11. NSPI’s average Audit Period planned outage exceeded its plan by about 11 days and nearly $250,000 (59 percent over budget). Use of this data requires care, in part because planned outages often go awry when something significant and unexpected surfaces. This phenomenon did apply at NSPI, as discussed earlier in this chapter. In order to provide a tighter context for analysis, we eliminated the planned outages having a “forced” component. The table highlights them in yellow. Elimination of these outages essentially cuts the results negativity statistics in half. The schedule variation becomes several days and the budget variation becomes about one third. On an absolute basis, the budget overages remain significant, but the resulting 16 percent overrun is moderate. (Chart is Confidential) Our greater concern at this time remains the seeming lack of any evident, meaningful NSPI analysis of outage performance. The results surely raise questions; NSPI’s reports, however, provide no explanations of the cost deviations.

3. OM&G Costs a. Spending Trends

NSPI’s cost of fuel exceeds OM&G costs by a factor of about six. Annual spending on the thermal fleet amounted to some $72 million in 2011 ($7.83/MWh). NSPI manages costs through a long list of accounts. Over 90 percent of them, however, fall into the categories of: Labor (59%), Contracts (21%), and Materials (11%). Liberty’s review of cost growth over the last five years shows OM&G costs escalating at a rate above expectations. The annual dollar growth is substantial but, due to the decline in generation, costs as a function of output grew much faster. The 2011 year produced particularly disappointing results, due largely to the Point Tupper extended outage and the expensing of the delay costs associated with the completion of Tufts Cove 6. We therefore also



examined annual growth rates with 2011 excluded. The cost growth rates decreased significantly, but resulting values still ran well above the rates one would expect. The double impact of higher costs and lesser output presents a troubling trend; NSPI and its customers pay more for less. Lingan present a good example of this phenomenon, as the accompanying chart illustrates. The combination of higher costs and less output has produced a five year annual compound growth rate of 12.7 percent. This growth represents an unacceptable sustained rate by any measure. NSPI’s decision to slate two Lingan units only for seasonal operation in 2012 will lower the denominator again. The new challenge for the station becomes how to reduce OM&G costs to be more consistent with its future role as a relatively lower capacity factor plant. This shift in thinking lies at the heart of NSPI’s challenge in the years ahead. One interesting observation from our analysis comes from NSPI’s ability to control labor costs, which represent the majority (59 percent) of OM&G costs. Compound annual growth between 2007 and 2010 (again excluding 2011 performance) ran at 3.5 percent. At the same time, much of the high growth in OM&G costs came from contracts, which made up 36 percent of the growth in five-year costs.

b. Budget Performance Liberty examined OM&G budget performance in the 2010-11 period. Significant budget overruns occurred in both years. Tufts Cove performance comprised an anomaly, due to the decision to expense the ongoing costs associated with bringing Unit 6 into service. Elimination of the TC 6 charges creates a less unfavorable picture, reducing the annual overruns by perhaps half. The accompanying table shows the budget deviations by station. Station performance has generally been good. Even major unexpected outages have not significantly affected the bottom line. The Trenton 2010 outage, however, presents a notable exception. The Point Aconi 2010 performance also appears unusual, in that it includes a large number of smaller deviations without a clear common cause. Point Aconi’s 2011 budget increased significantly suggesting that the 2010 result resulted more from budget inadequacy than performance issues.



The accompanying table shows budget deviations by category. The table shows the dominance of the TC 6 issues. The labor categories generate particular interest. They evidence large under-spending in the regular account, but made up by overages in overtime and term workers. The consistency of this deviation from year-to-year invites inquiry into how NSPI plans resources, and optimizes their mix.

The accompanying OT costs chart shows that overtime spending has run well over budget consistently. The overage has amounted to about $2 million per year. Compared with the under-spending in payroll, this result suggests a penalty from lack of staff in the form of excess overtime. Such a trade-off generally does not comport with good practice. A closer look at overtime, however, displays fairly reasonable levels of overtime. “The lesser the better” comprises an often used maxim regarding overtime. We generally consider overtime to be of concern when levels approach or exceed 10 percent. The Kaiser Associates 2008 review for the UARB cited 5-7 percent as “typical.” The accompanying chart shows that NSPI levels do not appear out of the ordinary except for Tufts Cove and the 2010 Trenton experience. We have discussed the problems with those two cases earlier. We therefore consider the issue not to be excessive overtime, but rather one of planning and budgeting. This observation further emphasizes the need for a closer NSPI examination of its resource planning practices.

c. Other Studies The Kaiser and UMS studies both complimented NSPI on plant OM&G costs. Kaiser found that “plant level OM&G costs are reasonable”. The firm did suggest an additional focus on labor, fleet fuel, and water. Kaiser also raised the resource planning issues as we noted above, suggesting that a better balance of contract labor could reduce overtime, which then ran at 8-10 percent.



UMS approached the challenge on a more quantitative basis. It found NSPI ''''' '''''''''' ''''''''' ''''''''' ''''''''''''''''''' '''''' ''''''''''''''''' ''''''''''''''''''''''''''' UMS offered benchmarking data that placed NSPI in a position that did not appear credible. Its data shows costs at only 20-25 percent of the peer group average. NSPI could have spent three times as much, yet remain among the “best” 10 percent. If such data were correct, one would rightfully suspect that NSPI’s costs are too low. Despite the data concerns, Liberty also concludes that NSPI has comparatively very low non-fuel OM&G costs. A sample of 204 coal plants shows NSPI costs to fall below the median and well below the average costs. Narrowing the sample to smaller plants more similar in size to NSPI’s fleet produces even lower comparative NSPI costs.

d. New Initiatives Two improvement initiatives now underway (continuous improvement and work management) promise improvement at NSPI. NSPI initiated the continuous improvement (CI) process at Trenton in 2010, and expanded it to Lingan in 2011. A consulting firm, PVA Associates, designed and facilitated the CI process. Many different programs in the industry proceed under the name “continuous improvement,” making content rather than nomenclature the key area of inquiry. We have observed in recent years a decline in the electric industry’s ability to effectively manage work. A specific shortcoming exists generally in the capability to monitor and analyze performance. Most utilities remain strong in managing to bottom line dollars, but many have lost focus on linking this bottom line with the degree to which expenditures actually produce positive results. Utilities generally can produce a wealth of data but, tend to be less capable in demonstrating awareness of what the data means. The personnel capable of providing useful analysis of the data have been disappearing from many utilities. NSPI’s CI initiative appears to be regenerating such thinking and the capability to apply it. Discussions with personnel closest to the initiative made it clear that continuing evolution of the program can bring major benefits. The program has initially focused on maintenance and improvement in the following areas:

• Forecasting of work and associated costs • Planning and scheduling of work • Execution and follow-up • Measuring, reporting and analysis

Development of a new work management process comprises the second important NSPI initiative. Both Kaiser and UMS had some criticisms of NSPI’s work management systems. The initiative began in response to the Kaiser work. The system employs a new system, Directline. More importantly, however, NSPI has initiated many changes to the underlying management



process. Directline provides a wealth of valuable information but, as noted above, information is not necessarily the problem. Rather, it is the ability and willingness to do something with the data. The link to CI becomes critical in this regard. The failure to adopt a “new way of thinking” will make the most elegant information system more expensive than effective. In summary, Liberty believes that both these initiatives, working in consort, represent strong efforts to make NSPI’s operations more effective.

4. Capital Investment a. Resource Planning

As the utilization and remaining lives of the coal units decrease, so does the justification for future investment in them. This perhaps became illustrated in a particularly unfortunate way in the 2009 Trenton 5 investments. NSPI spent $45 million on a major overhaul. Utilization was not then an issue. Neither were environmental requirements that now look to shorten the life of the unit. This example sounds the alarm that NSPI urgently requires an up-to-date integrated resource plan. NSPI, however, has observed that it cannot practically undertake a new IRP at this time, because of the need for the wind integration study, uncertainty in load forecasts (primarily NewPage and Bowater) and uncertain long-term GHG requirements and their ramifications. Despite the lack of a current IRP, NSPI does, however, undertake active planning. The Company has been considering various scenarios for the future and factoring that thinking into decisions. Nevertheless, integrated resource planning should receive close and immediate attention. Its impacts on current and future operations and investment are too great. Liberty does not subscribe to NSPI’s logic for delaying a new IRP. The more critical issue, however, arises from the need for a participative process, whether a formal IRP process or some substitute in the interim. Whatever process ensues, an IRP which includes eventual phase out of coal must recognize the experience elsewhere. Such phase-outs have tended to move faster than anticipated. When eventual closure becomes a certainty, the intervening issues at units tend to push in the direction of earlier retirement.

b. Investment Trends NSPI’s coal fleet age demands continuing investment, both in terms of overhaul of old equipment and installation of new equipment for environmental reasons. The accompanying chart shows that NSPI has invested a total of $297 million over the last five years on the thermal fleet. Annual spending peaked at over $80 million in 2009, driven upward by the Trenton 5 overhaul. Each plant has an individual responsible for defining new investment needs and priorities. All proposed projects undergo review by Asset Management and power production managers before



submission of a proposed budget for corporate approval. Subsequent approval by the UARB must follow as well. Our site visits, analysis, and interviews indicated no signs of plant neglect, either on an absolute basis or relative to each other. The accompanying chart shows the allocation of capital spending to each plant over the past five years. The data excludes Tufts Cove Units 4-6. Major recent overhauls at Trenton 5 and Point Tupper explain their higher levels. The TC units have not required the level of environmental investments that the coal units have. Major spending initiatives at each plant included:

• Lingan: rotary dumper replacement, low NOx projects, mercury abatement projects, Unit 1 rotor rewind and boiler refurbishment

• Point Aconi: LP turbine blade replacement, ash cell development and DCMS replacement project

• Point Tupper: mercury abatement projects, low NOx project, major turbine and generator overhaul, and road relocation

• Trenton: baghouse addition, Unit 5 generator replacement, low NOx and mercury abatement projects

• Tufts Cove: Unit 1 generator restoration.

Liberty’s experience shows capital spending versus budget at utilities to be somewhat volatile. We have commonly seen significant deviations versus budget. NSPI’s experience follows this pattern. The accompanying bar chart spans two years, which can smooth deviations. Most units experienced significant variance, with total program variance exhibiting an 11 percent underrun (excluding TC 6). On an annual basis, we understand that the chief constraint is getting the work done with the result that under-spending is more common.

5. Tufts Cove 6 Project Management In this section, we are addressing three specific questions:

• Was the initial selection of key vendors and contractors appropriate?



• Was an appropriate project management program in place? • Were NSPI’s responses appropriate when the problems became apparent?

a. Background Evaluating the management of the TC 6 project requires first some perspective on the nature of the project. Utilities generally do not consider power plant design and construction, particularly using established technologies, complex undertakings. Large stations, or those using new equipment or less tested processes, can present more complexity and sources of problems, but it is somewhat unusual for a small unit of simple technology to run into major trouble. The TC 6 unit represents a particularly small and simple undertaking by power plant standards. The events that unfolded during the engineering effort, the subsequent difficulties in continuing construction, two design problems that surfaced at the end of the project, and difficulties in commissioning prove hard to explain. TC 6 effectively consists of an add-on facility that converts the two current LM6000 units to combined cycle operation. The capture and use of the exhaust heat from Units 4 and 5 allows Unit 6 to generate an additional 25 MW. Yet another 25 MW results from duct firing in Unit 6. Duct firing involves further heating the exhaust stream with gas fired burners. A more efficient and cost effective plant results from the additions. Unit 6 required the addition of major components associated with the steam cycle, but did not necessitate installation of many other facilities normally required in a power plant. The fundamental energy source is the exhaust gas from the LM6000’s. The design of Unit 6 therefore became relatively straightforward. The 50 MW size is small and, by power plant standards, all of the construction quantities are far less than typically required. NSPI envisioned the project in 2008 as requiring a two year construction effort, starting in 1Q 2009 and entering service in 4Q 2010. NSPI anticipated NSUARB approval and procurement of major components for mid-2008. The project proceeded essentially on schedule until mid-2010. NSPI remained confident in early 2010 that the unit would enter service on schedule. In March 2010, NSPI refined the in-service date to November 1, 2010. Then came the July 2010 discovery by ''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''' ''''''''''''''''''''' '''''''''''''' ''''''''' ''''''' '''''''''' ''''' ''''''''''''''''''' ''''''''''''' '''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''''''''' ''''' '''''''''' ''''''''''''''' ''''' ''''' ''' '''''''''''''' ''''''''''''' '''' '''''''''''''''''''''' '''''''' ''''''''''''''''''''''''''''''' ''''''' ''''''''''''''''''''' '''''''''''''''''' ''' '''''''''''''' ''''''''''' ''''' ''''''''' ''' ''''''''''''''''' NSPI brought ''''''''''''' '''''''''''''' in at this point to assist with stress analysis associated with the necessary piping re-design. ''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''' '''''''' '''''''''''' ''''' ''''''''''' ''''''''''''''''' In the meantime, NSPI assigned a project team, and assumed scheduling responsibilities for the project. NSPI’s manager forecast a further delay of two months. The next table illustrates this pattern of frequent small changes and how it continued for an extended time. It suggests that the parties were just never able to get their hands around the problems and the impact of those problems on the project schedule.



When a major perturbation strikes a construction project, the inclination is always to work through it. In hindsight, one might later conclude that the project should have been stopped and an orderly, efficient path to completion defined before restarting. However, we have rarely seen that done. We therefore do not fault the decisions to struggle through the problems experienced at the time. '''' ''''''''''''''''''''' ''''''''''''' '''''''' '''''''''''''''' '''''''' ''''''''''''''''''''''' '''' ''''''''''''''''''' ''''''''' '''''' '''''''''' '''''''''''''''''''''''''''''''''''' '''' '''''''''''''' '''''''''''''''''''''' '''''' ''''''''' ''' ''''''''''''''''' ''''''''''' ''''''''''''''''''''''''''''''''''''''''' '''''''''''''''' ''''''''''' '''''''''' '''''''' '''''''''''''''''''''''''''' '''''''''''''' ''''''''' '''''' ''''''' '''''''''''''' '''''''''''''''''' ''''''''' '''''''''''''''''''' ''' '''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''' ''' ''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''''' ''''''' '''''''''''''' '''''''' '''''''''''''''''''''''''''''''''' '''''''' ''''''''''''''''''''''' '''''''''' '''''''''''' ''''''''''''''' ''''''' '''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''''''''''''''' ''' '''' ''''''''''''''''' ''''' '''''''''''''''''''''''' ''''''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''''' ''''' ''''''''''''' ''''''''''''''''''''' We found inappropriate the conclusion that completion could lie just around the corner, given the new engineering issues and considerable resulting re-work. A better assessment of schedule might well have led to a different course of action; i.e., one more consistent with the severity of the problems faced. In any event, there followed a string of problems, all of which seem to flow from the engineering changes, including resulting field re-work, effects of delays on equipment and other design, and schedule related problems. '''''' ''''''''''''' ''''''' ''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''' '''''' ''''''' '''''''''''' '''''''' ''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''' ''''''''''''''' '''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' '''' ''''''''''' ''''''''' ''''''''''''' '''''''''''''' ''''''''''' ''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ''''''''''''' ''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''''''''''''''' ''''' ''''''''''''' '''''''''' ''''''''''''''' '''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''' ''''''''' ''''''''' '''''''''' '''''''''' ''''''''''''''''''''''''' ''''' ''''''''' '''''''''''''''' ''''''''''' '''''''' ''''''''''''''' ''''''''''''''''''''' '''''''''''''' '''''''''''''''''''

b. Vendor Selection Our first question deals with how the players were selected for this project, with a particular focus, of course, on '''''''''''''''''. '''''''''''''''' has a strong reputation, track record, and place in the industry. The firm comprises an example of the maxim that one “can’t go wrong with them.” The same could be said of the other favored bidders; NSPI’s list included the best in the industry. We find no fault with NSPI’s selection of ''''''''''''''''. NSPI followed an orderly, competitive process through properly designed stages. ''''''''' ''''''''''' ''''''''''''''' '''''''''''''''''''' '''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''' ''''' '''''''' '''''''''''''''''



The notion that a top firm ensures success presumes that it applies to the project the kinds of people that make it a top firm. Such firms naturally put their best people where the most rewards and risk lie. A small job or client or routine work often leads large firms to assign their less valued people. This is not necessarily a fatal flaw, but creates circumstances that a careful owner should consider. '''''''''''''' ''''''''''''' '''''''' ''' ''''''''''''''''' '''''''''' ''''''''''''''' ''''''''''' '''' ''''''' ''''''''''''''''' ''''' ''''''''''''''''''' '''''''' ''''''''''''''''''' '''''' '''''''' '''''''''''''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''' '''''''''''''''' ''''''''' '''''''' '''''''''''''''' '''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''' ''''''' ''''''''' ''''''''''''' '''''''''''' ''''''' ''''''''''''''' ''' '''''''' '''''''''''''''''''''' '''''''' ''''' '''''''' ''''''''''''''''''''''''''' ''''''''''' ''''''''''''''''' '''' '''''''''' '''''''''''''''''''' ''''' '''''''''''' ''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''' ''''''''''' ''''' '''''''''''''' ''''''''''''' '''''''''''''' '''''''' ''''''''''''''' ''''' ''''''''''''''''' ''''' ''''''''''' ''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''' '''''''''''' ''''' ''''''''''''''''' '''''''''''''''''''''' '''' '''''''''''' ''''''''''''''''' '''''''''''''''''''''''' ''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''''' ''''''' ''''''''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''' ''''''''''''''''' '''''''''' ''''' ''''''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''''''''''''' ''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''''' ''''' ''''''''''''''''''''''''''' ''''''''' '''''' ''''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''' ''''' '''''''''''''''' ''''''''' ''''''''''''' ''''''''''''''''' ''''''' '''''''''''''''''''' ''''''''''''''''''''' ''''''' ''''''' ''''' ''''''''''''''''''' '''' '''' '''''''' ''''''''''' ''''' ''''' ''''''''' '''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''' The interface between engineering and construction comprises one of the key interface challenges on any project. A natural tension exists here, because of the degree to which the actions of each affect the other. An EPC contract makes a single company responsible for both engineering and construction, requiring it to manage the interface internally. Separate engineering and construction companies make a third party such as the owner or a separate, contracted project manager, responsible for managing the interface. The EPCM approach employed on TC 6 makes a representative of the engineering firm manager of the interface. NSPI has indicated that the structural conflict of interest that this approach creates contributed to the project’s problems. ''''''''' ''''''''''''' '''''''''''' ''''''''' '''''''''''''' ''''''''''''''''' '''''''''' ''''''''''' ''''''''''''' '''''''''''''''''''''''' ''''' ''''''''''''''''''''' ''''''' ''''''''''''''' '''''''''''''''''' ''''' ''''''''''' '''''''''''' ''''''' ''''''''''''' '''''''''''''''' '''''''' ''''' '''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''''' ''''''''''' '''''''''''''''''''''''' '''''''''''''''''''' '''' ''''' ''''''''''''''''''''''''''' '''''''''''''' ''''''''' ''''''''' '''''''''''''''''''''''''' ''''' '''''' ''''''''''''''''''' We ultimately, therefore, found the contracting approach, the vendor selection process, and NSPI’s attention to the resources assigned reasonable.

c. Project Management '''''''''''''''''' served as the project manager. The original ''''''''''''''' project management team had all the required project management functions, including a site manager, engineering, safety, environmental, construction, cost, schedule, administration, and quality. ''''''''''''''''' replaced the project manager in the summer of 2010 and the lead scheduler resigned in late 2010. NSPI thereafter assumed scheduling responsibilities. NSPI did not take an active, on-site role on the project until after the problems became apparent. NSPI’s initial team included four people. Retention of '''''''''''''''''' to perform the project management functions made the small NSPI owner oversight team appropriate. NSPI expanded its team following discovery of the problems. The Company added engineering, construction,



QA, scheduling, and commissioning resources. NSPI increasingly assumed project management functions as problems remained. '''''''' ''''''''''''' '''''''''''' '''''''''''''''''' ''''''''' ''' ''''''''' ''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''''''' '''''' ''''''' '''''''''''''''' '''''''''''''' ''''''''''''''' ''''''' '''''''''''''''''''''''''' '''''''''' '''''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''' ''''''' ''''''''''''' ''''''''''' ''''''''' ''''''''''''''''''''''''''''''''''' ''''''''' '''''''''''''' '''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''' '''''''''''''''''''''''' ''''''''''''''''''''''''' ''''' '''''''''''''' ''''''''' '''''''''''''''''''' ''''''' '''''''' '''''''''''''''''''''' '''''''''''''''' '''''''''''''''' ''''' '''''''''''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''' ''''' ''''''''''''''''''' ''''''''''''''''''''''''''''' '''' '''' ''''''''' ''''' '''''''''' ''' ''''''''' '''''''' '''''''''''' ''''''' ''''''' '''''' '''''''''''' '''' ''''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''' '' ''''''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''' ''''''''''' ''''''''''''' ''''' ''''''''''''' '''''''' ''''' ''''''''''''' ''''''' '''''''''''''''''''''' ''''''''''''' ''''' '''''''''''''

