New Services Offering – Tolls and Tariffs
On July 9, 2015, the NEB released its decision regarding an application filed by Alliance Pipeline Ltd. as General Partner of Alliance Pipeline Limited Partnership (“Alliance”) for approval of new services offering and related tolls and tariffs (the “Decision”). Alliance described its new services offering as an “at-risk” business model, deviating from the traditional cost of service model by assuming the risks of providing a variety of service offering and tolling options to generate revenues.
In its application, Alliance requested the orders and approvals necessary to implement new services and related tolls and tariff on the Alliance Pipeline (the “Alliance Pipeline”) commencing December 1, 2015 (the “Application”). Specifically, Alliance requested the following:
(a) An order pursuant to Part IV and section 60(1)(b) of the National Energy Board Act (the “NEB Act”) approving the tolls and tariff for the New Services Offering (the “NSO”);
(b) Approval of the mechanisms for, and calculation of, the Recoverable Cost Variances (“RCV”) demand and commodity surcharges and the Alliance Pipeline abandonment demand and commodity surcharges, including the approval and operation of the requested deferral accounts for the RCV and for collection of Alliance’s NEB-approved annual collection of pipeline abandonment funds;
(c) Approval of a streamlined regulatory process for new services and new or revised tolling proposals;
(d) An order or orders for the conversion of the existing agreements for transportation service to continue under the NSO;
(e) Continued relief from the requirement to file with the NEB quarterly surveillance reports (“QSRs”) and performance measures; and
(f) Such further and other relief as Alliance may request or as the NEB may deem appropriate, pursuant to section 20 of the NEB Act.
Notional Revenue Requirement
As a key part of its NSO, Alliance requested the development of a notional revenue requirement (“NRR”), a cost-based, long-term revenue requirement for 2016-2025 using a levelized value over the 10 year period. Alliance stated that the changes from its existing tariff transferred many business and revenue risks to itself, and was therefore developed as a starting point for the derivation of fixed tolls throughout the 2016-2025 period.
The NEB opted to not rely on the NRR or associated cost information, finding that the financial outlook for the Alliance Pipeline was not a sound basis for derivation of tolls, and noted that the Application would have been rejected under a cost-of-service model as being inadequate. Instead, the NEB relied on the market acceptance of the NSO, and the appropriateness of the Precedent Agreement Process in deriving just and reasonable tolls. The NEB found that:
(a) Alliance’s risk had been reduced considerably since the filing of the Application; and
(b) There had been significant uptake of the NSO since the Application was initially filed, resulting in additional certainty of firm contract levels for the next six years.
NSO
The NEB approved the NSO on the basis that each of the new services proposed was reasonable and would provide shippers with the flexibility to use services tailored to their needs. However, the NEB introduced specific limitations in order to better balance the risks faced by Alliance. Alliance was granted the ability