''''''''''''' ''''''''''''' '''''''''''''''''''''''' '''''' '''''''''''''''''''''''''''''' ''''' ''''''''''' '''''''''''''''' ''''''''''''''''' '''''''' ''''' '''''' ''''''''' '''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''''' ''''' ''''' '''''' '''''''''' '''''''''' '''''''''''''''''''''' ''''''''''''''' '''' ''''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''' '''''''''' '''' ''''''''''''' '''''''' ''''''''' '''''''''''''' ''''''''' '''''''' ''''''''''''''' '''''''' ''''''' ''''''''''''''''' '''''''''''''' ''' ''''''''''''' '''''''''''''''' '''''''''''''''''''''''''''''''' ''''''''''''''''''''''' '''''''''''' '''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''' ''''''' '''''''''''' ''''''''''''''''''''''''' '''''''' '''''''''''''''''''''' ''''''''''''' ''''''' '''''''''''''' '''''''''''' '''''''''''''''''''''''' ''' '''''''''''' ''''''''''''''''''''''''''''''''''' ''''' ''''''''' ''''''''''''''''' ''''''''' ''''' ''''''''''''' ''''' '''''''''''''''' '''''''''' ''''''''''''''''' '''' '''''''''''''''''''''''''''' ''''''''''''''''''''''''

d. NSPI Response The preceding observations make NSPI actions, at least until the middle of 2010, supportable. NSPI had a sound basis for belief that the contracts and people in place could and would deliver what was a reasonably simple project timely and effectively. NSPI provided a limited degree of oversight, but did act in a manner that was reasonable. Assigning a larger, more expensive team to such a small project would, in fact, raise more substantial questions. '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' '''''''' ''''''''''''''' ''''''''' ''''' '''''''''''''' '''''''''''''''''''''' '''''''''''' '''' '''''''''''''''''''''''''' '''''''''' ''''''''' ''''''''''' ''''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''' ''''''''' ''''''' '''''''''''''''''''' ''''''''''''' '''''''''''''''''''''''' ''''' ''''''''''''' ''''''''' '''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''' ''''''''''''''''''' '''''' ''''' '''''''''''''''' '''''''' ''''''''''''' ''''''''' ''''''''''''''''' '''''''''''''''''''' ''''''''''''' '''''''' '''''''''''''''''' '''''''''''' ''''''' '''''''''' '''''''' ''''''''''''''''''' ''''''' ''''''''' '''' ''''''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋

'''''''''' ''''''''''''''''''''''''' ''''''''' '''''' ''''''''''''''''''' '''''''''''' '''''''''''''''' ''''''''''''' '''''''''''''''' '''''''''''''' '''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''''''''''' ''''''''''''''

''''''''''''''''' ''''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''' '''''''''''' ''''' ''''''' ''''''''' '''''''''''''' ''''' ''''''''''''''''''''''' '''''''' '''''''''''' ''''''''''' ''''''''''' ''''''''''' ''''''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''' ''''''' '''''''''''''''''' ''''''' ''''''''''' ''''''' '''' ''''''' '''' '''''''''''''''''



''''''''''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''' ''''' ''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''' ''''' '''''''''''' '''''''''''''''' ''''''' ''''''''''''' ''''' '''''''''' '''''' ''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''''''''''''' ''''''''' '''''''''''' '''''''''''''' ''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''' '''' ''''''' '''''''''''''''''''''' ''''' '''''''''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''' did indeed prepare an undated, unsigned, two page “Project Recovery Plan.” It appears to have come in July or August 2010. This plan concluded that “with further detailed analysis by the contractor [Cahill] and with consideration of selective overtime, this schedule can be improved to meet a December 2010 COD date.” The plan included a number of mitigating actions but was short on specific numbers and analysis. In the meantime, NSPI initiated a number of mitigating strategies, but continued the same fundamental approach to completion. NSPI did not consider viable at this time a lengthy shutdown of the project to restore logical design and construction sequences. NSPI did use the “stop work” option in selected cases in mid-2010 to assess the engineering model, but no significant stoppages resulted. Examples of mitigating actions initiated by NSPI include:

• Weekly executive meetings to expedite engineering • Demands for added engineering resources and subsequent movement of resources to the

site • Engagement of the ''''''''''''' ''''''''''''''' to review critical systems and design • Addition of significant capability to NSPI’s site team • Requiring added resources, overtime, and double shifts on the part of contractors. • Assumption of project scheduling responsibility • Assumption of commissioning responsibility • Completion of some commissioning activities in parallel with construction.

We believe that NSPI grasped the magnitude of the TC 6 challenge shortly after the summer 2010 problems began to materialize, and ''''''''''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''''''' ''''''''' ''''''''''''''' ''''' '''''''''''''''''''''''''''''' '''''''''''''' NSPI made a commitment to a greater role for itself and precipitated significant actions reasonably promptly. The ultimate question is whether the Company could and should have done more, and, of course, without the benefit of hindsight. To a great degree, the die was already cast in mid-2010, and most ensuing problems can be traced directly back to the disruption that started at that time ''''''''' ''''''''''''' '''''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''''' Finally, judging the quality of NSPI’s performance, we must consider the length of time it eventually took to bring the project to completion. That the problems began with '' ''''''''''''' does not generate a valid “excuse” to delay the project indefinitely. '''''''''''''''''''''' '''''''''''''''' '''''''' '''''''' '''''''''' ''''' ''''''''''''''''''''''''' ''''' ''''''''' ''''''''' '''''''''''' ''''' '''''' '''''''''' '''''''' '''''''''''''''''' ''''''' '''''''''' ''''''''''''' ''''''''' ''''''''' ''''''''''''''''''''' ''''''''''''''''' '''''' '''''' ''''''''''''' '''''''' '''' ''''''''' ''''''''''' ''''' '''''' ''''''''''''''''''''''' '''''''''''''''' NSPI’s schedule reconciliation in fact includes a design-related explanation for essentially all delays up until mid-2011. We found no reason to question that assessment. Following that time, the Tufts Cove 5 blade failure controlled schedule thorough the remainder of the Audit Period. Problems with Unit 6 controls would arise in 2012, following the end of the Audit Period.



We ultimately found NSPI’s response when the problems became apparent to be timely and appropriate. '''''''' ''''''''''''''''''''' ''''''''' ''''''''''''''' ''''''''''''''''' ''''' ''''''''''''''' '''''''''''''''''''''' ''''' ''''' '''''''''' '''' '''''''''''''''''''''''' ''''' '''''''''''' We found no basis for criticizing NSPI’s actions in the second half of 2011.

C. Conclusions

1. Performance of NSPI’s coal fleet is on an externally driven decline, which creates new challenges for management.

The course of the industry across North America, including Nova Scotia, leads to a continuing decline in the use of coal. The primary value of NSPI’s coal fleet has come as low-cost, base load generation. As the units operate less and less in this fashion, their contribution and value will likely continue to decline. Nevertheless, for the foreseeable future, coal will remain a significant contributor, albeit a less efficient and more costly one. Management therefore faces a difficult challenge, and one that remains fairly new to the electric industry. This phase only begins a major transition in which NSPI’s largest assets, which form a significant component of its rates, will prove increasingly unable to use all of their capability. The degree to which the Company can mitigate resulting negative unit performance trends poses the coming test for NSPI management. Coal unit costs and future investments will have to be managed consistently with the fleet’s emerging new role.

2. The overall availability of the thermal fleet has been good; however, recent trends should be taken as a warning. (Recommendation #1)

Availability factors for the coal fleet have been high. Problems at a few units do not undercut this overall conclusion. Those recent problems appear to be atypical. Nevertheless, their existence justifies careful study by NSPI to determine whether controllable factors have played a role in those problems.

3. Forced outage performance of the thermal fleet has been good; NSPI’s forced outage rates, number of outages, and hours lost to outages all compare favorably with industry performance, and have produced low replacement power costs.

NSPI compares favorably in all measures of forced outages. Trenton 5 remains a continuing anomaly. NSPI also lost Tufts Cove 5 for much of 2011 due to a turbine blade failure. In no other instances did a unit approach a five percent forced outage rate in 2010 or 2011.

4. Execution of planned outages is below average. (Recommendation #7) On a numerical comparison basis, planned outage performance has not been good. Budgets and schedules have frequently not been met; the variations have been extreme in some cases. Some of these results arose from surprises discovered during outages (e.g., discovering blade cracking). Nevertheless, performance remains sub-par even after exclusion of such cases from the measurements. We did not observe a substantial impact on availability from the longer outages. Good management nevertheless seeks to minimize cost overruns and schedule delays on planned outages.



Our examination of NSPI’s outage planning and management program showed it to be weak. UMS reached a similar conclusion in a recent study. NSPI appears to have responded by initiating an improved approach to outage management.

5. The utilization of NSPI’s coal fleet has declined from 88 percent to 63 percent in the last four years, as part of an evolution that has had and will continue to have economic, technical and operational impacts.

Nothing describes the impact of a changing North American utility environment better than the changes in NSPI’s coal fleet utilization. Increased energy costs, reduced unit efficiency, damaging equipment stresses, higher OM&G costs, and the potential for stranded investment through premature unit retirement all represent potential impacts from reduced utilization of units intended for base load operation.

6. NSPI’s actions to evaluate the impacts of cyclical operation on the coal units and to determine the potential for damage as well as steps to mitigate any potential damage have been limited. (Recommendation #2)

NSPI understands that the physical risks associated with cycling coal-fired units exist and are consequential. Recent changes to more cyclic operation have come ahead of the appropriate analyses, however, which creates a real risk of “learning the hard way.” NSPI has studies underway, with specific work assessing turbines and seasonal plant operation. Study “overload” can become a problem, if too many efforts proceed simultaneously. Nevertheless, the impacts of daily cycling, or perhaps weekend cycling, of coal units present a big enough threat to justify advancement of efforts to understand them as well as industry experience and technology permit.

7. NSPI’s program to manage heat rates represents a strong initiative. NSPI has succeeded in ingraining the importance of heat rate into the culture at each plant. This strength has resulted from a broadly based, structured, and programmatic approach. The various program elements have had an effect, producing notable results.

8. Changes in unit operating characteristics, particularly load, have been major contributors to the significant decline in coal unit heat rates in recent years, but they do not tell the whole story as other factors, as yet unexplained, appear to be at work. (Recommendation #3)

There is a common sense basis to NSPI’s assertion that heat rate degradation in recent years results from running the units at reduced load. The data provides support for this concept, but also makes clear that it is not the only factor having an impact, at NSPI and elsewhere. Our analysis reveals too many instances of wide heat rate variations following little or no change in load. In this regard, NSPI’s own budget analyses are noteworthy. The data shows several points in which NSPI’s predicted load was very close; nevertheless the resulting heat rates varied by a wide margin. The absence of analysis of those variations is problematic and leaves the impression that there are other potential issues that NSPI has not addressed.



9. NSPI’s baseline heat rate data, in the form of unit performance curves that define the “standard” heat rates, appear flawed, resulting in an inability to analyze heat rate deviations and perhaps sub-optimal dispatch. (Recommendation #4)

Our analysis suggests that actual heat rates for the coal units are in all cases higher than those predicted on the performance curves, regardless of unit load. This raises questions on the adequacy of the dispatch standard and NSPI’s ability to evaluate, or even detect, performance deviations.

10. The 2011 Point Aconi heat rate appears so far beyond expectations as to suggest either an error or a major perturbation in unit operations, but no meaningful analysis has been conducted. (Recommendation #5)

Dismissing the aberrant 2011 heat rate as a consequence of reduced operation may well be unsound. If load provides the explanation, that is a surprising and very significant finding given the magnitude of the change. In any event, thoughtful analysis should be a priority in order to fully understand this major performance deviation.

11. Despite the outstanding efforts at efficiency improvement, electric consumption (station service) has not received a similar level of attention. (Recommendation #6)

Station service makes up about 700 points of the heat rate at a typical coal plant. This level makes such service a major contributor and, perhaps, a source of valuable improvement opportunities. Our examination of NSPI’s plant energy efficiency improvements failed to show any relating to auxiliary consumption. One unit cannot even record station service, because it lacks an appropriate meter. NSPI does not appear to make station service a priority.

12. NSPI’s outage planning and management systems have not met industry standards; a new initiative to address the issue is sound, but does not go far enough. (Recommendation #7)

Liberty observed a number of current weaknesses at NSPI. The lack of an integrated outage “plan” forms our principal concern. We define such a plan as including critical path schedules, resource requirements, scope, budgets, organization and accountabilities, staffing strategies (shifts and overtime), contingency plans as appropriate, management reporting requirements, management controls, and performance targets and expectations. NSPI’s approach before recent changes largely considered the purpose of the “plan” to address scope and schedule. The second gap we observed was in NSPI’s approach to managing outages. The first prerequisite is a good plan, but then someone has to execute it. Management also must exercise substantial oversight responsibilities to promote effectiveness. Carrying out those responsibilities requires comprehensive and tangible performance measures, used to conduct solid analysis of that performance. We did not observe these features in NSPI’s approach. NSPI has recently implemented a new program that addresses the first part of our concern; i.e., the planning process. The changes have brought important structure and uniformity to the process. NSPI can go further, however, in planning and in managing planned outages.



13. Numerous inconsistencies in the reporting of outage data compromise NSPI’s ability to perform effective analyses. (Recommendation #8)

Liberty’s review of outage performance used a number of NSPI sources for data. This use focused primarily on the planned and actual outage durations. We used the Company’s “Shutdown Summary Reports” and its annual “Thermal Maintenance Schedules.” We also made our own calculation of durations from NSPI supplied dates and other available data. We found as many as three different values for a certain outage duration, a number of miscalculated durations, and incorrect recording of durations. There may be reasons explaining data inconsistency. For example, NSPI classifies some outages as part planned and part forced. This approach may produce apparent variances in durations. The data we sought comprised more important performance indicators for use by a power plant organization. Commonly understood targets for completion of an outage and for the actual duration underlies effective analysis of performance variations from plans. Inconsistent or overly qualified data will not support such analysis.

14. Non-fuel operating costs at NSPI’s thermal units fall well under the values for similar plants.

NSPI’s OM&G costs are extremely low on a per MWh basis. Liberty’s analysis placed NSPI well below the median for all plants and even further below the average. NSPI costs fell further below these points when we limited the analysis to similar sized units.

15. The already low OM&G costs do not foreclose the need for attention to them as utilization declines. (Recommendation #9)

Two new OM&G cost trends have emerged; both indicate the need for attention. First, absolute costs (in dollars) have increased at a rate above expectations. These costs show an increase rate above 5 percent per year, even after we remove the effects of recent, atypical unit problems. Second, as generation decreases, the cost per MWh rises. This phenomenon means that NSPI faces both lower output and higher costs. For example, Lingan has experienced a compound annual growth rate of 12.7 percent over the last five years. Despite past performance, therefore, new trends signal the need for more work to assure that costs stay consistent with the new operating attributes of the plants.

16. NSPI’s pattern of internal versus external labour resources displays an anomaly that requires examination. (Recommendation #10)

NSPI’s pattern shows significant under-runs in internal labour costs versus budget. This result can indicate insufficient staffing. At the same time, it over-runs overtime and contractor budgets, which suggests premium-cost efforts to make up for internal resource shortfalls. Effectively designed budgets use optimum inside/outside/overtime mixes. Unidirectional deviations of the magnitudes experienced by NSPI therefore call into question the quality of the plan and of its implementation.

17. NSPI has introduced promising new initiatives in the form of its Continuous Improvement Program and improved work management systems.



NSPI’s new continuous improvement initiative shows strong promise, with immediate benefits coming from a more structured and analytical approach to improving operations. The program is relatively young, but NSPI has made substantial progress in embedding its “way of thinking” into its staff. Sustaining current levels of commitment and rates of implementation should produce impressive results over the long term. NSPI’s new work management process, which includes the new Directline system, has also demonstrated real value. Past studies have criticized NSPI’s work management processes and NSPI appears to have produced a meaningful response. Efforts to develop and implement the process have so far come together well.

18. NSPI operates under an outdated Integrated Resource Plan (IRP) and has no near-term plans for a replacement; this circumstance deprives the Company of the best basis for making key decisions on spending and investment in the context of a rapidly changing resource outlook. (Recommendation #11)

How NSPI can best manage its fleet in changing circumstances stands as an important overall theme of our work. Defining the scenarios possible and likely under those circumstances comprises an essential component of effective management. Absent such definition of that new scenario, specifically in the form of generation mix, it is not clear how NSPI can manage the transition, or how stakeholders can meaningfully participate in dialogue and oversight about it. The affected questions include:

• What level of capital investment is appropriate for the coal units? • How must OM&G costs change with the declining use of the coal units? • What cycling assumptions should be made for the coal units and what is the impact on

the need for other generation? • What is the impact on long-term rates of these new dynamics? • How should that impact resource decisions?

These few examples illustrate the need for current consideration by NSPI and discussion among stakeholders. An IRP process presents a common vehicle for promoting discussion. NSPI believes the timing is not right. The Company cites load uncertainty, the need to complete the wind integration study, and greenhouse gas uncertainties. Liberty does not believe that any of these issues imposes real restraints on considering a new IRP at this time. In any event, however, the more important issue is not whether a new, formal IRP process should now commence. Rather, we view the need as starting the dialog among stakeholders on how the new generation mix will evolve and how that affects today’s decisions at NSPI, even if that dialogue occurs outside the bounds of the IRP process.

19. Recent investment levels at the thermal plants appear to be reasonable both in total and in how the funds are allocated among the plants.

NSPI uses an effective system for defining capital needs. A dedicated manager at each plant helps to ensure the establishment of priorities consistently and with direct input from each plant. Further, the asset management process provides for facilitation of priorities.



The resulting $50-60 million spending level, with spikes for special overhauls, appears sufficient to meet plant needs. Liberty found no evidence of starving the plants and no signs that important priorities failed to be met. The allocation of capital on a MW basis seems reasonable.

20. ''''''' '''''' '''''' '''''''''' ''''' ''''' ''''''''' '''' ''''''''' ''''''' ''''' '''''''''''''''''' ''' '''' '''''''''''''''''' '''''''''' ''' ''''''' ''''''' ''''''''''' ''''' ''''''' '''''''''''''''' '''''''''' '''' ''''' '''''''''''''''' '''''''''''''' ''' '''''''''''' ''''''''''''' '''''' '''' ''''''' ''''''''''''''' ''''''' ''''' '''''''''''''' ''''''''''''''' '''''''''

'''''' '''''''''''''''''''''''' ''' '''''''' '''''''''''''''''' ''''''''''''' '''''''''' ''''''''''' '''''' ''''''''' '''''''' ''''''' ''''''' '''''''' ''' ''''''''''''''''''' '''''''' '''''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''' '''' ''''''' '''''''''''' ''''''''''''''''''' ''''''' '''''''' '''''''''''''''' ''''''''' ''' '''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' ''''' '''''''' '''''''''' '''''''' ''''''''''''' ''''''''''''''''''''''''''''''''''' '''''''''' ''''''' ''''''' ''''''''''''''''' ''''' ''''''''''''''' '''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''' ''''''''' '''''''''''' ''''''''' '''''''''''''''''''''''''' '''''''''''''''''''''' '''''' '''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''' '''''''''''''' '''''''''''''''''''''' ''''''''''''' ''' '''''''''''''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' '''''''''' ''' ''''''''''''''''''''''' ''''' ''''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''' ''''''''''''' ''''''''''''' '''''''''''''' ''''''' '''''' ''''''''''' ''''''''''''''''' ''''''''''''' ''''' ''''' ''''''''''''''''' ''''''''' ''''''''''''''''''' ''''''''''''''''''''''' '''' '''' ''''''' ''''''''' ''''''''''''''' '''''''''' ''''''' ''''''''''''' '''''' ''''''''''''' '''''''''''''''''''''''''''' ''''' ''''''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''''''''''' '''''''' ''''''' '''''''''''''''''' '''''''''''''' ''''''''' ''''' ''''''''''''''''''''''''' '''''' '''''' ''''''''' '''''' ''''''' ''''''''''

21. '''''''''''''' '''''''''''''' '' '''''''''''''''''' ''''''''''' '''' ''''''''''''' ''''''''''''' ''''' '''''''''''''''' '''''' ''''' '''''''''''''''' '''''''''''' ''''' ''''' ''''''''''''' '''''''' ''''''''''''''''''''' '''''''''''''' '''''' ''''''''''''''' ''''' '''''''''''' '' ''''''''''''''' ''''''' '''''''''''''''''''' ''' ''''' ''''''''''''''''' '''''''''''''''

'''''''''''' '''''''''''''''''''''' ''' ''''''''''''' ''''' '''''''''''''''''' ''''''''' '''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' '''''' '''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''''' '''''''''''''''''' '''''''' ''''''''''''''''''''' '''' '''''''''''''''''''''''' ''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''''' '''''' '''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''' ''''''''''''''''''' ''''''' '''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''' '''''''''''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''' ''''''''''' '''''''''''''''''''' '''''''' ''''''' ''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''' ''''' ''''''''''''' '''''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''' ''''''' ''''''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''''' ''''''''''''''''''' ''''' ''''''''''''''''''''' '''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''' '''''''' '''''' '''''''''''''''''''''''''''' '''''' ''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''' '''''''' ''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''''''''' ''''''''''''''''''' ''''' '''''''''' ''''''''''''''' '''''''' '''''''''''''''''''''' ''''''''''''''''

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

''''''''''''''''' '''''' ''''''''''' ''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' ''' '''''''''''' ''''''''''' ''''''''''' ''''''' '''''''''''''''''''''''' ''''''''''''''' ''''''' '''''''''''' ''''' '''''''''''''''''''' '''''''' '''''' '''''''''''''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''' '''''' ''''''''''''''''''''''''' ''''' ''''''' '''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''''''''' '''' '''''''''''''''''' ''''''''''''''''''''''''''' ''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' '''''''''''''' '''' '''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''''''''''' '''''''''''''' '''''''''''' '''''''''''''''''''''' ''''' '''''' '''''''''''''''''' '''''''''''''''''''''''' ''''''' '''''''''' ''''''''''''''''' '''''''''''''''''''' ''''''''''''' ''''''''''''''''' '''''''''''' '''''''''' ''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''''''''' ''''''' '''''''''''''' ''''' '''''''''''' '''' ''''''''''''''' '''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''''' '''''''''''''''''''''''''''''' '''''''''''''''' '''''''''''' ''''''''''''''''''''''' '' ''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''' '''' '''''''' '''''''''''''' ''''' ''''''' ''''''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''' '''' '''''''''''''''''' '''''''''''' '''''''''''''''''''''

22. NSPI’s responses to the project’s problems that began to emerge in mid-2010 were appropriate given the limited options available to them at the time.



NSPI reacted in a timely manner to the emerging engineering problems. NSPI raised concerns, which its contractor initially downplayed. NSPI later insisted on more engineering resources. NSPI’s requests included at first unsuccessfully, the placement of engineering resources in the field. As the problems progressed, NSPI eventually took over management and scheduling functions, including establishing weekly executive meetings. A more complete listing of NSPI actions has been provided in the findings section. We did not find fault with NSPI’s response, particularly given the circumstances at the time.

D. Recommendations

1. Conduct a thorough evaluation of specific recent availability impacts to determine if any underlying common causes or emerging threats warrant response. (Conclusion #2)

Performance, in terms of availability, has been good at most NSPI plants, but the Company has experienced some severe events over the last few years and now continuing into 2012. NSPI has a fairly strong program of root cause analysis, as applied to equipment failures. A broader approach in this case, which seeks common threads among the events and is not limited to a narrow equipment focus, may prove insightful. The only good outcome from such major outages is lessons learned and sometimes those lessons are not readily apparent. The recommended analysis in this case can successfully employ traditional NSPI methods, but should also include an important added feature. We recommend a focus less on equipment and more on common programs that might have contributed to the extended outages, such as engineering, maintenance, operations, outage planning, and management.

2. Undertake a study to determine the degree to which daily or weekly cycling of the coal units is likely to lead to equipment and reliability problems and the steps that might be taken to mitigate those consequences. (Conclusion #6)

We anticipate that the impacts of cycling on the coal units will start to become evident in the not-too-distant future. It takes time for such problems to materialize, but once they do it is likely too late to arrest the slide in unit performance efficiently. NSPI has the opportunity to get in front of this emerging issue, in order to understand better its exposures and, more importantly, what steps might be taken to mitigate those exposures. Improved information can allow NSPI better to define its operating limits and identify other preemptive actions.

3. Refine and expand the analysis of unit heat rates to determine what factors beyond changes in unit load may be affecting efficiency on a significant scale. (Conclusion #8)

Our analysis demonstrates that other factors are contributing to heat rate changes; it is less clear that they are significant. It will take more analysis to determine that. In any event, the notion that load changes provide a universal explanation for efficiency declines over a sustained period is not appropriate. Greater effort is needed to understand any other factors present. A good starting point, and an example of the kind of analysis required, is the data points where the load forecast was correct but the heat rates varied greatly.

4. Examine unit performance curves to determine: (a) their applicability to predicting heat rate over a time of varying load, (b) the reason why actual heat rates are



significantly higher than the standard, and (c) any modifications to the data used for unit dispatch that prove appropriate. (Conclusion #9)

The deviations observed between the performance curves and actual heat rates are substantial and in a direction that indicates worse performance. In addition, incorrect data produces sub-optimal dispatch. It is therefore appropriate for NSPI to undertake a close examination of the performance curves and, to the extent possible, reconcile them with actual results.

5. Conduct a thorough review of 2011 heat rate performance at Point Aconi to determine how a change of the magnitude observed is possible. (Conclusion #10)

Liberty does not believe that load changes, as limited as they were, can explain such a large deterioration in efficiency. The Point Aconi 2011 heat rate “jumps-off-the-page,” and it is unusual for such an abnormal number not to trigger considerable analysis and discussion.

6. Incorporate station service as a priority element in efficiency improvement initiatives at generating stations. (Conclusion #11)

NSPI power plant people are committed to the efficiency improvement effort and added attention to internal electric consumption may offer another tool. In the meantime, enhanced visibility of this parameter will aid in increasing sensitivity to and knowledge of such opportunities.

7. Expand upon NSPI’s current efforts to improve the outage planning process by (a) broadening the definition of the outage plan and (b) implementing new approaches to managing outages. (Conclusions #4 and 12)

NSPI is doing a good job of implementing a standard shutdown planning process. We believe this effort should expand well beyond the scope and scheduling elements now contemplated. It should include resource requirements, budgets, organization and accountabilities, staffing strategies (shifts and overtime), contingency plans as appropriate, management reporting requirements, management controls and performance targets and expectations. Enhanced approaches to outage management are also appropriate. Specifically, the definition and subsequent monitoring of specific performance objectives is a necessity. An analysis of performance, in the sense of going beyond the raw numbers to paint a picture for management, is presently an important missing ingredient.

8. Examine the accuracy of outage data reporting and make changes to ensure accuracy and consistency of performance measures. (Conclusion #13)

It is important to have one set of targets and results that is known to everyone and forms the basis for planning, analysis and performance assessment. The thermal maintenance schedule may provide a suitable vehicle. Management should take steps to assure that contradictory numbers are not published at any time or in any place.

9. Revise plant OM&G cost targets to be consistent with any future reduced utilization of the units. (Conclusion #15)

Two factors are at work that could damage NSPI’s excellent cost performance: escalating OM&G costs and declining generation, which further raises the OM&G costs on a per MWh



basis. Equally important is the notion that OM&G costs on a dollar basis should be reduced when production is significantly reduced on a permanent basis. It is therefore incumbent on NSPI to reexamine its cost targets to determine the optimum level consistent with future operating levels of the plants.

10. Re-evaluate annual resource planning practices to ensure optimized resource mixes get determined and incorporated into the budgeting process. (Conclusion #16)

The current strategy to under-staff with respect to the plan and make up for it with added overtime and contractors is not a good practice, and likely produces a less cost effective resource mix. The plan, by definition, should include the desired resource mix and management should be committed to executing that plan.

11. Initiate a process with stakeholders, preferably in the nature of an IRP process, to share the challenges and complexities of the rapidly changing role of NSPI’s most valued generation assets, and to provide a more appropriate basis for future management of the fleet. (Conclusion #18)

NSPI will be called upon to make many important decisions relating to its thermal units over the next few years and those decisions will impact unit longevity, performance and, in turn, customer rates. The rules have changed and the new generation environment looks very different than it did just a few years ago when the prior IRP was completed. It is essential that NSPI get on a firm footing for power plant planning and management and equally important that the stakeholders are on board.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) IX. Economic Dispatch

July 9, 2012 Page IX-1 The Liberty Consulting Group

IX. Economic Dispatch

A. Background Dispatching generating units is a simple concept, but has very complex underpinnings. The basic premise is that generating unit dispatch should proceed in order of increasing cost. The less expensive (from a variable dispatch cost standpoint) units should get dispatched before the more expensive units. In this manner, a utility can meet load in the least expensive manner. At all times, a supply stack defines the dispatch order, which ranks units by dispatch cost. Power plant dispatch, however, does not proceed solely on the basis of economics. A number of operational and security constraints come into play within any power grid. Examples include transmission issues such as thermal limits on lines, voltage support needs, system stability issues (such as reliability requirements and load following requirements), and generating unit operational constraints (such as minimum loads, ramp rates and fixed emissions limits). However, the economic aspect of dispatch centers on dispatch cost. Dispatch cost generally consists of fuel cost plus a variable operation and maintenance (VO&M) adder, each expressed in $/MWh. Dispatch algorithms use fuel unit prices in $/MMBtu which dispatchers apply to generating unit heat rates (Btu/kWh) to produce either a single, step-function, or curve of the $/MWh dispatch cost. Fuel unit cost in $/MMBtu comprises by far the most important driver of dispatch cost. VO&M also has importance, but makes up only a small percentage (typically less than 10 percent) of total dispatch cost. Heat rates also play a key role, but generally do not present a factor within dispatcher and operator control. Heat rates do not fluctuate to the degree that fuel prices do. The key factor thus becomes what fuel prices to use in a dispatch model, given: (a) the importance of this parameter in affecting dispatch costs and therefore unit energy production, (b) the uncertainty associated with fuel markets, (c) the liquidity and transparency, or lack thereof, in fuel markets, and (d) the delay in actual purchases of replacement fuel relative to when it is consumed through dispatch. This last item is specific to coal-fired units. Coal consumption and coal pricing for dispatch requires careful consideration because, especially for smaller utilities like NSPI, coal purchases occur less frequently. Accordingly, there can arise a major disconnect in fuel prices between the assumed price for dispatch and the ultimate price actually paid. Generally, utilities use the approach of assigning a dispatch cost to coal that reflects the current market price (all-in, delivered, and also known as “burner tip” price) for the coal consumed. This replacement cost approach forms the standard in the power generation industry. Liberty examined the approach NSPI uses for determining coal dispatch costs and discovered that NSPI uses replacement costs tied to future expected purchase dates, not current market price. NSPI’s Energy Dispatch Process comprises a repeated series of daily steps that covers the two primary time periods served by NSPI; i.e., the Day-Ahead Process and the Real-Time Process. This process uses the standard breakdown for serving load in North American markets. NSPI’s approach uses a standardized flow of processes and information:

• The Day-Ahead process begins with GenCost model, which NSPI populates with the operational and cost parameters of all the dispatchable units, updated by plant staff. The



parameters include net capacity, AGC capability, ramp rates and all key elements of plant production.

• Scenarios are run, starting with the base case, on system economics and system security, to get an initial dispatch schedule.

• Day-Ahead marketers and gas marketers discuss the next-day gas requirements based on the scenario runs.

• A “morning call” takes place between the day-ahead marketers and the operations superintendents from each plant, which covers: o Outages o Output and availability o Fuel use and fuel mix o Maintenance and repairs needed o Risk assessment o Equipment issues

• Scenarios get revised based on the information from the morning call and the model is re-run.

• Day-Ahead transactions are made considering imports and exports. • The daily dispatch plan is created and sent to all users of this information by email. • Gas is procured (transactions finalized) for next-day gas. • The Day-Ahead marketer prepares the daily dispatch study. • Outage requests are considered and accepted. • Economic dispatch scenarios are developed and run. • The final Daily Schedule (with notes) is distributed. • The real-time process is in effect to balance load and generation.

To summarize, NSPI prepares a schedule of its upcoming resource commitments on a daily basis, to most economically meet the Company's system requirements, particularly over the following 24-hour period. The daily scheduling meeting takes place each morning to discuss the Day-Ahead commitment schedule and the factors that will influence that schedule. The next-day schedule is the focus of discussion; that is, for the 24-hour period commencing at midnight, or about 15 hours after the scheduling meeting. The daily call offers the primary opportunity to share information between all the generating units and the dispatch operations. It takes place by phone conference call, with notes taken by the dispatching team. Information gathered by this voice call is summarized, and included in the daily operating plans. The weather forecast and forecasts of activity from the large-volume customers serve as primary drivers for NSPI estimates of load. A forecast of the availability of its power plants and other resources for the same period provides another key input to scheduling. Units are “available” taking into account maintenance outages, operational restrictions and must-run statuses for reliability reasons. The results of the Day-Ahead commitment schedule go to NSPI’s real-time desk for management of the economic dispatch on an hourly basis. A Real-Time marketer remains on duty at all times to enter into hourly transactions for imports and exports, if they are economic



compared with NSPI’s own generation. For each hour, the energy marketer assesses the dispatch order and compares the costs of resources available for import or export with NSPI's incremental generating costs, making hourly purchases from the market when economically advantageous. The hourly resource schedules select resources from the NSPI stack until all system requirements are met. NSPI first dispatches resources that are not economically driven, but are required for effective electric system operations. For example, some generating units are in a “reliability must-run” status, in order to provide voltage support where needed on the NSPI system. The IPPs and wind generators also get dispatched first, regardless of their cost, as NSPI must take their output per contract requirements. Load-following resources required to make up for large load changes or the intermittent production of the wind resources may also require dispatch out of economic order. These examples illustrate the need for must-run resources and the effects of operational requirements that require first NSPI dispatch, and around which NSPI must conduct its secondary dispatch decisions and its purchase and sale activities. The NSPI hydroelectric resources have almost zero operating costs; they therefore get dispatched prior to any of the fossil fuel resources. The first resources dispatched after the must-run and hydroelectric resources are NSPI’s lower-cost coal and gas generating units. At higher natural gas prices (relative to coal prices), all of the NSPI coal units may be dispatched before the natural gas-fired units. With low gas prices, as have been seen in recent years, coal and gas compete very closely.

B. Findings

1. Determining Coal’s Replacement for Dispatch Purposes The market price assigned to replacement coal forms a key factor in dispatch. NSPI uses an approach that assigns a dispatch cost to its coal units to match coal prices forecasted for the date of assumed “open positions.” The basis for defining open positions comes from NSPI’s schedule for future purchases and deliveries of specific coal commodities. NSPI uses future, projected prices determined on the basis of that schedule for dispatch of coal-fired units. The exception to NSPI’s use of projected (futures, forwards or forecasted) is for the Petcoke requirements at Point Aconi, because NSPI has no valid source for projections of this commodity. NSPI uses the expected coal blend at each unit to weigh the commodity costs. The Company updates these blends through runs of the Company’s Coal Model. These runs ascertain expected fuel mix at each unit. These numbers feed both the Company’s dispatch and forecasting processes and models. NSPI has continued to experience very high levels of coal inventory, as gas has increasingly displaced coal as a generation fuel. Most coal-fired generators share this experience, which upheaval in fuel markets has produced. These high inventory levels, however, demonstrate just how difficult it is to optimize fuel inventory management in the long term, and to predict NSPI’s next open positions for each commodity. This situation results in NSPI comparing fluctuating future coal prices with spot gas prices for dispatch purposes. The gas price is what NSPI would pay tomorrow; the coal price is what NSPI might pay many months into the future.



6. Cycling Cost The cycling of coal-fired units grows in importance to NSPI. No longer can NSPI’s coal-fired fleet be considered full baseload with little cycling. Rather, cycling of units from minimum to maximum loads (and everywhere in between) has become prevalent and may play even more of a role at NSPI in the future. The close competition between gas and coal-fired units on a cost basis forms a key driver of this dispatch decisions. The increasing role of wind generation may also have a substantial impact on the cycling of fossil units. Accordingly, NSPI should pay close attention to the impacts of cycling on its coal fleet. Currently, NSPI neither captures nor considers the costs of cycling in its dispatch. However, cycling can add major costs to coal units, due to the increased stress on many coal unit systems and components.

7. Variable O&M Costs Variable O&M Costs play a role in dispatch, albeit much smaller than that of the fuel component. Historically, coal and gas price differentials have been high enough to make close competition between the two fuels for dispatch more rare. However, recent fuel markets have caused such competition to flourish. Coal-fired generating stations have come to face displacement gas generation much more frequently. Tighter competition between coal and gas plants, makes VO&M much more important. It may well make the difference between the order of economic dispatch. Historically, the fuel price disparity made VO&M adders irrelevant for deciding on which units to dispatch, but in today’s market it can be the deciding factor. The VO&M adders that NSPI uses for its coal-fired plants are generally low compared to other, similar power plants in North America. The result is that coal fired plants, when competing against the market for imports and against gas-fired generation, may be receiving an unwarranted advantage. NSPI needs to address the VO&M levels applied to all of its units, given the role it now plays in economic dispatch.

8. Wind Integration GE Energy Consulting has been retained to provide a detailed wind integration study for the NSPI system. Liberty views this work favorably. As a leader in this area, GE Energy Consulting should succeed in providing useful insights to NSPI on the uncertain future impacts of wind energy.

C. Conclusions

1. NSPI’s methods for pricing replacement coal for dispatch purposes inappropriately uses is its next “open position” as the key determinant. (Recommendation #1)

To create supply curves for use in the dispatch of its generating units, NSPI uses projected coal prices that correspond to their next “open position” for each commodity (with the exception of Petcoke, for which there is no available forward price). Liberty concludes that, compared to other utilities, this is not the appropriate approach. Instead, Liberty finds that the use of spot or near-term coal market prices, regardless of the “open position” status of procurement is



preferable. Liberty is confident that tying coal prices to the same time period (current) as gas prices will provide a more accurate basis for dispatch between all units.

2. NSPI’s dispatch process does not account for the variable cost component of cycling costs. (Recommendation #2)

NSPI does not account for the short or long-term impacts of cycling its coal units. Currently, NSPI does not have a solid grasp of the costs associated with cycling, nor does it apply any cycling costs in its forecasting tools. By ignoring the impacts of cycling, NSPI is not adequately applying the cost of running its coal units that cycle. This gap has become more important, given the increase in cycling that is expected to continue.

3. NSPI’s dispatch model uses questionable Variable O&M data. (Recommendation #3) Variable O&M costs will play an increasingly important role in both the forecasting and dispatch processes at NSPI due to cycling and the proximity in the dispatch curve of coal and gas units. However, Liberty finds that the VO&M parameters used by NSPI to be very low relative to similar power plants in North America. By under-estimating VO&M, NSPI provides an unrealistic advantage to coal-fired power plants in its portfolio.

4. NSPI’s dispatch process will need to consider the results of the Company’s Wind Integration Study. (Recommendation #4)

NSPI has commissioned a Wind Integration Study being performed by GE Energy Consulting. While this study was commissioned in part for the purpose of identifying issues in terms of long term planning and forecasting, it may have important implications for economic dispatch. Currently, these implications are not fully understood or being managed by NSPI.

5. NSPI lacks a central dispatch information system to share information among plant managers, operators, control center and dispatchers. (Recommendation #5)

NSPI currently gathers and shares key information from its morning phone call. These conference calls appear to be well-organized and useful, but Liberty feels there may be ways to improve the dissemination of information. The possibility for errors and omissions exist when all information is provided by voice call.

D. Recommendations

1. Adjust the method for pricing coal for dispatch purposes. (Conclusion #1) Liberty recommends the complete review and adjustment of coal pricing for use in dispatch to reflect near-term coal prices. In using prices from the near-term or spot market, NSPI will allow gas and coal units to compete on the level playing field that should result in lower overall cost and more accurate inventory levels.

2. Adjust the dispatch process to account for the variable cost component of cycling costs. (Conclusion #2)



NSPI should account for the short and long-term impacts of cycling its coal units. Liberty recommends that NSPI perform or commission an assessment of cycling impacts, and apply the variable cost component of cycling costs (on a $/MWh basis) to its dispatch decisions.

3. Study variable O&M data closely and make resulting adjustments for dispatch purposes. (Conclusion #3)

Liberty recommends that NSPI performs or commissions a study of its units’ VO&M data, and implements the appropriate numbers within its dispatch data sets. This is critical moving forward, given the proximity of gas and coal-fired units on the supply curve, which makes VO&M an important driver (and sometimes the key difference) in least-cost dispatch between coal and gas-fired units.

4. Provide a planned, structured means for addressing the results of the Wind Integration Study. (Conclusion #4)

Liberty recommends that the results of NSPI’s Wind Integration Study be carefully monitored to ascertain the impacts of intermittent (wind) generation. Specifically, NSPI must look at the implications of wind on load following, system security, and economics. Liberty recommends a detailed review of these components in a manner that produces specific initiatives for the dispatch team.

5. Develop a modern dispatch information system to share information between plant managers, operators, control center and dispatchers to work in conjunction with the morning calls. (Conclusion #5)

Liberty recommends implementation and deployment of a web-based information system for input by plant superintendents, and used by all users of their information for dispatch, operations and marketing. The system should have standardized input areas that would be quickly and easily filled out and submitted for the morning calls. The necessary information should be documented and ready for review in the morning calls.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) X. Power Purchases and Sales

July 9, 2012 Page X-1 The Liberty Consulting Group

X. Power Purchases and Sales

A. Background NSPI has traditionally relied predominantly on its own generation, rather than bulk power purchases, to supply its load. Its purchases have fallen into three principal categories:

• Long-term contracts from solicitations for independent or renewable power, undertaken in response to provincial requirements

• Term imports of market power acquired to replace NSPI generation during maintenance outages or at peak-load times

• Short-term purchases from the power markets to the west and from New England, when NSPI can buy on a real-time (hourly) basis at a delivered price lower than the marginal cost to generate with its own units.

NSPI conducted five competitions for independent or renewable power over the 20 years prior to 2010. A 2007 solicitation focused on the acquisition of substantial amounts of renewable energy required to meet Nova Scotia’s renewable energy standard (“RES”) of five percent of energy production in 2010 and 10 percent in 2013. The government extended the 2010 RES requirement to 2011, as wind-project developers experienced delays. Reasons for these delays included project financing difficulties. The NSUARB reviewed the results of this solicitation later in 2007. Deliveries by four of those projects began in 2010. Deliveries increased considerably in 2011. Two additional, smaller projects began production in 2011. NSPI forecasts that the remaining ones from the 2007 solicitation will begin production in 2012 and 2013. The Company expects all to be at full production by the end of 2013. NSPI’s Ragged Lake Control Center has operational control over the Nova Scotia Control Area. The Energy Dispatch and Marketing group within the Fuels, Energy & Risk Management (FERM) organization prepares a Day-Ahead commitment schedule for the generating units expected to run that day and for any scheduled power purchases. Ragged Lake receives that schedule. The schedule undergoes hourly updates to accommodate changes in load, generating unit availability, and Real-Time purchases or sales. Energy Dispatch and Marketing also maintains a Real-Time trading desk. A Real-Time marketer remains on duty at all times to enter into hourly transactions for imports and exports that prove economic compared with NSPI’s own generation. The Real-Time desk and operators run an Opsym model hourly, updating the system loads and generating unit information. The energy marketer on duty assesses the dispatch order for each hour of the day, and compares the costs of resources available for import or export with NSPI's incremental generating costs. The marketer makes hourly purchases from or sales into the market when economically advantageous. The preceding FAM Audit found NSPI’s practices and operations for real-time power marketing effective. Liberty concluded, however, that NSPI could improve the identification, solicitation, and evaluation of opportunities for term power purchases. We recommended that the Company better establish itself in the market for term power purchases, and more regularly identify, solicit, and evaluate market opportunities. Liberty also recommended that the Company develop specific written procedures for making export power sales.



NSPI agreed with Liberty’s recommendations, and engaged a consultant to review its power-purchasing practices. Liberty had found the Company’s short-term (i.e., less than one week) procurement satisfactory. The NSUARB had found the 2007 solicitation for multi-year purchases satisfactory. The consultant’s review, completed in July 2011, therefore focused on medium-term (greater than a week and less than two years) trading. It produced a number of findings, and recommended adoption of Interim Term Wholesale Power Policy and Procedures. NSPI began regular solicitations for monthly power purchases in the spring of 2011. The Company modified the consultant’s recommended policy and procedures, putting modified ones in place in December 2011. Liberty reviewed the Company’s activities in each of the three areas: purchases of independent power, term imports, and Real-Time purchases and sales.

B. Findings The following table presents the power quantities and costs associated with each of the three categories of wholesale power purchases, plus power exports, for each of the two years of the Audit Period.



2010/2011 Power Purchases and Imports/Exports 2010 2011

NSPI Total System Requirements (MWh) 12,163,603 11,917,083 Non-Wind IPPs

MWh '''''''''''''''''' '''''''''''''''''' Proportion of TSR (%) ''''''' '''''''' Cost ($000) '''''''''''''''' '''''''''''''' Average Unit Cost ($/MWh) ''''''''''''' ''''''''''''''

Wind IPPs MWh '''''''''''''''''' '''''''''''''''''''' Proportion of TSR (%) ''''''' ''''''' Cost ($000) '''''''''''''' '''''''''''''''' Average Unit Cost ($/MWh) '''''''''''' ''''''''''''

Power Imports MWh ''''''''''''''''' ''''''''''''''''' Proportion of TSR (%) ''''''' ''''''' Cost ($000) ''''''''''''''''' ''''''''''''''' Average Unit Cost ($/MWh) ''''''''''''' '''''''''''''

Power Exports MWh ''''''''''''' '''''''''''''' Proportion of TSR (%) ''''''''''' ''''''' Revenue ($000) ''''''''' '''''''' Average Unit Revenue ($/MWh) '''''''''''''' ''''''''''''

Net Outside Resources1 MWh '''''''''''''''''''' '''''''''''''''''''''' Proportion of TSR (%) '''''''' '''''''''' Net Cost ($000) '''''''''''''''' ''''''''''''''''' Average Unit Net Cost ($/MWh) ''''''''''''' ''''''''''''''

1IPPs, Wind and Imports less Exports The table shows a substantial increase in production from IPP Wind projects in 2011 over 2010 levels. One large project, the Glen Dhu North, accounted for much of that increase, as it reached full production. Production in 2010 increased by 242 percent over 2009, as three of the largest new projects reached full production. In 2010, NSPI experienced a 25 percent drop in power imports from 2009 amounts. Imports, however, increased by about half that amount from 2010 to 2011. Production by Non-Wind IPPs remained roughly constant. Net Outside Resources stood at just over 10 percent of Total System Requirements by the end of the Audit Period.

1. Independent and Renewable Power The table below lists NSPI’s Independent Power Producer (“IPP”) resources. The list presents wind and “other” projects, with the latter category principally comprising biomass.



Contracting Party and Location MW Production (MWh)

Wind Budget Actual Cap.

Factor Budget Actual Cap. Factor

2010 2011

Pubnico Point Pubnico 30.6 ''''''''''''''''' '''''''''''''' '''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''''''''

Glace Bay Lingan Lingan 14.0 '''''''''''''''' ''''''''''''''''' ''''''''''''' ''''''''''''''' '''''''''''''' '''''''''''''''

Glace Bay Lingan Glace Bay 1B 0.8 '''''''''''''' '''''''''''' '''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''

Glace Bay Lingan Port Caledonia 0.8 '''''''''''' '''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''' ''''''''''''''''

Confederation Power Tiverton 0.9 '''''''''''' '''''''' ''''''''''''''' '''''''''''' ''''''''' '''''''''''''''

Confederation Power Springhill 2.1 ''''''''''''' '''''''''''''' '''''''''' '''''''''''' '''''''''''''' '''''''''''''''

Confederation Power Higgins Mountain 3.6 ''''''''''' '''''''''''' '''''''''''''' '''''''''''''' '''''''''''' ''''''''''''''

Renewable Energy Goodwood 0.6 ''''''''''''' ''''''''' '''''''''''''' ''''''''''''' ''''''''' ''''''''''''''

Renewable Energy Brookfield 0.6 ''''''''' ''''''''' '''''''''''''''' ''''''''' ''''''''' ''''''''''''''''

Shear Wind Inc Fitzpatrick Mtn 1.6 '''''''''''' ''''''''''' '''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''

Renewable Energy Point Tupper 1 1.4 '''''''''''' '''''''''''' ''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''''''''

Renewable Energy Digby 0.8 ''''''''''''' ''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''

Renewable Energy Tatamagouche 0.8 '''''''''''''' '''''''''''''' '''''''''''''''' '''''''''''' ''''''''''''' ''''''''''''''

RMS Energy Dalhousie Mtn 51.0 ''''''''''''''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''''''' ''''''''''''''''' ''''''''''''''''

Shear Wind Inc Glen Dhu North 62.0 ''' ''''''''''''' '''''''''''' '''''''''''''''''''' '''''''''''''''''' ''''''''''''''

Horizon Legacy Maryvale 6.0 '''''''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''' '''''''''''''' ''''''''''''''

Renewable Energy Point Tupper 3 22.0 '''''''''''''''' ''''''''''''''''' '''''''''''''''' ''''''''''''''''' '''''''''''''''' ''''''''''''''

Watts Wind Energy Watts Section 1.5 ''' ''' '''''''''''' ''' ''''''''''''' '''''''''''''''

Colchester-Cumberland Spiddle Hill 0.8 ''' ''' ''''''''''' '''' '''''''''''''' ''''''''''''''

Other

Black River Hydro Mabou 0.2 '''''''''''' ''''''''''''' '''''''''''''' ''''''''''''' '''''''''''''' ''''''''''''''

Brooklyn Power Liverpool 23.4 '''''''''''''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''' '''''''''''''''''' ''''''''''''''

Morgan Falls Power Bridgewater 0.5 ''''''''''''' '''''''''''' '''''''''''''' '''''''''''''' '''''''''''' ''''''''''''''

FW Taylor Lumber Musquodobit 0.8 '''''''''''''' '''''''''''''' '''''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''

Halifax Renewable Sackville 2.0 ''''''''''' '''''''''''' '''''''''''''' '''''''''''''' ''''''''''' ''''''''''''''''

a. Wind Projects i. Operational Improvements

NSPI does not “dispatch” wind-powered generators, but takes whatever each one produces. Most of the wind power-purchase agreements (“PPAs”) set annual delivery quantities, and impose performance penalties for failure to produce those quantities. Performance penalties generally start at ''''' '''''''''''''''''' of contracted quantities. NSPI has utilized an internal forecast of monthly production for each project. It bases this forecast on three years’ operating history, adjusted for known variances. Projects cannot now be managed against that forecast, however, due to the variability of wind, and to the lack of information on how much wind to expect each month at each location.



NSPI formed a working group in 2009 to study operational changes necessary to maximize the value of production from its owned and contracted wind resources. That group identified improved forecasting of wind as a high-value activity in identifying appropriate adjustments to operating processes. NSPI has since collected extensive data about weather and the forecasting of wind-powered generation. NSPI also worked on incorporating the wind resources into its economic dispatch. The working group used data and observation to determine that updating the wind forecast four times per day to match the weather forecast updates provided an improved forecast of possible wind generation. Inadequate information on wind-turbine availability presented another complication. Early operators under wind PPAs did not have responsibility for notifying NSPI when some of their equipment was not in service. NSPI has since sought to modify the PPAs to oblige each operator to report on equipment availability and on wind speed and wind direction at its location, on a real-time basis. Improvements in wind forecasts and equipment availability have enabled NSPI to begin using forecast wind generation for real-time dispatch. NSPI initially treated Wind as a reduction in load, rather than as a source of electrical energy. Following its forecasting improvements, the Company now tries to include wind generation in hourly power scheduling.

ii. Renewable Energy Integration Study

The preceding FAM audit included a recommendation that NSPI submit a plan for analyzing back-up and load-following services alternatives for its wind-powered generation. The Company initially agreed to study and report on Nova Scotia characteristics by the fourth quarter of 2011. The Company observed that this study would provide the basis for addressing backup services. NSPI had expanded its plans by early 2011, when it advised that it was prepared to complete a more comprehensive Renewable Energy Integration Study. NSPI had by March 2011 completed a project charter, assigned members of its staff to the project team, and initiated exploratory meetings with engineering-consultant candidates for performing the study. NSPI issued the RFP in July, and selected General Electric International, Inc. (GE). GE performed a similar study for the New England (U.S.) Independent System Operator (ISO-NE). GE completed that study in December 2010. The work for NSPI consists of six tasks:

''''''''' '''' '''''''''' '''''''' '''''''''' ''''''''''''' ''''''''''''''''''''''' ''''''''' ''''' ''''''''''''''''' '''''''''''''''''''''''''' ''''''''' '''' ''''''''''''''''' '''''''''''''''''''''' '''''''' ''''''''''''''' '''''''''' '''' '''''''''''''''''''' ''''''''''''''''' ''''''' '''''''''''''''''''''''

'''''''''' '''' ''''''''''''''''''' '''''''''' ''''''''''''''' ''''''''' '''' ''''''''' ''''''''''''' ''''''''''''''' The consultant’s proposal suggests that the analytical results of the tasks will include:

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋

∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋ ∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋∋

NSPI provided the following schedule for the six tasks:

• Task 1: Complete



• Task 2: Complete • Task 3: In progress, with forecasted completion by end of July 2012 • Task 4: Forecasted completion end of August 2012 • Task 5: Forecasted completion end of July 2012 • Task 6: Forecasted completion end of September 2012.

NSPI’s Wind Integration Study benefits from the work for ISO-NE. In particular, ''' '''''''' '''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' '''''' ''''''' '''''''''''' '''''''''''''' '''''''''''''''''''''' ''' ''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' '''''' ''''''''''''' '''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''''''' ''''' '''''''' ''''' '''''''' ''''''''''' ''''' '''''''''''' '''''''''''''''''''''' '''''''''''''''''' '''''''' '''''''''''''''''''''' ''''' ''''''' ''''''' ''''' ''''''''' '''''''''''''' '''''''' ''''''''''' '''''''''''' ''''''''' '''''''''''' '''''''''''' '''''''''''' ''''' ''''''''''''''''' '''''''''' ''''''''''''''''' '''''''''''''''''' ''''''' '''''' ''''' ''''''' ''''''''' '''''''''''''''''' '''' ''''''' ''''''''''''' ''''''''''''' '''''''''' ''''''''''''''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''' ''''''' ''''''''''''''''''''''''''''' ''''''''''''''' '''''''' ''''''''''' ''''''''''''''''''''' '''' ''''''''''''''''''' ''''''' ''''''''''''' '''''' '''''''''''''''

b. Non-Wind IPPs NSPI’s non-wind IPPs resulted primarily from a required solicitation following the construction of Point Aconi Unit 1. NSPI has signed contracts with seven IPPs. Production from one of the contracts had not started by the end of 2011. Most of the projects produce very small amounts of energy relative to NSPI’s total load. The contracts for these IPPs do not fix production volumes; NSPI buys whatever they produce. The Company prepares internal forecasts of production from each project, using the most recent three years of production data. NSPI monitors actual production against the internal forecasts, and makes inquiries if production falls short. As indicated in the table, production was slightly above Budget in both years.

i. Brooklyn Power

The Brooklyn Power Project stands as one of NSPI’s oldest, but most consistently performing IPPs. This source is associated with the Bowater Mersey paper mill in Liverpool, Nova Scotia. The report for the preceding FAM Audit noted the long-standing pricing dispute between the parties. That dispute involved differences in calculation of energy rates under the PPA from 1995 through 2007. The parties settled the dispute in December 2010. NSPI paid approximately '''''''''' '''''''''''''''' ''''''''' ''''''''''' ''''''''''''''''' ''''' ''''''''''''''''''''''' ''''''''''''''''' '''''''''''' NSPI advises that $518,707 was in respect of the period from January 1, 2009 through the November 2010 effective date of the settlement. That amount, plus the increased annual costs in effect after the effective date of the settlement, will flow through the FAM.

ii. Minas Basin Pulp & Power Project

NSPI conducted an RFP process for power from distribution-connected biomass projects in December 2008. It received ''' '''''''''''''' ''''''''''''''''''''' '''''''''''' '''''''''''''' '''''''''''''' '''''''''' ' '''''''''''''' ''''''''''''''''''''''' '''''''''''' ''''''''''''''' proposed a biomass-fueled cogeneration project. The parties entered a power-purchase agreement for 10 MW in September 2010. Production is forecast to begin in 2012.

iii. 2010 RFP for Firm Renewable Energy

By early 2010, NSPI did not have enough renewable power either constructed or under contract to meet the Province’s Renewable Energy Standard (RES) regulations for 2013. On April 5, 2010, the Company issued an RFP for firm renewable energy from transmission-connected



projects. On April 9, 2010, it filed a Capital Work Order with the NSUARB for the Port Hawkesbury Biomass Project, a cogeneration project to be located at NewPage’s Port Hawkesbury paper manufacturing plant. This wood-waste fueled power source will use an existing plant boiler, which had operated at a reduced load factor. NSPI reported that the combination of the RFP and the NewPage project would provide the balance of the open requirements for 2013 RES Compliance. NSPI received '''''''' ''''''''''''''''''''''' in response to that RFP. '''''''''''' proposed biomass to produce RES-compliant energy. In September 2010, NSPI filed Supplemental Evidence with the NSUARB in the Capital Work Order proceeding. It concluded that NSPI’s proposed Port Hawkesbury Project gave the Company the best opportunity to achieve timely compliance with the 2013 RES, but that NSPI should continue discussions with one of the ''''''''' outside proponents. The NSUARB approved the Company’s Project later in 2010. Liberty inquired about what happened to the outside proposals. NSPI advised that commercial negotiations had started with the better of the two outside proposals. Economic changes affecting loading and net sales in the Company’s service territory, however, eliminated the need for continuing negotiations. The NewPage project would prove sufficient to meet RES requirements.

c. COMFIT The Province of Nova Scotia’s Renewable Electricity Plan provides for a Community-Based Feed-In Tariff (COMFIT) program to encourage the development of local renewable energy projects by municipalities, First Nations, co-operatives, and non-profit groups. Projects will connect to the power grid at the distribution level. The program began accepting applications in September 2011. The first round of project approvals came in December. At the time that this report is being written (second quarter 2012) NSPI is developing a distribution-class power-purchase agreement (PPA) for use with these projects. NSPI expects to begin signing PPAs with approved projects later in 2012. At this time, there is thus no schedule for delivery of power. NSPI’s 2013-2014 GRA filing, however, forecasts that power deliveries will begin in 2014.

2. Term Imports NSPI has historically made most of its import power purchases on an hourly basis, occasionally making 24-hour block purchases as well. Maintenance outages, however, have led the Company occasionally to seek one- or two-week purchase opportunities. Prior to August 2009, NSPI had issued only one formal RFP for a term import purchase, for 100 MW during peak hours for two weeks in December 2008. At that time, a consultant conducting computer simulations of NSPI’s operations (in the context of a study of natural gas requirements), found that ''''''' '''''''''''''''''' ''''''''''''' '''''' '''''''''''''' ''''''''' '''''''''''''' '''''''' ''''''''''''''' '''''''''''''' ''''''''''' '''' ''''''''' '''''''''''' '''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''' '''''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''' '''''''''''''''' '''''''''''''''''''' ''''''''''''' '''''''''''' ''''' ''''''''''''' '''''''''''' '''''''''''' ''''''''''''' Some months later, FERM staff began tracking the forward monthly term prices for NEPOOL (the only regional market with price transparency) against '''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''' ''''' ''''''' ''''''''''''' ''''''''''''' '''''''''' '''''''''' '''''''''''''''''''''' ''''''''''''''''''''' '''''' ''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''



''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''' '''''' '''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''' '''''' '''''''' '''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''''''' '''''''''''''''''''''' '''''''' ''''''''''' '''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''' ''''' ''''''''''''' '''''''' ''''''''''' '''''''' '''''''''''''''''''''' '''''''''' ''''''''''''' ''''''''''''' '''''' ''' ''''''''''''''''''' '''''''''''''' '''''''' ''''''''' ''''''' '''''''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''''''''''''''''''''' '''''''''' '''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''' '''''''' '''''''''''''''''''''''' '''''''''''''''''' ''''''''''''' '''''''' ''''''''''''''''' '''''''''' ''''' ''' '''''''''''''' ''''''' '''''''''''''''''' '''''''' '''''''''''''''''''''' '''''' ''''''''''' ''''''''''''''''''''''

'''''''''''''''''''' '''''''''''''''''''' NSPI experienced an extended outage at Tufts Cove in 2009. NSPI responded with an RFP in August for a month-long, 100 MW purchase for 24 or 16 hours per day for the month of September. The RFP went by e-mail to '''''' potential suppliers on August 14, 2009. The solicitation sought responses by August 19. ''''''''''''' ''''''''''''''''' ''''''''''' '''''''' '''''''''''''' '''''''''''''' ''''''''''''' ''''' ''''''''''''''''' '''''''''''''''' ''''''''''''''''' ''''''''' ''''''''''''''' '''''''''' '''''''''''''' ''''''''''' ''''''''''''''' '''''''''''''''''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''''''' '''''''''''' ''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''' '''''''' ''''''' ''''''''''' ''''''' ''''''''''''''''''' ''''''''''' '''''''' '''''''''''''''''''' '''''''''''''''''''' ''''''''' '''''''''''''' ''''''''''' '''''''''' ''''''' ''''''''''''''' '''''''''''''' '''''''''''' '''''''''''' ''''''' ''''''''''''' ''''' ''''''''''''''' ''''' ''''''''''''' NSPI prepared a file documenting the RFP, the informal and formal responses, and comparisons to its own generation. NSPI conducted two subsequent, 2010 verbal solicitations, each for a 100 MW, one-month term purchase for April 2010. '''''''' '''''''''''' ''''''''''''''' ''''''' '''''''''''''''''''''''''' ''''''''''''''' '''''''' '''''''''' ''''''''''''''''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''' ''''''''''' ''''' '''''''''' '''''''''''''''''''''''' ''''''''''''''' ''''' '''''' '''''''''''''' '''''' ''''''''' '''''' ''''''' '''''''''''''''' '''''''' '''''''''''' '''''''''' ''''''''''''''' '''''''''''' '''''''' ''''''''''''''' NSPI also received an unsolicited, April 2010 proposal ''''''''''' '''''''' ''''''' ''' ''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''''' '''''' ''''''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''' '''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''' ''''' ''''''''''''''''''''''' ''''''''' '''''''''''''''''''' ''''''''''''' ''''''''' ''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''' ''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''' '''''''''''''''''''''''''' '''''''''''''''' ''''''''' ''''''''' '''''''''''''''''' '''' '''''''''''''''' ''''''' '''''''''''''''''''''''' ''''''' ''''''' ''''''''''''''''''''''' '''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''''''''''' ''''''''' '''''''''''''''' ''''''''''''''' '''''''''' ''''''''''''''' ''''''''''''' ''''''' '''' '''''''''' ''''''''''''''''' '''''''''''''''''''''''''' ''''' '''''''''''''''' ''''''''' ''''''''''''' '''''''''''''' '''' '''''''' '''''''''''''''''' '''''''''''''' ''''''''''''' ''''''''' '''''''''''''''' '''''''' '''''''''' ''''' ''''''''''' ''''''''''''' ''''' '''''' ''''''''''''''''' '''''''''''''''' ''''''' ''' '''''''''''''''''''''' '''''''''''' ''''' '''''' ''''' '''''''''' ''''''''''''''''' '''''''''''''''''''''''''' '''''' '''''''''''''''' '''''''' ''''''''''' ''''''''''''' ''''''''' ''''''''''''''''' ''''' ''''''''' '''''''''' ''''' ''''''''''' ''''''''''''''' ''''' ''' '''''''''''''' ''''''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''' ''''''' '''''''''''''''' '''''''''''' ''''''''''''''''

a. 2010 FAM Audit Recommendations The report for the preceding FAM audit addressed NSPI’s lack of participation in the market for term power purchases. The report did not find the Company’s responses to its affiliate’s offers to be sufficient. The report made three recommendations:

1. Better establish NSPI’s position in the market for term power purchases, and more regularly identify, solicit, and evaluate market opportunities.

2. Improve procedures, documentation, analysis and management oversight of affiliate relations and transactions, especially with EEI regarding power-purchase transactions.

3. Develop specific written procedures for the decision to make an export power sale. NSPI agreed with these recommendations, and has taken two steps to address them:

1. Beginning in March 2011 (for power to flow in April), NSPI issued RFPs for monthly power in each of the remaining months of 2011.



2. In the second quarter of 2011, NSPI engaged a consultant to review its wholesale power purchase policies and procedures. The consultant presented its report to NSPI in July 2011.

i. Monthly RFPs for Power

NSPI issued written RFPs for month-long power supplies each month after February 2011. The RFPs sought up to 100 MW of firm, on-peak power, five days per week, 16 hours per day (5x16), but stated that the Company would consider other offers. ''''''''' ''''''''''''' '''''''''''' ''''' '''''' '''''''''''''''''''' ''''''''''''''' '''''''''''''''''''' ''''''''''''''' ''''''''''''''''''' ''''''''' '''''''''''''' ''''''''' ''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''''''''''''''''''' ''''''''' '''''''''''''''' '''''''''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''' ''''''''''''''' '''''''''''' ''''''''''''''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''' '''''''''''''''' '''''''''' ''''' '''''''''' '''''''''''''''''''''''''''' ''''''''''''' '''''' ''''''''''''''''' '''''''''''''' ''''' ''''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''''''' ''''''''''''''' ''''' '''''''''' '''''''''' ''''''''''''''''''' '''''''' ''''''''''''''''''''' ''' ''''' ''''''''''' '''' ''''''' '''''' ''''''''''''''''''''''' ''''''''''''''' '''' '''''''''' '''''''''''''''''' ''''''' '''''''''''''' ''''''''''' '''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''' ''''''''''''''' '''''''''''''''' ''''' '''''''''' ''''''''''''''''' ''''''''''''''' '''''''''''' '''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''''''''''''' ''''''' '''''''''''' '''' '''''''''''''''' '''''''''' '''' '''''''''''''''''''' ''''''' ''''''' '''''''''''''''''''''' ''''''''''''''' ''''' '''''''''' '''' '''''''' ''''''''''' '''''''''''''''''''''' '''''''''''''''''''' ''''''''''''' '''''''' ''''''' ''''''''' '''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''' ''''' '''''''''''' '''''''''''''''''''''''''' ''''''' '''''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''' '''' ''''''''''''''''''' '''''' ''''''''''''''' ''''''''' ''''''''''' ''''''''' ''''''''''''' '''''''''''''' ''''''' ''''''' ''''''''' ''''''''''''''''''''''''''' ''''''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''''''' '''''''''''''''''''' '''''''''' '''''''''''''' ''''''''''' '''''''''''''''''''''''''' ''''''''''''' ''''''' ''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''' ''''''''' '''''''''''''''' ''''''''' '''' ''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''' '''''''''' '''''''''''''''''''' '''''''' ''''''''''''''''' '''''''' ''''''''' ''''''''''''''''' '''''''''' ''''''''''''' ''''''''''' ''''''' '''''''''''''''''''''''' ''''''''' ''''''''''''' '''''''' ''''''''' ''''' ''''''''''''''' '''''''' ''''''''''' '''''''''''' '''''''''''''''''''''' ''''''''''' ''''' '''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' ''''''''''''''' '''''''''' ''''''''''''' ''''''''''''' ''''''''''' '''''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''''' '''''' '''''''''''''''''''''''' '''''''''''''' ''''''''''''' ''''''''''''''''''''''''' ''''''''''''' ''''''''''''' '''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''' ''''''' ''''''' '''''' '''''''''' ''''''''''''' '''''''''''' ''''' '''''''' '''''''''''''' '''''''''''''' ''''''' '''''''''''' ''''''''''''' ''''''''' '''''''' '''''' '''''''' '''''''''' '''''''''''' '''''''''' ''''''' ''''''''''''' NSPI has called each of the suppliers every month to advise them that the RFP was coming, to encourage them to participate, and to answer any questions about the competition. One supplier provided comments on the conduct of the solicitation. NSPI responded positively to its suggestions. NSPI also conducted a competition for Import Power Scheduling Services in early 2011. '''''''''' '''''''''''' '''''''''' ''''' '''''' ''''''''' ''''''''' ''''''''' ''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''''''''''''''' '''''''' ''''''''''''''' The agent transacts in ISO-New England on NSPI’s behalf, and then arranges for delivery of any purchased power to the U. S.-Canada border. It can also take power supplied by NSPI, and sell it in the ISO-New England market. NSPI receives and delivers power on the Canada side of the MEPCO/New Brunswick interface. NSPI sent an RFP for these services to ''''''''''''' ''''''''''''' ''''''''''''' ''''' '''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''''' '''''''''' ''''''''''''''''''''''''''''' ''''''''''''' '''''''' ''''''''''' ''''''' ''''''''''''''''''''''''' ''''''''''' ''''''''''''' ''''''''' '''''''' '''''''''''''''''''''''''' '''''''' '''' ''' '''''''''''''' '''''''''' '''''''''' '''''''''''''' '''''''' '''''''''''' '''''''''''''''' '''''''''''' '''' '''''''' ''''''''''''''''''''''''''''

ii. Consultant Review of Policies and Procedures

NSPI retained a consultant to review its wholesale power purchasing policies and procedures. The consultant focused on medium-term (greater than a week but less than two years) trading. The review addressed the following items:

• Solicitation Design



• Solicitation Frequency • Parties Solicited • Products Solicited • Solicitation Flexibility • Information Provision and Encouragement to Potential Counter-Parties • Evaluation • Modeling and Analysis • Awards • Number of Parties Awarded • Documentation of Analysis and Decision • Management Oversight • Policy and Procedures • Treatment of Affiliates • Comparison to Other Electric Utilities.

The consultant found that NSPI’s medium-term purchasing at the time (second quarter 2011) matched well against the criteria applied, and that improvement opportunities that Liberty had noted either no longer existed or were being systematically addressed. Particular recommendations included:

• Conduct additional price discovery, because the ISO-NE forward price is “problematic” • Develop policies and procedures to govern power purchasing, for addition to NSPI’s Fuel

Manual. ICFI provided recommended interim policy and procedures for NSPI’s possible use while its own policy and procedures were being developed. That policy and those procedures addressed the following areas:

• Determination of Economic Import Requirements • Solicitation of Term Supply • Evaluation of Bids • Contracting Implementation • Documentation • Hedging • Supplier Evaluation • Counter-Party Mobilization and Management.

iii. NSPI’s Policies and Procedures

NSPI finalized its procedures responsive to the consultant’s review later in 2011. NSPI’s procedures covered all of the areas recommended, but included additional detail, and added some sub-procedures not addressed by the consultant; e.g., credit considerations for prospective counter-parties. The principal substantive difference from the consultant’s recommendations lay in the scope of the system study to estimate potential economic import requirements. The consultant had recommended an annual study with periodic updates. NSPI’s procedures call for monthly or seasonal studies. The consultant’s review focused on “medium-term trading,” defined as more than one week but less than two years. Thus, purchases envisioned could have been for as long as two years.



NSPI explained its decision not to address longer term trading, noting that it had not approached market participants for one-year terms. '''''''' ''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''' ''''''''''''' ''''''' '''''''''' ''''' ''''''''''''''''''''''' '''''''''' '''''''''''''''''' ''''' '''''''''''''''''''''''''' ''''''''''''''''''' '''' '''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''''''''''''''''' '''''''''''' ''''''''' ''''''''''' '''''''''''''''''''''' '''' ''''''''''''''' '''''''''''' ''''' ''' ''''''''''''' ''''''''''''''''''' '''''' ''''''''''''''' ''''' ''''''''''''''' ''''''''''''''''''' NSPI also noted new restrictions on firm transmission imposed by the New Brunswick System Operator in the fall of 2011. Such limits constrain NSPI’s ability to commit to imports, because non-firm imports impose additional operating reserve requirements on NSPI. With these limits, NSPI must maintain one MW of reserve for every MW of non-firm energy purchased. NSPI would ordinarily cover this reserve requirement by keeping generating units on-line but backed down, or by designating uncommitted quick-start units. This requirement does not present problems at times when the turbines operate only occasionally (e.g., March, April and May), but presents challenges during periods of high demand.

b. December 2010 Power Purchase A planned, November 2010 outage at Tufts Cove Unit 3 extended into December. Moreover, Units 1 and 2 required shorter, but unplanned, outages for repairs. NSPI had not yet then begun its regular monthly solicitation for power purchase. Term imports typified its response to added power requirements associated with generator outages. NSPI called its usual power-purchase counter-parties, but not until November 22. NSPI issued an RFP sent on that day, via e-mail. Proposals were due November 26; i.e., the day after the Thanksgiving holiday in the U. S. NSPI’s '''''' ''''' ''''''''''''''' ''''''''' '''''''''''''''''''''''''', did not respond to the RFP; its employees, as expected, were off for the holiday. A second counter-party also did not respond, and two others could not get transmission to enable them to deliver on a firm basis for the term requested (first three weeks of December). ''''''''' ''''''''''''''''' ''''' ''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''' '''' ''''''' '''''''''''''''''''' ''''''''''''' ''''''''' '''''''' ''''''''' ''''''''''''''' ''''''''''''''' ''' '''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''' '''''''' ''''''''''''' ''''''''''''''' ''''''' ''''' ''''''' ''''''''''''''''''''''''''''''''' ''''''''' '''''''''' ''''' ''''''''''''''' '''' ''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''' '''''''''' '''''''''''''''''''''''''''' ''''' ''''''' '''''''''' ''''''''''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''''' ''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''''''''' '''''''' '''''''''''''' '''''''''' '''''''''''' '''''''''''' '''''''' ''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''' '''''''''''' '''''''' ''''''''''''''' '''''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' '''''''' ''''' ''''''' ''''' '''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''' '''' ''''' '''''''''''' ''''''''''''''' '''''''''' ''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''''''''''' '''''''' '''' ''''' ''''''''''''''' ''''''''''''''' '''''''''' ''''''''' ''''''''''''''''''''''' ''''''''''''''''''' ''''''''' '''''''''' '''''''''''''''' '''''''''''''''' '''' '''''''''''''''''''''' '''''''''''' ''''''''''' ''''''''''''''''' ''''''''''''''' ''''' ''' '''''''' '''''' '''''''''''''''' ''''''' '''''''''''''' NSPI has previously reported that it hedges imported power purchases with natural gas swaps. NSPI has stated that it considers hedging the gas both effective and versatile, because it provides the Company an opportunity to hedge for import power and gives NS Power the opportunity to choose the more economical alternative of Tufts Cove generation or imported power. We asked whether NSPI had hedged the price of the December power imports. The response stated that:

Total forecasted natural gas requirement is comprised of the gas requirement for NS Power’s gas-fired generating units as well as the gas requirement for NS Power’s forecasted imports. The hedges are put in place for the total forecasted natural gas requirement, not the individual components themselves (for example, gas requirements for imports).



The next table compares second and third quarter 2010 forecasts of gas requirements for November and December 2010. The total dropped significantly between the two forecasts, but total hedges in place remained the same. The combination of reduced usage forecasts and static hedges caused the percentage of forecasted natural gas requirement hedged to become 139 percent for November and 92 percent for December.

Q2 and Q3 2010 Gas Requirements Forecasts Forecast (MMBtu) 2nd Quarter 2010 3rd Quarter 2010

Month Nov-10 Dec-10 Nov-10 Dec-10 Use Forecast Requirement

LM6000 ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''''' TUC 1-3 '''''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''' Imports ''''''''''''''''' '''''''''''''' ''''''''''''''''' ''''''''''''''''''''

Total Requirements '''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''' Hedges in Place '''''''''''''''''''' '''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''''

Percentage Hedged ''''''''''' '''''''''' '''''''''''''' '''''''''

Q2-Q3 Change in Forecast Source Nov-10 Dec-10

LM6000 ''''''''''''''''''' ''''''''''''''''''' TUC 1-3 '''''''''''''''''''''' ''''''''''''''''''' Imports '''''''''''''''''''''' ''''''''''''''''''

Total Requirements '''''''''''''' ''''''''''''' NSPI prepared the Q3 2010 Forecast in September 2010. Normally re-balancing hedge positions occurs immediately after forecast completion. NSPI did not at that time know about the extended outage for Tufts Cove 3. That extension would reduce NSPI’s own gas requirements further. NSPI left the hedges in place after the forecast reduction to hedge the power imports

3. Short-Term Purchases and Sales NSPI continues to use a scoring system to assess the performance of its power marketers. NSPI Corporate Accounting performs the scoring. For each hour, the system compares the benefit of power actually imported to the potential benefit, or “opportunity,” of importing the system-required amount at the NEPOOL price. The calculation of opportunity for imports compares NSPI’s marginal cost of generation for each hour (from its dispatch modeling) to the '''''''''''''''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''''''''''' NSPI scores power exports in a similar way, using a “mirror image” of the import opportunity calculation. Compensation for the power marketers links to their scored performance. The table below shows the number of short-term purchase and sale transactions and related volumes by counter-party for 2010 and 2011.



Short-Term Import Volumes (MWh) and Transactions '''''''''''''' ''''''' '''''''' ''''''''' '''''''''''''''' '''''''' ''''''' '''''''''

'''''''''''''''''''''' '''''''''''''''' '''''''''''''' ''''''''''''

'''''''''

'''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''

'''''''

'''' ''''

'''''''''''''''''''''''' '''''''''''''''''' ''

''''''''''

'''''''' '''''''''''''''''''''''''' '''''''''''''''''' ''' ''' ''

'''''''''''''''' '''''''''''''''' '''''''''''''''' '''

''''''''''''''''' '''''''''''''' ''''''''''''''' '''''' '''

'''''

'''''''' ''''''''''''''' '''''''''''''''''''''''''

''''''''''''''''' ''''''''''''''''' '''''''''''''' '''''''' ''''''''''''''''' ''''''''''''''''''''''''' ''''''

''''''' '''''

'''''''' '''''''''''''' '''''''''''''''''''''''''

''''''''''''''''' '''''''''''''''''''

'''''''''''''''''''' ''''''' '''''''''''''' '''''''''''''''''''''''''

'''''''''' '''''''' '''''''

'''''''''' '''''''''''''''''''''''''''''

''''''''''''''''''''

''''''''''''''''''''

''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''' '''''''''

'''''''''' '''''

''''''''' '''''''''''''

''''''''''''' '''''''''''' '''''''' '''''' '''''' ''''''''

Short-Term Export Volumes (MWh) and Transactions

''''''''''''''' ''''''' ''''''' ''''''''' ''''''''''''''''' '''''''' '''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''''' ''' ''' '' '''''''''''''''''''''' ''''''''''''''''' '' ''' ''

'''''''''''''''''''''' '''''''''''''''''' ''' ''' ''' ''''''''''''''''''''''''' ''''''''''''''' ''' '' '''

'''''''''''''''' ''''''''''''''''' '' '''''' '''' '''''''''''''' '''''''''''''''''' '' ''' '' '''''''' '''''''''''''' '''''''''''''''''''''' '''''''''' '''''''''''' '''''''' '''''''' '''''''''''''''''' ''''''''''''''''''''' ''' ''''''' '''' ''''''''' ''''''''''' ''''''''''''''''''''''' '''''''' '''''''''''''' ''''''''' '''''''' ''''''''''''''''''''''''''''''''''''''' '''' '''''' '''' '''''''''' ''''''''''''''''''''''''' '''''''''''''' ''''''''''''' ''''''''' '''''''''' '''''''''''''''''''''''' '''''' '''''' ''''

'''''''' ''''''''' '''''''' '''''''''' '''''''' '''' '''' ''''''

4. Transmission Limitations Transmission constraints and limitations affect NSPI’s economic dispatch and import or export of power. The transmission corridors with the most significant constraints are the Cape Breton export corridor, the Onslow import corridor, the Onslow South corridor and the Nova Scotia/New Brunswick interface. NSPI's current generation options and dispatch patterns cause limits to be reached on its transmission facilities. Most of the Company’s major generating facilities are on Cape Breton, which has an export limit to the Nova Scotia mainland of '''''''' to ''''''''' MW. This capability is generally sufficient to handle the east-to-west power flow with current facilities and with only minor disruptions to the economic dispatch. However, additional generation in Cape Breton (such as wind projects) will stress the Cape Breton export interface beyond reliability criteria on single contingencies, thus requiring reinforcement investments. The Onslow import corridor, from the eastern mainland to Onslow, is limited to '''''''' to ''''''''''''' MW. The Onslow South transmission limit is from Onslow to the Halifax metropolitan area; that limit is '''''''' to '''''''' MW. NSPI currently must provide voltage support to the Halifax area by running the Tufts Cove units. For most of 2010 and 2011, the Tufts Cove units have dispatched ahead of the higher-cost coal units. If the relative prices of natural gas and coal change, however, at least some of the Tufts Cove units might have to run out of the economic dispatch order. This



condition represents the largest internal (in Nova Scotia) constraint on the Company’s economic dispatch. Additional generation in both Cape Breton and Nova Scotia’s eastern mainland would further stress the Onslow South interface into Halifax. The flow of power in Nova Scotia runs from the primary generation resources in Cape Breton to the major load center in the Halifax metropolitan area. Increasing power flows from east to west would necessitate additional reactive power compensation in the Halifax area to meet voltage criteria. Additional generation in the west mainland would improve load flows, but the existing transmission system in that region would require extensive upgrades to handle any additional capacity. The Nova Scotia/New Brunswick intertie provides the only path for power flows in and out of Nova Scotia. The intertie is limited under normal system conditions for both imports and exports. The normal import limit is 300 MW, and the export limit is 350 MW. However, each of these limits is variable, depending upon system conditions in both provinces. In real-time, the NSPI import limit is the lesser of 300 MW or 22 percent of the Company's load, which prevents load shedding to avoid an under-frequency situation. The import flow is also limited at times in New Brunswick due to transmission congestion or other constraints within that province. New Brunswick must maintain firm transmission capacity of less than 100 MW to facilitate a reserve-sharing agreement with NSPI. The Company advises that NSPI can arrange firm transmission of up to 178 MW through the intertie for import power purchases, which is well above the Company’s historical import levels. In fact, transmission limits to imports are now primarily in New Brunswick, due to a load pocket in the Moncton area and the inability to transmit power regularly across New Brunswick from Québec. In recognition of these limits, NSPI’s consultant affirmed the Company’s practice of limiting the size of the monthly import RFPs to 100 MW. This size reserves two-thirds of the total import capability for short-term imports, and it avoids the risk of over-commitment when load is low and non-curtailable production is high.

9. Power Imports, Peak and Off-Peak Total power imports, both monthly and short-term, were 137 percent of Budget in 2010, and 116 percent of Budget in 2011. Power exports comprised only three percent of Budget in 2010 and six percent of Budget in 2011. The following table presents the distribution of monthly and short-term imports between peak and off-peak periods:

Power Imports, Peak and Off-Peak (MWh)

Period 2010 2011

Monthly Short-Term Monthly Short-Term On-Peak '''''''''''''''' ''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''' Off-Peak ''''''''''''''' ''''''''''''''''''' '''''''''''''''' '''''''''''''''''



C. Conclusions

1. NSPI has been making sufficient progress in addressing the introduction of wind into its power-supply mix.

NSPI formed a working group to study operational changes necessary to maximize the value of production from its wind resources. The prior FAM Audit report noted that the working group was developing software to adjust the dispatch of other generation around predicted wind power output. This year, the Company reported that the forecasting tool was completed, and has had success in estimating how much the call on other units can be reduced when specifying the Day-Ahead schedule to the Control Center. Ragged Lake Control Center personnel reported that dealing with the variation in wind production has not yet raised significant issues, because the variations experienced to date have fallen within the capability of the Company’s Automatic Generation Control (AGC) on its fossil units. All of the personnel with whom we spoke were looking forward to the results of the Wind Integration Study, however, as all are aware that more wind is coming onto the system this year and next. Wind-powered generation reached almost five percent of NSPI’s Total System Requirements (TSR) in 2011. Most utilities can handle up to about 10 percent of TSR by treating wind power as a reduction in load; indeed, this is primarily how NSPI has handled it to date. Getting beyond that level has been found to require a considerable increase in regulation service, however. The study being conducted by and for NSPI is expected to address how that will be accomplished. NSPI’s Wind Integration Study is taking its preparations for increased penetration of renewables to a broader level than previously anticipated. An NSPI briefing for Liberty in April 2011 provided a schedule for the Wind Integration Study. It called for release of an RFP in the first week in May, and a draft report by the end of October 2011. The RFP was actually issued in July 2011, and the final report is due at the end of September 2012. Between the original schedule and the final, NSPI learned what was involved in developing and completing the study. The project scope evolved from providing the basis for development of a more informed understanding of back-up and load-following to the scope described in the Findings section of this chapter. As the project team developed the scope of work, it became apparent that modeling NSPI’s entire system, and studying the impact of integrating all future sources of additional energy (e.g., renewable generation, imported energy) was required to understand the impact of increasing levels of wind. The project scope, and new deliverables, evolved over the course of scoping the study and preparing the RFP. The earlier work in scoping and carrying out this study has produced a more comprehensive look at the near-to-intermediate-term future of NSPI’s system than did the 2009 IRP Update. That update did not intend to address day-to-day generation dispatch issues. NSPI Staff members acknowledged to members of the Audit Team that the Base Plan in that Update has been overtaken by changes in Federal policies on emissions, and in Provincial policies on access to biomass. Preparation of a new IRP is required in the near term.



NSPI should report to the NSUARB after completion of the Wind Integration Study on changes in operating strategies to accompany increased wind penetration. The focus of the evaluations in the Wind Integration Study is the period 2011-2020. The project team found that modeling NSPI’s entire system was required in order to fully understand the impact of increasing levels of intermittent generation.

2. NSPI conducted appropriate and sufficient monthly RFPs for power in 2011. Liberty reviewed all the monthly RFPs. NSPI made purchases only for April and May, but competitions were held for every month after March. NSPI’s RFPs were well constructed and appropriately distributed. We found NSPI’s interactions with bidders positive. The Company evaluated responsive offers. FERM personnel kept the FST properly advised of this activity, and documentation of the competitions was satisfactory.

3. The processes for monthly power imports have improved, but should undergo review after NSPI has responded to its consultant’s recommendations. (Recommendation #1)

NSPI’s processes for soliciting and considering monthly and seasonal power imports were essentially non-existent at the time of the prior FAM Audit. Now there exist policies and proper processes. Repeated monthly solicitations for April through December of 2011 produced only two transactions. Those solicitations and their continuation into 2012 should have established NSPI as an active participant in that market, and should lead to more and better offers in the future. One likely benefit is that NSPI is now not going to the market only when it needs power to replace that lost to outages. It seems likely that, if solicitations are regular, then the terms available for replacement power will be better. The report by NSPI’s consultant to the Company noted that a number of aspects of its recommended power-purchase processes should be reviewed “in a couple of years.” In particular, the consultant cited:

• Assumptions for import capacity study, including forward-price curve, and heat rate for modeling gas-fired power generation, for example

• Target mix of short-term and monthly purchases • Target product; e.g., on-peak versus all hours, firm versus non-firm • Hedging strategy; i.e., hedging imports with forward purchases of power rather than

natural gas. The consultant recommended that this review take place no later than the spring of 2013. The consultant also noted the difficulties that NSPI faces in obtaining forward pricing for possible term imports. Much forward-price information is available for ISO-NE, but the consultant notes that transmission charges and fees usually put these prices well above NSPI’s costs to generate. Moreover, the consultant noted that NSPI’s principal suppliers for term purchases have cost structures that are much different from most ISO-NE participants. Thus, they can, and often do, price their offers of power much differently than what is reported for ISO-NE. As a consequence, ICFI recommends that NSPI conduct additional price discovery.



Liberty supports these recommendations. NSPI should report to the NSUARB on the results of the recommended reviews.

4. NSPI continues to need to prepare written power export procedures. (Recommendation #2)

One recommendation from the preceding FAM Audit was that NSPI develop specific written procedures for decisions to make power exports, as well as power purchases. Specific, written procedures for processes involving the exercise of discretion form part of a proper controls environment. NSPI agreed with this recommendation, and made it part of its consultant’s review of Company practices. The consultant reported that it had reviewed such procedures, but made no comment on them. NSPI advised Liberty that procedures have been prepared, but have not been finalized because of low priority, given that its export levels remain small.

5. The December 2010 import-power solicitation responded appropriately to the circumstances, but NSPI did not conduct it at a propitious time. (Recommendation #3)

NSPI’s RFP for power in December 2010 came prior to its initiation of regular solicitations. It comprised, however, the Company’s normal response to generating unit unavailability during high-load periods. The power contracted through the RFP seemed costly at the time, but turned out to cost less than the later, real-time imports would as December progressed. These later December 2010 purchases, particularly during the last half of the month, appear to show the effects of the “basis blowout” in the Northeast U. S. Gas Market. The solicitation came late in the month and over a U.S. holiday weekend. The regular solicitations that NSPI began later should avoid this problem in the future. NSPI appropriately designated some of its natural gas hedges to the power import, rather than liquidating them when gas requirements were reduced in its forecast updates. The reduced effectiveness of those in offsetting the increase in power prices resulted from the failure to make basis hedges; i.e., the same problem (discussed above) that affected NSPI’s other natural gas hedges for that period. The natural gas hedges should therefore be included in the calculation of excess costs experienced as a result of NSPI’s failure to hedge basis.

6. Transmission constraints in southeast New Brunswick impose a significant constraint on access to attractively-priced power imports. (Recommendation #4)

Reviewing NSPI’s monthly import-power-purchase competitions in 2011 indicates that firm imported power was available on a monthly basis any time that NSPI was willing to buy it at a price linked to a Day-Ahead NEPOOL price. When transmission across New Brunswick is available, however, firm power becomes available at a fixed price considerably below the NEPOOL forward price. NSPI started regular power solicitations in 2011. These solicitations discovered that transmission was available only in April and May. ''''''''''''' '''''''''''''' ''''''''''''''''''''''' ''''''''''''''''' '''''''' '''' '''''''' '''''''''''''''''''' ''''''''' ''''''' '''' ''''''' '''''''''''''''''''''' '''''' '''''''''''' ''''''''''''' '''''''''' '''''''' '''''''''''''' '''''''''''''' '''' ''''''''''''' '''''''''''''''' '''''''' '''''''''''''''''''' ''''''''



'''''''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''''' '''''''''''''''' '''''''''''''''' ''''' ''''''''''''' ''''' '''''''''''''''''' ''''''''''''''' ''''''''''''' '''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''' ''''''''''''' ''''' '''''''''''' '''''''''''''''''''''''''' '''''''''''' '''''' ''''''''''''''''''''''''''''' '''' ''''''' ''''''''''''''''''''''''' '''''''''''' ''''' ''''''''''''''''''''' '''''''''''' '''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''' '''''''' ''''''''''''''''''''''''''''' ''''' '''''' ''''''''''' ''''''''''''' '''' '''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' '''''''''''''''' '''''''''''' '''''''''''''''''' '''''''' '''''''''' '''''''''''''''''''''''''' '''''''''' ''''''''''' '''''''''''''''''''''' ''''''''' ''''''''''''''' ''' '''''''''' '''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''' '''''''''''''''''''' ''''' '''''''''''''''''' ''''''''' ''''''''''' '''''''' ''''''' '''''' '''''''''''''' '''''''''''''''''''''' ''''' ''''' '''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''''' ''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''' '''''''''''''''''' ''''' '''''''''''''''' ''''''''' ''''''''''' ''''''''''''''''''''''' ''''''''' '''''' '''''''''''''''''''''''' ''''''''''''' '''' '''''''' ''''''''''' ''''' ''''''' ''''''''''''''''''''' ''''''''''''''''' '''''' ''''' '''''''''''''''''''' ''''''''''''' '''' '''''''''''''''' ''''''''''''''''''' ''''' ''''''''''''''''''' ''''''' ''''''''''''''''''''''''''' ''''''''''' ''''''''''''' '''' ''''''''''''''' '''''''''' '''' ''' ''''' ''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''''''''' '''''''''''''''''''' '''''' ''' '''''''''''''''''' ''''''''''''' '''''''' ''' '''''''''''''''''''' '''''''''''''' '''''' '''''''''''''''''' ''''' ''''''''''' '''''''''''''''''''''' '''' ''' ''''''''''' ''''''''''''' '''' '''''''' ''''''' '''''''''''''' '''''''''''''''''''' ''''''''''''''''''''' '''' ''''''' '''''''''''''''''''''''' ''''''''''' ''''''''''''''''''' ''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''' '''''' '''''''''''' '''''''''' ''''''' '''''''''''' ''''''''' '''''''''' ''''''''''''' '''''''''''''' ''''''''''''''''' '''''''''''''''''''''''' '' '''''''''' ''''''''''''''''''' ''''' '''''''''''''''''''' ''''''''''''' '''''''''''''''''''''' ''''''''''''' ''''''' '''''''''''' ''''''''' ''''' '''''''''''''''''''''''' '''''''''''''' ''''' ''''''''' '''''''''''''''''''' '''''''''''''' ''''''' '''''''''''''''''''''' '''''''''''''' '''''''' ''''''' ''''''''''''''' ''''' ''''''''''''''' '''''''''''''''''''' '''''''''''' ''''''''''''''' ''''''' '''''''''''''''''''''''''' '''''''''''' ''''''''''''' '''''''''' ''''''''' ''''''' ''''''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''' '''''''''''''''' ''''''''' '''''''' '''''''''' '''''''''''''' '''''''''''''''' ''''''''''' '''''''''''''''''''''''' ''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''''''''' ''' '''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' ''''''''' '' ''''''''''''''''''''' '''''''''' As reported in our Evidence, NSPI FERM personnel affirmed both the role of transmission in the availability of this power, and the seasonality of transmission availability. '''''''''''''''''''' '''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''''''' ''''''' ''''''''''' ''''''''' ''''''''' ''''' ''''''''' '''''''''''''''' ''''''' ''''''''' ''''''''''''' '''''''''''''' '''''''''''' ''''''''''''''''' '''' '''''' '''''''''''' ''''''''''''''''''' ''''''' ''''''''''''' ''''' ''''' ''''''''''''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''' ''''''''''''''''' ''''''''' '''''''''''' ''''''''''''''''' '''''' '''''''''''''''''''''''''' ''''' '''''' ''''''''''''' '''' ''''''''''''''''' '''''''' '''''''''''''''''''''''

7. NSPI’s response regarding imports of more than one month but less than two years was not sufficient. (Recommendation #5)

Liberty understands that New Brunswick has recently imposed new restrictions on firm transmission, and that “transacting on shorter terms (seasonally, monthly or shorter) allows for greater flexibility to account for changes in the generation pattern.” If transmission in both New Brunswick and Nova Scotia has to be improved to accommodate renewable generation, or for some other reason, it seems appropriate to ask whether power imports should be allowed to displace NSPI generation for more than a few hours at a time. ''''''' '''''''''''''''''' ''''' '''''''''' ''''''''''' ''''''''''' '''''''''''''''''''''''''''''' ''''' ''''''''''''''''''''' '''''''''''''' ''''''''''''''''''' '''''''''''' ''''''''''''''' ''''''''''''''''''' ''''' ''' '''''''' ''''''''''''''''''''''''''''''' ''''''''''''' ''''''''' '''''''' ''''''''''''''''''' '''''''''''''' '''' '''' '''''''''''''''''''' ''''' ''''''''''''''''' '''''''''''' '''''''''' ''''' '''''''''''' ''''''''''''''''' ''''''' '''''''''''' '''''''''' ''''''''''''''''''''''''''''''''' ''' '''' ''''''''' '''''''' ''''''''''''''' ''''' '''''''''''' ''''' '''''''''''''' ''''''''''' '''''''''' ''''' '''''''''''''''''''''''''''''' Liberty believes that additional information about the possibility of longer-term imports is important for: (a) evaluating possible investments in transmission, and (b) evaluating the potential retirement of some of NSPI’s generating units as part of its emissions compliance plans.

8. NSPI’s method for estimating power exports for the Fuels Budget no longer remains appropriate. (Recommendation #6)

The Forecasting Appendix to the FAM Plan of Administration describes NSPI’s current method for forecasting power exports for the Fuels Budget:



The volume of export power forecast to be sold in the year will be assumed as 50 percent of the unused on peak capacity of Tufts Cove Units 2 and 3 as calculated by the initial Strategist run.

Actual 2011 exports produced 5.7 percent of the quantity forecast in this way. The 2010 actual was 2.8 percent of Budget. That this method has considerably over-forecast exports does not have a major impact. Forecasted exports represented only 1.7 percent of Total System Requirements in 2010 and 1.3 percent in 2011. Continuing to over-forecast them by such a large margin is not helpful, however, as it inflates estimated fuel requirements, even if only slightly. We asked NSPI FERM personnel whether there might be a better way to forecast power exports. Their response was that, until coal prices dropped below natural gas prices sufficiently to overcome transmission and other fees into the New England Power Market, power exports are likely to be close to zero. We agree, and we recommend that the method for forecasting power exports be changed accordingly.

D. Recommendations

1. Review monthly power import processes in the spring of 2013, and report to the NSUARB on the results of the review. (Conclusion #3)

As noted in the conclusion on this point, the Company’s consultant on power-import processes (ICFI) recommends that a number of aspects of those processes be reviewed “in a couple of years.” Liberty supports this recommendation, and suggests that it take place in the spring of 2013.

The nature of the review is largely specified in ICFI’s report to NSPI on this subject. The element that Liberty would add is reporting on NSPI’s efforts at price discovery for power imports. ICFI discusses the considerable difficulties with use of ISO-NE price data as an indicator of import-power prices, and recommends that NSPI conduct additional price discovery.

Liberty also recommends that the results of NSPI’s review be shared with the NSUARB. That sharing should take the form of a report to the NSUARB on the results of the review once it is complete, presumably in the second quarter of 2013.

2. Prepare written power export procedures. (Conclusion #4) Liberty continues to believe that specific written procedures for all fuels processes comprise an important part of a proper controls environment. NSPI’s consultant on power-import processes reported that it had reviewed power export procedures, but NSPI has yet to finalize any. NSPI should expeditiously complete the procedures for addition to the Fuel Manual, immediately.

3. Include the natural gas hedges for December 2010 power imports in the calculation of excess costs resulting from the failure to hedge basis. (Conclusion #5)



Chapter V of this report, addressing Fuel Oil and Natural Gas Contracting, contained a recommendation that NSPI’s recovery of certain gas costs be deferred, pending an assessment of the basis hedges that should have been in place at that time. The natural gas hedges re-designated to the December 2010 power import should be included in that assessment.

4. Six months after completion of the Wind Integration Study, report to the NSUARB on the transmission constraints in New Brunswick and on the costs and benefits of addressing them to promote enhanced power import capability. (Conclusion #6)

NSPI produces its 10 Year System Outlook annually. Part of that report, the most recent of which was filed in March of this year, addresses NSPI’s transmission system. NSPI has also conducted feasibility studies for renewable energy projects under consideration by Nova Scotia’s Renewable Energy Administrator. Many of those studies recommended upgrades of NSPI’s transmission and distribution network. From 2010 to 2012, NSPI also participated in the Atlantic Energy Gateway project, which developed resource development scenarios for the region. The studies reviewed for that work highlighted inside-New Brunswick transmission congestion issues that limit transmission into Nova Scotia. NSPI’s generation and fuel-requirements forecasting processes have not previously modeled its own transmission system. A model of NSPI’s transmission system has been included in the system model being used in the Wind Integration Study (WIS), however. NSPI expects that study to identify NSPI system congestion issues associated with additional renewable generation to meet the Province’s Renewable Electricity Standard (RES) regulations. The mitigation analysis being conducted as part of that study will provide recommendations to address those congestion issues. NSPI expects that the WIS will also help NSPI to understand the extent to which transmission congestion issues outside of NSPI’s service territory warrant examination. Liberty understands that renewable energy is being developed in New Brunswick, as well as in Nova Scotia. It may well be that power transmission issues associated with renewable energy development are being studied there, as well. NSPI has reported that preliminary estimates of required transmission reinforcements were prepared for the Maritimes Area Transmission Planning Committee in late 2011. Expansion of the Nova Scotia-New Brunswick Interconnect has also been identified as a component of the Muskrat Falls Project. Additional capacity on that Interconnect will be required to accommodate the export component of that Project. How that Project would affect power flows should be a focus of further analysis. Liberty recommends that, six months after the completion of the Wind Integration Study, NSPI assemble relevant information into a report to the NSUARB on options for resolution of the key transmission issues that limit power imports into Nova Scotia. The report should incorporate considerations of improving the network’s ability to deal with the intermittent nature of renewable generation, both in Nova Scotia and in New Brunswick, and accommodating the arrival of power from Muskrat Falls. The report should address options that NSPI can take on its own, those that require action on the part of New Brunswick interests, and rough estimates of the costs of each option.



The report should also address options for increasing power imports into Nova Scotia. Liberty expects that there will be “break points” in the costs of options for increasing power imports. The recommended report should address and explain them. Explanations should address network configuration and development issues in New Brunswick, as well as in Nova Scotia.

5. Inquire about power-supplier interest in year-round sales to NSPI, and report to the NSUARB. (Conclusion #7)

NSPI should make serious inquiries into the possibility of longer-term power imports as part of its studies of emission compliance strategies. We understand that transmission issues will need to be addressed as well, in order to assess the potential for greater reliance on imported power. Resolving those issues would have a cost. Liberty believes, however, that analysis of on-system resource investments is not complete without evaluation of potential term power-import options. Liberty recommends that NSPI conduct an initial survey of power suppliers, to gauge their interest in longer-term arrangements for supply to NSPI. Liberty also recommends that the Company report to the NSUARB on the results of this survey no later than three months after NSUARB acceptance of this recommendation.

6. Reduce forecast power exports to zero. (Conclusion #8) NSPI FERM Staff suggest that, until coal prices are sufficiently below natural gas prices to overcome transmission and other fees required to get power from Nova Scotia to New England, NSPI’s power exports will be almost nothing. Liberty recommends that the Forecasting Appendix to the FAM Plan of Administration be changed to reflect this assessment.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) XI. FAM Accounting

July 9, 2012 Page XI-1 The Liberty Consulting Group

XI. FAM Accounting

A. Background

1. FAM Description A NSUARB 2009 rate decision approved the implementation of NSPI’s Fuel Adjustment Mechanism (“FAM”) effective on January 1, 2009. The FAM provides for an annual adjustment in customer rates to recover fuel and purchased power costs on a more current basis, in order to minimize the effects of volatile fuel and energy costs. The FAM reconciles (with a modest incentive provision) the differences between actual fuel and energy costs and base fuel and energy costs. The initial Base Cost of Fuel was set at 4.561¢/kWh for 2009 and 2010; it was reset in 2011 at 4.609 ¢/kWh, based upon $537.8 million of net fuel costs. The initial FAM adjustor effective on January 1, 2009 was set at zero, with Board approval. It was reset effective January 1, 2010 and 2011 at ($0.198) ¢/kWh and $0.704 ¢/kWh, respectively. Two deferral accounts drive annual changes in the costs recovered from customers through the FAM:

• AA (the Actual Adjustment): tracks the difference in current fuel and energy costs from those reflected in the base cost of fuel or actual adjustment

• BA (the Balancing Adjustment): compares costs actually recovered through AA to those intended to be recovered.

The difference between current costs and recoveries accrues interest at a rate equal to NSPI’s Allowance for Funds Used During Construction (“AFUDC”). That interest forms part of the reconciliation of actual and base costs. The FAM’s AA and BA features for each rate class provide for refunds to customers of overcollections and for recovery by NSPI of undercollections. The NSUARB approved the first AA FAM element effective January 1, 2010. The adjustment calculation used actual revenue and cost data for the first 10 months of 2009 and estimates for the final two. The NSUARB approved an AA charge in the amount of $0.198 ¢/kWh. The BA factor did not yet apply, because there had yet been no AA recoveries. For 2011, the NSUARB allowed an AA charge of $0.592 ¢/kWh and a BA charge of $0.112 ¢/kWh. The FAM’s incentive provision, when it operates, provides that only 90 percent of variances of up to $50 million (plus or minus) flow through to customers. NSPI therefore absorbs 10 percent of any increases and it retains 10 percent of any savings, up to a maximum of $5 million. The Board’s approval of the FAM provided for a Plan of Administration (“POA”), which outlines the application and operation of the FAM. The POA provides details and directions for fuel and energy costs allowable for recovery through the FAM. The POA provides references to the various financial system general ledger accounts where NSPI records applicable costs for financial reporting purposes. The POA also sets forth monthly and quarterly reporting filing requirements that serve to track FAM activity for the NSUARB and stakeholders. The POA describes the AA and the BA factors, and the hearing process for review and approval of FAM rate adjustments. The FAM’s operation and calculations are subject to periodic audit to assure



completeness and accuracy, and to assure that fuel and purchased power costs have been incurred reasonably and prudently. A principal goal of the combined use of FAM and base rate components is to assure that customers pay no more or less (subject to the incentive provision) than the actual cost of fuel and energy prudently and reasonably incurred. The scope of Liberty’s FAM accounting review for 2010 and 2011 included:

• FAM accounting policy and procedures • Actual fuel and purchase power costs recorded within the general ledger accounts, as

provided for under the approved POA • Difference between actual fuel and purchase power costs and those recovered under base

rates • Interest on differences • The resulting, AA deferred over/under collection balance associated with 2010 and 2011

costs to be refunded or collected effective January 1, 2011 and 2012, respectively • The resulting, BA deferred over/under collection balance associated with tracking

January 1, 2011 AA factor effective January 1, 2011 • Compare and contrast results in 2010-2011 audit period to that in 2009 audit period • Other relevant accounting issues that may affect the FAM.

10. FAM Accounting - Fuel and Purchased Power Cost Liberty reviewed NSPI’s financial accounting process, and examined detailed financial accounting records that support the actual cost of fuel and purchased power claimed. Liberty conducted an on-site review at the offices of NSPI to examine documents and supporting work papers, and to discuss processes, procedures, systems, documentation, and FAM reporting with various NSPI representatives. Liberty sampled a number of NSPI’s accounting entries from January 2010 through December 2011 reporting, and performed test procedures on December 2010 accounting documents. We also reviewed organization charts, charts of accounts, cost-center and project activity codes, general policies and procedures related to fuel and purchased power procurement, fuel inventory records, energy marketing documents, and supporting accounting information pertaining to the various FAM fuel and purchased power cost components. Liberty’s review also addressed accounting issues identified in prior reviews (e.g., Mark-To-Market, or “MTM”) accounting for solid and liquid fuel transactions and increased cost of solid fuel handling). Liberty’s examination of these issues in this audit focused on the appropriate level and timing of the inclusion of such cost and impacts on the interest or carrying cost for over/under collections. Liberty also examined whether NSPI maintains its FAM accounting and reporting information in a manner sufficient to facilitate the level of verification and auditing that is customary in the administration of clauses such as NSPI uses and their oversight by regulators.

B. Findings

1. Accounting Policies and Procedures Liberty interviewed NSPI’s Senior Manager Fuels Planning and Performance and other individuals who maintain the necessary fuel and purchase power accounting records and have



oversight or assist in the preparation of the monthly/quarterly and annual FAM reporting financial statements and supporting documents. Liberty also interviewed the Senior Manager, Fuels Strategy and Performance to gain additional insight into coal handling and inventory strategy that might affect FAM-related costs. Liberty also examined the procedures that guide these activities. The POA serves as the principal governing document, providing the policies and procedures related to the FAM calculation and allowable fuel costs to be included. NSPI also employs other accounting policies and procures related to fuel and purchase power costs. They provide the administrative and accounting procedures necessary to ensure that costs have been reasonably and accurately reported. Consistent with the findings of the preceding FAM Audit, Liberty found current accounting personnel to be knowledgeable, helpful, and open about the monthly/quarterly and annual FAM accounting reporting process, and familiar with the detailed, supporting work papers. NSPI continues to maintain a formal accounting organization flow chart, and operates under a clear chain of reporting in organizations responsible for FAM-related accounting activities. These organizations include the Controller, Fuels Planning & Performance, and Fuel Accounting & Reporting. NSPI made organizational changes in a number of departments during the Audit Period; however, the changes to accounting were minor in nature and most of the major participants remained the same as that in 2009. NSPI continues to maintain a formal POA, which contains the necessary supporting procedural accounting and reporting checklists. NSPI also maintains appropriate accounting policies and procedures, which address accounting for fuel and purchased power expense, including inventory records. Moderate changes to the POA have been made, and approved by the NSUARB. The systems and tools that NSPI uses for fuel and energy accounting and reporting include an appropriate overall accounting system, an appropriate chart of accounts having numbers and definitions sufficient to define adequately the accounts, activities, cost centers, and project codes necessary for FAM operation and calculations. NSPI uses an effective Oracle Accounting System to maintain its general ledger. Fuelworx operates as a sub ledger for fuel inventories and its interfaces with Oracle are effective. NSPI used MS Excel™ worksheets to perform variance reporting in key areas of sales information, foreign exchange, and other related fuel and purchased power activity. Liberty observed that NSPI maintained the same detailed monthly analytical data in support of FAM costs during the current Audit Period as it had in 2009. Test work validated the existence of documented FAM accrual and adjusting entries and continued reliance upon same. NSPI prepares reports under process checklists that it keeps current and to which its personnel adhere. Liberty also found that accounting systems provide the flexibility not just to record, but to analyze costs.

11. FAM Cost Element Issues Liberty addressed with NSPI a number of issues in the context of the preceding FAM Audit and the process for setting the FAM adjustor amounts. Mark-to-Market (“MTM”) accounting for hedges comprised a significant issue in the 2009 FAM cost and 2010 FAM adjustor calculations. NSPI agreed to make necessary changes to its accounting policy and to reflect MTM transactions in the FAM calculation when the underlying instruments settle. The change also required the



recalculation of interest charges in 2010 for the reversal of such prior transactions. Liberty’s review of FAM accounting and reporting data confirmed NSPI complied with this agreement. When the FAM was first established, base rates included an amount of $2.2 million for Solid Fuel Handling. NSPI agreed to exclude this amount when calculating FAM over/under collections until the conclusion of its next base rate case proceeding. Liberty confirmed that NSPI properly addressed this cost for FAM purposes. After NSUARB approval in December 2010 NSPI began including in the FAM the recovery of capital costs for the Point Tupper Wind project, understanding that said recovery would cease upon inclusion of the project in base rates following the next base rate proceeding. NSPI included in FAM recovery costs $3.2 million of these capital costs from December 2010 through December 2011. NSPI did eliminate these costs in 2012, following their inclusion in base rates effective in January 2012.

12. Verification and Testing of FAM Accounting Policies and Procedures Liberty tested and verified NSPI’s FAM accounting policies and procedures that underlie its fuel and purchase power costs claimed for 2010 and 2011. Liberty obtained financial information through data requests, gained access to other supporting data during on-site review and inspection. As part of the on-site process, Liberty met frequently with responsible NSPI personnel to gain a more in-depth understanding of information provided, and to request additional documents supporting claimed fuel and purchase power costs. Liberty’s testing focused primarily on the month of December 2010, but Liberty conducted additional spot testing for some activities in various months through the January 2010 and December 2011 Audit Period. Liberty pursued more detailed review and analysis for specific FAM cost elements, including some costs from January and February 2012 to verify transfer of certain costs from the FAM to base rates. Liberty found that NSPI adhered to accounting processes called for by policies and procedures. NSPI maintained vendor master files, and set and followed organization and authority approval levels for fuel and purchased power procurement. Data from purchase requisitions, purchase orders, and contracts effectively flowed through Fuelworx and Oracle as required, including contract change authorizations. Station-by-station receipts of goods and tracking of deliveries existed and NSPI prepared analytical reports on a station-by-station basis to support review and reconciliation. The plants have various feeders, meters, and measurement systems to determine the quantity of fuel consumed. Policy and procedures exist to track inventory consumption and to make inventory adjustments. Measurements taken by feeders/meters as coal and oil are consumed get automatically fed into the Process Information (“PI”) system. PI system data feeds into Fuelworx daily. Each plant enters the fuel blend ratio into Fuelworx, and the system calculates consumption quantities. NSPI bills BTU penalty adjustments to suppliers, or deducts a corresponding amount from supplier invoices. Monitoring includes cross checks, and provides for reconciliations and any necessary adjustments.



Liberty’s review of the Chart of Accounts and associated definitions included account designation, activity, cost center, and project codes related to FAM fuel and purchase power costs. Liberty obtained detailed general ledger activity within the Oracle Accounting System for each FAM account listed in the POA and for other accounts affecting the FAM. Liberty reviewed December 2010 activity in detail, tracing activity to the sub ledger, original adjusting and accrual entries, and supporting work papers. This work disclosed no concerns. Liberty reviewed the interfaces between Fuelworx (the sub ledger for fuel inventories) and Oracle. We traced, cross checked, and reconciled information on a sample basis. Liberty’s work included a review of variance reporting that supported costs entries. This work disclosed no concerns. Liberty reviewed in some detail the MS Excel worksheets used for variance reporting in the categories of sales information, foreign exchange, and other related fuel and purchase power activity. Our audit procedures included occasional requests for supporting data, followed by discussion with NSPI to gain a better understanding of approach and reporting practices. Liberty tracked, for example, gas sales recorded from supporting MS Excel schedules. We verified the accuracy of the charges we tested and accompanying adjusting and accrual entries. The supporting procedural accounting and reporting checklists were well maintained and followed, with a few minor exceptions. Our review of December 2010, monthly, quarterly, and annual FAM control review sheets found them properly maintained. Our review of the December 2011 information, however, showed that it failed to include the quarterly and annual FAM control review sheets. NSPI finally provided the quarterly control sheet, which the Company said it maintained elsewhere, and the annual control sheet as we were drafting this report. We reviewed all December 2010 other control sheets related to fuel accounting process and of accounting accrual and adjustment entry checklists. We determined that NSPI completed the necessary and appropriate steps December 2010. We tested a sample of other months from the Audit Period, finding the steps similarly complete. The monthly Fuel & Purchased Power Accounting Binder contains a checklist for each FAM adjusting and accrual entry, and includes supporting work papers. For example, adjusting and accrual entries provide support for such major FAM cost components as booked natural gas (“NG”) consumption, '''''''''''' ''''''''''''''''''''''' ''''''''''''''' ''''''''''''' ''''''''''' ''''''''''''' of related hedges, storage gas losses, heavy fuel oil (HFO) burn and overhead, fuel handling reallocation, Mark-to-Market (“MTM”) adjustments, Foreign Exchange (“FX”) adjustments, quarterly fuel financial instruments, and power purchases and sales. Liberty reviewed the entries and their supporting work papers, and traced the entries to the appropriate general ledger accounts. Liberty found no material gaps or errors. Liberty undertook additional testing to confirm transaction details and examine supporting information. For example, Liberty reviewed and confirmed Bunker Fuel MTM transactions and general ledger activity in January 2010 through April 2010 to verify proper credits and cash receipts of transactions.



Liberty also inspected transactions related to legal proceedings that might affect FAM costs. Liberty’s requested a narrative discussion explaining any legal proceedings with the potential for affecting Audit Period FAM costs. NSPI’s response failed to disclose a settlement agreement (booked in December 2010) that increased purchase power costs by $518,707. Liberty discovered the settlement agreement as part of the detailed review of information for our primary test month (December 2010). This settlement with an IPP provider covered costs for 2008 through 2010. Liberty’s review of the December 2010 accounting entry showed that it appropriately excluded 2008 (i.e., pre FAM) costs of $234,260, leaving the proper balance for treatment through the FAM. Liberty also requested and received additional information to support the rationale for the settlement. The accounting and other supporting information did validate the FAM costs, but NSPI’s failure to provide a full response to the data request does point to the need for improved diligence in promoting the transparency of FAM costs and underlying support. NSPI’s accounting system, including supporting work papers, provided sufficient and reasonable flexibility in analyzing costs associated with the various FAM cost elements, with the exception addressed below and concerning cost for dead storage. The Company’s work papers and supporting documents supported the ability to query and extract information successfully from the accounting system, and to permit the determination of actual cost impacts, if any, on claimed fuel and purchase power costs.

13. Dead Storage Fuel Handling Costs Liberty’s review did disclose an area of concern regarding fuel handling costs with respect to the differences between different sets of numbers. Liberty attempted to quantify the cost of coal handling related to dead storage and its overall impact on 2010 and 2011 FAM costs. NSPI initially provided 2010 costs $482,840 ($188,072 at Bear Head and $294,768 at Lingan). NSPI reported 2011 costs of $531,873 ($84,632 at Bear Head and $447,241 at Lingan). These figures produce a total of $1,014,713 for the two years and two locations combined. Liberty interviewed NSPI accounting and fuels personnel to discuss the details underlying these amounts. Our review of accounting documents (project-code based) tracking Bear Head fuel handling costs revealed that the numbers NSPI had provided understated Bear Head costs by $311,013 in 2010 and $880 in 2011. Reviewing Lingan costs proved more complicated, because there exist no project codes for recording costs at the required level of detail. Liberty and NSPI staff from Fuels Strategy & Performance and Fuels Accounting & Financial Reporting jointly reviewed other supporting information in an attempt to generate specific values for Lingan costs for dead storage. This joint process produced agreement that the relevant costs for Lingan could be reasonably approximated, but perhaps slightly overstated at about $1.3 million for 2010 and 2011 combined. Liberty believes the consensus was that such costs approximated $1.3 million for the two-year Audit Period. Reviewing the information available also confirmed that handling costs have been increasing (e.g., transportation fees) and that dead storage coal inventory levels continue at high levels. Liberty discussed with Fuels Accounting the desirability of designating a project code for the underlying activity Lingan, in order to track costs better, particularly given NSPI’s special request to include them in FAM recovery. Liberty also discussed with Fuels Strategy the lack of



formal cost benefit analysis during the Audit Period addressing long term dead storage and its cost impacts. Chapter VI of this report discusses NSPI’s contract with an outside firm to study solid fuel inventory levels in order to determine the optimum levels of inventory, considering NSPI’s unusual situation related to both location and to the complexity of solid fuel mix. NSPI anticipates completion of this study later in 2012.

14. Energy Transaction Pricing and Volume Verification a. Front Office Role

Gas marketers enter gas purchase and sale terms into the Nucleus system, which operates as NSPI’s master system for recording its gas and power purchase and sale transactions. Nucleus serves the same role for financial instruments bought and sold to hedge the prices of the gas and power transactions. The Gas Marketer prints the Daily Trading Position report at the end of each day. This report summarizes all physical deals for that day. This report is forwarded to the Corporate Accountant in the Fuels Planning & Performance unit, which serves as the Back Office for NSPI’s gas and power transactions. NSPI’s gas day ends at 11:00 a.m. Atlantic time. At approximately 1:30 p.m. Atlantic Time, Spectra’s Link System is finalized. Spectra Energy Corporation owns almost 80 percent of the Maritimes & Northeast Pipeline system, both U. S. and Canadian segments. A subsidiary operates M&NP. Spectra owns and operates a number of gas pipeline systems in the U. S. and Canada. The Link System serves as Spectra’s on-line system for use by all for access to nomination, shipment and delivery information on all Spectra pipelines. The results of the 1:30 p.m. finalization process show actual NSPI consumption of fuel, plus any cuts or curtailments in gas volumes shipped to NSPI’s power plants or its resale customers. In advance of the month-end process, the Gas Marketer enters NSPI’s Nucleus system to schedules gas, updating any transactions affected by cuts, curtailment, or any other event affecting gas volumes, based on the Link System data. Either the 24-Hour Desk or the Day-Ahead Desk Power makes purchases and sales. The traders enter material terms and identifying information into Nucleus when a deal has been reached with a counter-party, or at the end of the Energy Marketer’s shift. Nucleus generates a confirmation that is printed, signed, and faxed to each counter-party by the Energy Marketer. At the end of each shift, the Energy Marketer prints a deal report from Nucleus and signs off on its accuracy.

b. Middle Office Role At approximately 8:00 p.m. to 9:00 p.m. Atlantic Time, the Back Office Risk Group receives pricing data from Platts, a commercially-available price-reporting service. Platts reports prices for “index points; i.e., locations where substantial quantities of gas are bought and sold. The Risk Group manually enters the Platts index-point price data for the points relevant to NSPI’s gas transactions (e.g., Dracut, Tetco M3) as part of daily risk-management procedures. Power-price indexes get down-loaded automatically into Nucleus. After entry into Nucleus, “reprocessing” of the data assigns the relevant index price to each deal entered by the Front Office referencing an index price.



c. Back Office Role Confirmation Process: At the end of each day, the Corporate Accountant faxes deal confirmations from Nucleus to each counter-party for all gas sales. Counter-parties have 48 hours to respond with any discrepancies; otherwise, confirmations are considered to be accurate and the deal can then proceed through the settlement process. Confirmations received from counter-parties undergo reconciliation with data that Front Office personnel have entered into the Nucleus system. A signed copy of each purchased-power confirmation is filed by the Financial Analyst, and a copy of each agreed-upon confirmation is filed in the Back Office. The Financial Analyst from Fuels Planning & Performance follows up with the Power Marketer if any discrepancy arises between NSPI’s Nucleus-generated invoice and what is received from transaction partners. The Financial Analyst compares the deal report against the Daily Interchange Log Sheet from the Control Centre to verify the accuracy of the data that has been entered into Nucleus. The Financial Analyst actualizes power volumes by tying information regarding physical flows of power with the volume information the Power Marketers have entered into Nucleus as part of the deal-entry process. The Financial Analyst checks all power-volume information received. The discovery of any differences (due to power being cut, transmission restricted, or other events) leads to a change to the Nucleus volume entry to reflect actual flow volumes. This information is forwarded to the Back Office Corporate Accountant for use in the settlement process. Settlement Process: The purchased-power settlement process (paying for purchased power or receiving payment for power sold) begins on the 20th of the month following the transaction. The gas settlement process occurs on the 25th of the next month. The settlement process involves:

• Generating and distributing invoices and purchase statements • Identify and resolving discrepancies in payment amounts (either to or from counter-

parties) • Receipt of payments.

Nucleus generates invoices and purchase statements that get faxed or e-mailed to counter-parties, while NSPI is contemporaneously receiving invoices and purchase statements from its counter-parties. The Corporate Accountant reconciles NSPI’s internally-produced statements with those received from counter-parties to ensure that NSPI is set to pay and be paid correct amounts based on verified volumes and prices. ''''''''''' ''''''''' ''''''''''' '''''''''''' ''''''''''''''''''''''''''''''''''''': Upon receipt of the invoice '''''''''''' ''''''''''''', the Corporate Accountant uses two spreadsheets to verify the calculation of the amount owed to ''''''''''' '''''' the previous month’s deliveries. This results in the preparation of a ''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''''''' report, which confirms ''''''''' ''''''''''''' '''' invoicing NSPI based on the proper delivered-volume information and the correctly-calculated price, and ultimately ''''''''' '''''''''''' '''' invoicing NSPI the correct amount.



When completed, this report is forwarded to the Manager, Fuels Accounting & Financial Reporting and the Director, Fuels, Energy & Risk Management, each of whom provides signature approval for the process. '''''''''''' ''''''''''' does not present NSPI with a detailed invoice ''''' '''''''''''' does; however, it sends a one-page fax detailing the amount that NSPI owes '''''''''' ''''''''''. NSPI’s Corporate Accountant also performs a replication of this number, using data extracted from the Nucleus system. This replication effort is also signed-off on by the Manager Fuels Accounting & Financial Reporting and the Director, Fuels, Energy & Risk Management.

C. Conclusions

1. NSPI applies suitable accounting resources, systems, tools, and methods to FAM administration.

NSPI’s accounting and reporting organizational structure and staff provide reasonable oversight and direction of accounting for fuel and energy transactions affecting FAM operations. Personnel in the fuel procurement and accounting department exercised reasonable oversight and direction of staff to perform the duties to proper FAM administration.

2. Formal and appropriate review and approval processes exist for FAM recording and reporting and NSPI has followed them.

NSPI continues to maintain a formal FAM in-house review and approval process. The process provides for a stepped level of review by key personnel, who review and comment on the draft monthly/quarterly/annual FAM filings to be submitted to the Board. However, with minor exceptions, the draft reports are maintained, and they include comments and suggested changes along with the formal sign off sheets by key responsible personnel.

3. Necessary and appropriate accounting policies and procedures exist and test work verified their application as intended.

Liberty requested and received copies of NSPI’s general accounting policies and procedures for fuel and purchased power procurement and inventory, as well as energy marketing. Significant accounts include gas and power revenue/purchases/receivables/payables. Liberty’s review and testing of processes found them to be reasonably applied. The accounting policies and procedures related to fuel and purchased power procurement provide the necessary guidance for receipt of goods, invoice processing, and month-end close. These accounting policies have been updated routinely as needed to include addressing the need to comply with NSPI’s Fuel Manual as it relates to annual solid fuel requirements. Liberty’s testing found no exceptions or concerns.

4. Fuel and purchased power accounting (inventory and expense) is generally sufficient, but Lingan fuel storage comprises an exception. (Recommendation #1)

NSPI’s accounting system for solid, liquid fuels (Heavy and Light Fuel Oils), and natural gas generally consists of Fuelworx and Oracle, along with stand-alone Excel spreadsheet analysis where appropriate. Purchase/supply contracts are set up and maintained in the inventory master



file in Fuelworx and data from the PI system described earlier feeds Fuelworx. This system automatically calculates the weighted-average unit cost of inventory used to record consumption. Oracle serves as the general accounting system. Excel spreadsheets process Gas and Power revenue, purchases, receivables, and payables. Nucleus tracks market transactions. Purchased power and grid sales are scheduled for the next day(s) as well as the next hour(s). Deals are executed over a recorded phone line or logged over instant messaging (IM), which is then confirmed by issuing and faxing the confirmation from Nucleus. Accounting transactions are generated from Nucleus and processed through Oracle, the general accounting system. Other entries that have an impact on the cost of fuel included in the FAM, such as MTM and FX rates, are processed through Excel spreadsheet analysis. All of the related fuel and purchased power costs (solid and liquid fuels, gas and purchase power, MTM, and FX, for example) included in the FAM are supported by detailed analysis documents and a review process that includes any accrual and/or adjusting entries (described later). Liberty’s review and testing found them to be consistently and appropriately applied. Fuel and purchased power inventory accounting policies and procedures provide the necessary guidance for maintaining the inventory master file, conducting physical inventory, comparing and adjusting counts, if necessary, and reporting results to the Director, FERM. Liberty’s review and testing found no exceptions or concerns. NSPI can effectively track extraordinary, temporary dead coal storage levels at both Bear Head and Lingan; however, related fuel handling costs included in the FAM could only be effectively quantified at Bear Head. NSPI has set up a designated project code within its accounting system to track what it deems as temporary dead storage and handling costs. These costs have grown as a result of fuel market changes that have produced lower coal burns, and thus additional handling cost for larger than anticipated coal fuel stocks at Bear Head. Dead storage inventory is also effectively tracked at Lingan, however, there is no such project code for related fuel handling costs. It takes considerable effort now to identify such costs with reasonable accuracy. Introduction of a project code for assigning charges would support better identification and review of the costs. Liberty found agreement with Fuel Accounting with this conclusion, and believes there is also agreement that such a project code for Lingan dead coal storage handling cost should implemented.

5. NSPI maintains and adheres to appropriate process checklists when preparing FAM-related reports.

NSPI’s uses formal process checklists, which preparers in the various departments follow and check off as they perform the necessary analysis (e.g., comparing the various fuel and purchased power reports for each station to information from Fuelworx, Nucleus, and Oracle as well as gas and purchased power purchased/sold). NSPI maintains two supporting binders that underlie the preparation of each monthly FAM report. Liberty found the checklist process and utilization to be reasonable. With minor exceptions, the draft reports are maintained, and they include comments and suggested changes along with the formal sign off sheets by key responsible personnel.



6. Detailed monthly analytical data supports recorded FAM costs. NSPI maintains a binder entitled “Fuel & Purchased Power Month-End” for each monthly FAM filing. This binder contains the checklist of analytical tasks to be performed for each of the generating stations in which fuels are consumed, and their related cost values are analyzed within the various reporting programs. Consumed costs are compared to recorded costs and adjustments where appropriate, if any, are determined and approved. The binder also contains the formal in-house review process described earlier. The actual accrual and/or adjusting entries related to the generating stations are contained in another binder “Fuel & Purchased Power Accounting.” The process was reviewed and tested and found to be reasonably applied, except for only one minor omission related to a small CT generating unit.

7. FAM accrual and adjusting entries are appropriately documented. The accrual and adjusting entries related to all of the relevant fuel and purchased power costs are contained in the “Fuel & Purchased Power Accounting” monthly binder. The binder contains a check-list of all necessary/routine monthly accrual and adjusting entries, for which entries and all supporting data are attached. Liberty reviewed and tested some of the major entries (including copies of various general ledger accounts). Costs reflected in these accounts represent the fuel costs allowed to be recovered through the FAM, as listed in the POA. Liberty’s review of associated entries and supporting documents supported NSPI’s December 2010 monthly, quarterly, and annual FAM report.

8. The accounting system provides suitable flexibility in analyzing costs. Liberty reviewed NSPI’s Chart of Accounts, including information that describes its fourteen digit “Accounting Flexfiled” code system. This five-segment system identifies Company, Account, Activity, Cost Centers, and Project. Liberty requested and received copies of detailed general ledger account activity information for the 2010-2011 Audit Period, and conducted transaction testing on a number of the major cost elements. Our testing included review of the related adjusting entries and supporting data for the month of December 2010. We examined a number of related accounting transactions in multiple months of the Audit Period. This review and examination showed no reason for concern as to consistency of the classification of costs within the appropriate accounts, nor did it disclose any material differences between FAM cost recorded and those reported.

9. NSPI has effectively implemented previously recommended changes with respect to costs related to mark-to-market accounting treatment.

Liberty confirmed NSPI’s implementation and accounting treatment associated with the MTM issues raised in the preceding FAM Audit. Liberty reviewed the accounting process, supporting data, and changes to NSPI’s policy and procedures for fuel-hedge costs. NSPI now recognizes the affected fuel FAM when settled. NSPI has fully responded to the recommendation.

10. Solid Fuel Handling is allowed in FAM, but $2.2 million was provided for in base rates; the associated base rate value is excluded when calculating over/under collections.

The preceding FAM Audit observed that the POA provides for FAM recovery of solid fuel handling costs. NSPI explained that its past and current practice has been to expense such costs (handling/unloading fuel into inventory as well as when removing from inventory to be



consumed). All solid fuel handling cost is tracked by project code. One of the codes applies to normal cost and the second addresses temporary dead storage cost (discussed above). The report from the preceding FAM Audit also explained that NSPI’s then-approved base rates included $2.2 million for solid fuel handling, therefore requiring assurance that it not get recovered again through the FAM. NSPI provides such assurance. The Company includes solid fuel handling as part of its FAM cost of fuel consumed, but then makes two deductions. The first deducts the calculated base cost of fuel value (¢/kWh rate times applicable sales volumes) already in base rates. The second deducts an amount for solid fuel handling (approximately $183,000 or 1/12th of the solid fuel handling cost of $2.2 million included in base rates). The preceding FAM Audit found this process appropriate. We confirmed its application during the current Audit Period. NSPI has now undergone a revision in base rates, as part of its preceding GRA. NSPI has undertaken, for FAM purposes, the steps required to continue the avoidance of double recovery.

11. NSPI properly handled the transition in approved methods for recovering '''''''' ''''''''''' '''''''''' costs from customers.

NSPI began, following NSUARB Board approval in December 2010 to include in the FAM capital costs of the Point Tupper Wind project. Such recovery would cease upon inclusion of such costs in NSPI’s ensuing GRA. NSPI’s included in the FAM '''''''''''''''''''''''''' of the capital costs through December 2011. Further, Liberty’s review of FAM accounting data for January and February 2012 confirmed that NSPI has eliminated such costs from FAM calculations. This removal conforms to the results of NSPI’s preceding GRA under which new rates became effective in January 2012. Board approval in December 2010 NSPI allowed for the recovery of capital cost; i.e., return on (profit) and of (depreciation expense) on the '''''''''''''' '''''''''''''''''' '''''''''''' project in FAM cost which would cease upon inclusion of the project in its next approved GRA rate case proceeding. Liberty confirmed the inclusion of such cost; i.e., '''''''''' ''''''''''''''''' from December 2010 through December 2011 in the FAM costs. Further, Liberty confirmed the elimination of such cost in the FAM beginning in January 2012 since the project was then included in GRA rates which became effective in January 2012.

12. NSPI performs regular and routine verifications of all invoices and purchase statements provided by its counter-parties.

The Front, Middle, and Back Office each play a role in performing invoice verification and replication. For gas purchases and sales, the Front Office enters deals in Nucleus, and ensures that volumes entered into Nucleus match statements received from the Pipeline. The Middle Office is responsible for entering index price information into Nucleus, while the Back Office verifies that both price and volume information in Nucleus (and therefore on NSPI-generated invoices) match any invoices or purchase statements received from counter-parties.



Summary of Transaction Verification Roles

13. NSPI’s transaction verification and reconciliation processes are sound. The transaction-verification and payments processes that NSPI uses for gas and power purchases and sales are well structured and operated efficiently.

D. Recommendations

1. Assign and use a project code for charging Lingan fuel handling costs. (Conclusion #4) NSPI should setup and utilize a project code within its accounting system to track temporary dead storage handling costs at its Lingan storage facility. There is no such project code related to Lingan Fuel handling costs and only after considerable effort in reviewing supporting documents could one discern such cost. An assigned project code provides for a more cost beneficial review process. Liberty discussed the matter with Fuel Accounting and believes there is general agreement that such a project code for Lingan dead coal storage handling cost should be implemented and followed.

Front Office -Gas Marketers and Power Marketers enter transactions into Nucleus at deal inception.

-Updates Nucleus volumes using actual volume data received from Spectra’s LinkSystem.

Middle Office

- On a daily basis, Risk Group receives index pricing information from Platt’s and inputs relevant indices into Nucleus.

Back Office -Corporate Accountant generates invoices for submittal to counter-parties; reconciles invoices with counter-party records.

-Corporate Accountant replicates amounts owed to counter-parties.

Confidential Report to the NSUARB Audit of NSPI’s FAM – P-887(3) XII. NSPI/EEI Gas and Power Transactions

July 9, 2012 Page XII-1 The Liberty Consulting Group

XII. NSPI/EEI Gas and Power Transactions

A. Background NSPI and its affiliate Emera Energy Inc. (“EEI”) both buy and sell natural gas and electric power at wholesale in the Maritime Provinces. The two affiliates thus both compete with each other, and they serve as suppliers to and customers of each other. This chapter provides the results of some broad comparisons between the gas and power transactions of NSPI and EEI. Because they buy from and sell to third parties, as well as from and to each other, it is possible to compare their transactions with each other to those with other, unaffiliated parties. This chapter also presents the results of some “matching-transaction” tests. Performing a matching-transaction analysis requires care to assure comparability. A number of factors can affect the value of power or gas at a particular location. In an effort to control for the variables that can distort results, Liberty’s definition of “matching” transactions requires:

• A common “trade date” for agreeing to the transaction (sale or purchase) • Common flow dates (beginning and end) • Common flow hours (in the case of power purchases and sales) • Common delivery or receipt points.

Liberty divided its work in both power and gas matching transaction analysis into two parts:

• In the NSPI data, compare the price it is paying to or receiving from EEI with those it is paying to or receiving from its other counter-parties in matching transactions

• In the EEI data, compare the price NSPI is paying to or receiving from EEI with what EEI’s other counter-parties are paying or receiving in matching transactions.

B. Findings

1. Gas Transactions

a. NSPI NSPI bought gas under a long-term contract with '''''''''' ''''''''''''''''''' ''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''' ''''''''''' ''''''''''''''''''''''' '''' ''''''''''''' It also bought long-term gas from ''''''''''' '''''''''' '''''''''' '''''''''''''''''''''''''''''' ''''''''' '''''''''''''''''''''''' ''''''''''''''''' '''''''''' ''''''' ''''''''''''' NSPI sold its “excess” gas to counter-parties that it selected through annual competitions. NSPI also entered into purchases and sales that it referred to as “balancing” transactions on a day-to-day basis. Those transactions adjusted the quantity of gas that NSPI had available each day to match the quantity that it needed for power generation. Often those balancing transactions were “intra-day;” i.e., entered into to buy or sell comparatively small amounts of gas after the day’s pipeline flows had been nominated. NSPI also held contracts for firm transportation capacity on the Canadian segment of the Maritimes & Northeast Pipeline system (“M&NP-CA”). The term of these contracts ''''''''''''''' '''''' '''''''''''''''''''' '''''''' '''''''''''. Accordingly, NSPI generally made its monthly purchases ''''' ''''''' '''''''''''''' ''''' '''''''' ''''''' '''''''''''''''''' '''''''''''' '''' ''''''''''''''''''''' ''''''''''''' '''''''''''''''' ''''''''''''' '''''''' '''''''' ''''''''''' '''''' '''''''''''''' '''''''''''''''''' '''''''''''''''' '''''''''''''''' '''''''''''''''''''' '''''''''''''' ''''''''''''''' NSPI delivered the gas that it used for power generation to its Tufts Cove Generating Station. NSPI’s resale transactions generally occurred at ''''''' ''''''''''''''''''''''''''''



''''''''''''''' '''' '''''''''''''''''''''''''' ''''''''''''''''. NSPI’s gas-transportation contracts provided for ''''''''''''''''''''' ''''' '''''' ''''''''''''''''' '''''''''''''''''''' ''''''''''''''' '''''' '''''''' ''''''''''''''''''''''' '''''''''''''''''', however. NSPI thus made delivery under its resale transactions at any of those points. NSPI replaced the ''''''''''''' '''''''''''''''''' and ''''''''''''' '''''''''''''''''''''' '''''''''' ''' ''''''''''''''''''''' ''''' ''''''''''''' '''''''' ''''''''''''''''''''''' Multi-year contracts with '''''''''''' ''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''''''''''''''''' '''''''' '''''''''''''''''' '''''''''''''''''''' ''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''' '''''' ''''''''''''''''''''' which also includes seasonal and monthly purchases. Daily and intra-day transactions continue, because NSPI requires them for matching available quantities to generation needs. NSPI relinquished its '''''''''''''''''''''''' contracts when ''''''''' ''''''''''''''''' ''''' '''''''''''''''''' '''''''' '''''''''''''' ''''''''''''''' ''''' ''''''' '''''''''''''' '''' ''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''' '''' ''''''''''''''''''''''' '''''' ''''''''''''''''''' '''''''''''''''''' ''''''''' '''' '''''''''''' '''''''''''''''''' ''''' '''''''' '''''''''''''''''' '''' ''''''' '''''''''' ''''''''''' ''''''''''''''''''' '''''' ''''''''''''''''''' ''''' ''''''' '''''''''''''''''' ''''' ''''''' '''''''' '''''''''''''''' ''''' '''''''''''''''''' ''''' '''''' '''''''''''''''''''''''' ''''''''''''''''' ''''' '''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''''' ''''''' '''''''''''''''''' ''''' ''''''' ''''''' '''''''''' '''''''''''' ''''''''''''' ''''''''''''' ''''''''''''''''''''' '''''''' ''''''''''''''' ''''' ''''''' ''''''''''''''''''''' '''''''''''''''''''''''''''' ''''' '''''''' '''''''''''''''''' '''' '''' ''''''''' '''''''''' '''' '''''''''''''''' '''''''' ''''''''''''''' ''''''' ''''' ''''''''' '''''''''''''''''''' '''''''''''' '''''' '''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''' '''' '''''''''''' ''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''''' '''''''''' ''''''''''''' ''' '''''''''''' '''''' ''''''''' ''' '''''''''''' '''''''' '''''''''''''''' '''''' ''''''''''''''''''' '''' ''''''''''''''' '''''' ''''''''''''''''' ''''''''' '''''''''''' '''''''''''''''' '''''''''''''' ''''' '''''''''''''''' ''''''' ''''''' '''' ''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''''''''' '''''''''''''' ''''''' ''''' '''''''''''''''''''''' '''''''''''''''' ''''''''''''' '''''''''' ''''' ''''''' ''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''' ''''''''''''' '''''''''''' '''''''''''' '''''' ''''' ''''''''' '''' ''''''''''''''''''''''' ''''''''' ''''''''''' ''''' ''''''' ''''''''''''' '''''''''''' ''''''''''''''''' '''''' ''''''''''''''''''''' ''''''''' ''''''''' '''''' ''''''''''''''''''''''' ''''''' '''''''''''''' '''' ''''' ''''''''''''''''''''' '''''''''''''''''''' ''''''''''''''' The next two tables show the quantities of NSPI’s gas purchases and sales in 2010 and 2011. All of these transactions took place at delivery points on M&NP-CA.



The tables show that ''''''''''''' '''''''''''''''' provided the vast majority (''''''''''' percent) of NSPI’s gas supplies in 2010. Sales to '''''''''' accounted for only '''''''' percent of sales in that year. NSPI bought '''''''''' percent of its gas from ''''''''''''' '''''''''''''''''' in 2011, and bought ''''''''''' percent from '''''''''''''' ''''''''''''''' in that year. NSPI made sales primarily to ''''''''''''''' '''''''''''''''''' (''''''''' percent), ''''''''' (''''''''' percent), and ''''''''''''' '''''''' (''''''''''' percent).

b. EEI We identified EEI’s gas purchases and sales at delivery points on M&NP-CA in 2010 and 2011. We do not report that information here, because EEI considers it extremely confidential.

c. Matching Transactions Liberty obtained and compared records of gas purchase and sale transactions from both NSPI and EEI. In 2010 and 2011 EEI and NSPI made natural gas purchases from and sales to one another under '''''''''''' ''''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''' ''''''''''''' '''''''''''''''''''''''' '''''''''''''' ''''''' '''''''''''''''''''''' ''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''' NSPI Purchases: In 2010 and 2011 NSPI bought gas from EEI a total of ''''''10 ''''''''''''' on a '''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''' '''''''''''''' Transaction records showed a moderate number of matching transactions according to our criteria (trade date, flow dates, and location). In these transactions, NSPI bought gas from another counter-party at the same time that it was buying gas from EEI. In the transactions with EEI, NSPI ''''''''''' ''' '''''''''''''' ''''''''''' '''' '''' ''''''' ''''' ''''' ''''''''''''' ''''''''''''''''''''''''''''''''''''' in most of the matching transactions. NSPI Sales: In 2010 and 2011 NSPI sold gas to EEI a total of '''''' '''''''''''' ''''' ''' ''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''''' '''''''''''''' Transaction records show an extremely small number of matching transactions according

10 '''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''''''' '''''''''''''''''' '''''''''''' '''''''' ''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' ''''' ''''''''''' ''''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''''' '''''' ''''''' ''''''''''''''' ''''''' '''''''''''''''' '''' ''' ''''''''''''''''' '''''''''' '''''''' '''''''''''''''''''''''''''



to our criteria. In these transactions with EEI, NSPI ''''''''''''''''''' ''' ''''''''''''' '''''''''''' '''''''''''' '''''''' ''''''''' '''' '''''''' '''''''''' '''''' ''''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''' EEI Purchases: In 2010 and 2011 EEI bought gas from NSPI a total of ''''''11 ''''''''''' ' ''' ''' ''' ''''''''''' ''''' ''''''''''''''''''''''''' '' ''''' Transaction records show a moderate number of matching transactions. In these transactions, on the same dates, and at the same locations, EEI was buying from another of its counter-parties when it was also buying from NSPI. When NSPI sold to EEI, NSPI ''''''''''''''''''' ''' '''''''''''''' '''''''''''' ''''''''' ''''''''''''' ''''''''''''' '''''''''''''''''''''''''''''''''''' '''''''''''' ''''' ''''''' ''''''''''' EEI Sales: In 2010 and 2011 EEI sold gas to NSPI a total of '''''' '''''''''''' ''''' ''' '''''''''''' ''''' ''''''''''''''''''''''''''''''''''''''''''''' ''''''''''''' Transaction records indicated a small number of matching transactions. In these transactions with EEI, NSPI '''''''''' ''' ''''''''''''''' ''''''''''''' '''''''''' '''''''''''' ''''''''''''' ''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''.

d. Daily and Intra-Day Price Trends

Daily Purchases We plotted the price trends in daily purchases by NSPI and EEI across the four years of 2008 through 2011. We used the weighted-average purchase price of all transactions for each day minus the Dracut Netback price for that day. The data shows that EEI’s purchase prices xxxxxxxx over this period, while NSPI’s purchase prices '''''''''''''''''''''''''. Intra-Day (Balancing) Purchases A plot similar to that for daily purchases across the same four again shows that EEI’s purchase prices xxxxxxxx, while NSPI’s xxxxxxxx.

2. Power Transactions

a. NSPI NSPI’s power transactions considered in this analysis are more properly referred to as power imports and exports. NSPI’s contract purchases within Nova Scotia from independent power producers and from wind-power producers are not included in the analysis. NSPI also has some small local-distribution customers in Nova Scotia which are not included in this analysis. Liberty’s analysis did include power imports from the U.S., which come via the MEPCO/New Brunswick Power interface, power bought at the HydroQuebec/New Brunswick Power interface, and power bought at the New Brunswick Power/Nova Scotia Power interface. Power exports take place at the MEPCO/New Brunswick Power interface and at the New Brunswick Power/Nova Scotia Power interface. The following table shows NSPI’s power imports and exports by counter-party in 2010 and 2011.

11 Ibid.



2010 2011

Counter-Party Imports (MWh)

Exports (MWh)

Imports (MWh)

Exports (MWh)

'''''''''''''''' ''''''''''''''''' '''''''' ''''''''''''''''' '''''''' '''''' ''''''''' ''''''''''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''''' '''''''''''''''''' '''''''''''''' '''''''''''''' '''''''''''''' '''''''''' ''''''''' ''''''''''''''' ''''''''''''''''''''' ''''''''''''''''' ''''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' '''''''' '''''''''''''''''' ''''''''''''' ''''''''''' '''''''''''''''''''''''''''' '''''''''''' ''''''''''''''''''' '''''''''''''' '''''''''''''''''' ''''''''''''' '''''''''''''''''''''''' '''''''''''''''' ''''''''''''''''''''''' '''''''''' ''''''''' '''''''''''''''''''''''' '''''''''''''''' ''''''''''''''' '''''''''' Total ''''''''''''' ''''''''' ''''''''''''' ''''''''

The table shows that imports were ''''''''''' '''''' ''''''''''' '''''''''''''''''' in 2010, and ''''' ''''''''''' '''''''''''''''''' in 2011. In 2010 '''''''''' '''''''''''''''''''''''''''' supplied ''''''''' percent of the imports, and '''''''''' '''''''''''''''''''''' ''''''''''''''' ''''''''''''''''''''''' ''''''''''''''''''''''''''' supplied ''''''''''' percent. '''''''''' supplied ''''''''''' percent. The ''''''''' ''''''''''''''''''''''''' power all came in at the MEPCO/New Brunswick Power interface. Monthly RFPs began in early 2011. In that year, ''''''''' ''''''''''''''''' ''''''''''''''''''''''''''' share increased to ''''''''' percent of imports, and '''''''''' ''''''''''''''''''''''''''''''' declined to '''''''''''' percent. '''''''''''' ''''''''''''''''''''''' '''''''''''''' increased to ''''''''''' percent. The following table shows NSPI’s power imports and exports by deal type in 2010 and 2011.

2010 2011

Deal Type Imports (MWh)

Exports (MWh)

Imports (MWh)

Exports (MWh)

Daily ''''''''''''''''' '' ''''''''''''''''' '' Hourly ''''''''''''''''' ''''''''''''' '''''''''''''''''' ''''''''''''' Monthly ''''''''''''''''' '' '''''''''''''''''''' '' Total ''''''''''''''''' '''''''''''' ''''''''''''''''''' ''''''''''''''

The table shows that ''''''''' '''''''' of power imports, and ''''' ''''' power exports, take place ''''' ''''' ''''''''''''''''' ''''' ''''''''''''''''''''' '''''''''''''. ''''''''''''''''''''' ''''''''''''''''''''''''''''' accounted for ''''' percent of imports in 2010, and ''''''''' percent in 2011.

b. EEI Total EEI sales include sales of power produced at EEI’s Bayside Power Generating Station. Much of Bayside’s power production is committed to New Brunswick Power through the winter months; it sells to whomever it can find in the other months. The New Brunswick power market is considerably larger than NSPI’s. NSPI’s imports and EEI’s purchases and sales comprise only a small part of that market. NSPI and EEI have xxxxxxxx xxxxxxxxx counter-parties for wholesale power transactions, although the counter-party identity



masking used by Liberty did not allow a determination of whether NSPI and EEI have common counter-parties.

c. Matching Transactions NSPI Purchases: NSPI made ''''''''' '''''''''''''''''' purchases from EEI in 2010 and ''''''''''' in 2011. The 2010 transactions totaled '''''''''''''''''''' MWh and accounted for approximately '''''' percent of NSPI’s total 2010 purchases from EEI. In 2009, most of NSPI’s power purchases from EEI came from '''''''' ''''''''''''''''' ''''''''''''''''''''''. NSPI made no comparable ''''''''''''''''''''' purchases from any other counter-parties in either 2009 or 2010. NSPI made '''''''''''' '''''''''''''' purchases from EEI in 2010 and '''''''''''' in 2011. While there were no exact matching transactions, the price that NSPI paid in these '''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''' '''''''''''''''''''''''' '''''''''''''' '''' '''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''''' '''''''' ''''''''' '''' ''''''''''''''''''' '''''''''''''' NSPI made '''''' '''''''''''' purchases from EEI in 2010 and '''''''''''' in 2011. The transaction records yielded four matches with NSPI’s other counter-parties, with NSPI paying '''''''''''' ''''''' '''''''' ''''''''' ''''''''''''' '''''''''''''''' '''''''' '''''''' ''''''''''''' NSPI Sales: NSPI made '''''''' '''''''''''''' '''''''''''''' '''''''' to Emera during the audit period, ''''' ''''''''''''''''' '''''', '''''''''''' ''''''''' ''''''''''''''''''''''' had no matches to other NSPI sales. NSPI sold '''''' '''''''''''''''' to EEI in 2009. EEI Purchases: We found no EEI purchases matching the ''''''''' '''''''''' ''''''''''''''' ''''''''''''' ''''''''''''''''''' from NSPI during the audit period, ''''' ''''''''''''''''' ''''''' '''''''''''''. EEI bought no power from NSPI in 2009. EEI Sales: We found no EEI sales matching NSPI purchases from EEI sold at the NB/NS interface. This result was the same in 2009.

C. Conclusions

1. EEI still conducts natural gas transactions with more counter-parties than does NSPI, but the difference is less than it was in 2009.

The Maritimes Gas Market remains a significant source of gas for EEI, but less so than it was in 2009. '''''''''''' '''''''' ''''''''''''''''''''''''''''''' '''''' ''''''''' '''''''' '''''''''''' '''''''' ''''''''' ''''''' ''''''''''''''''''''' ''''''''' in 2010, but ''''''''''''''' '''''''' ''''''''''' '''''' '''''''''' '''''''''' in 2011.

2. Natural gas transactions between NSPI and its affiliates did not present any patterns demonstrating less than arm’s length dealings.

There were '''''''''''''' ''''''''''''' transactions between NSPI and its affiliate EEI in 2010 and 2011 than occurred during the first Audit Period (2009). Those '''''''' transactions, however, continued to show mixed results when comparing transactions with its affiliate to those with unaffiliated third party. The relatively small number of matching transactions, however, makes firm conclusions impossible. We note, however, that the number of matching transactions where NSPI was buying from EEI in 2009 is comparable to the number of instances of the same type of transaction in 2010 and 2011. In all three years, NSPI paid ''' '''' ''''''''' '''''''''' to its affiliate than it did to unaffiliated third parties most of the time.



In 2009, when EEI sold to NSPI and to an unaffiliated third party at the same time, the unaffiliated third party paid xxxxxxxxxxxxxxxxxxxxxxxxx. In 2010 and 2011, the unaffiliated third party paid xxxxxxxxxxxxxxxxxxxxxxxxxxxx.

3. Prices paid for gas in daily and intra-day transactions trended in opposite directions for the two affiliates.

Liberty plotted prices paid by the two affiliates over the period 2008-2011 in daily and intra-day transactions. The Maritimes gas market is small, with a relatively small number of counter-parties, yet we observe that, over the period, the prices paid by NSPI trended xxxxxxxxxxxxxxx, while those paid by the affiliate trended xxxxxxxxxxxxxx.

4. NSPI’s power purchases from EEI ''''''''''''' '''''''' 2010. NSPI’s power purchases from its affiliate '''''''''''''''' '''''''''''' 2010.

D. Recommendations Liberty has no recommendations in this area.

Audit of Nova Scotia Power, Inc.’s Fuel Adjustment Mechanism for 2010-2011

Documents

Transcript of Audit of Nova Scotia Power, Inc.’s Fuel Adjustment Mechanism for 2010-2011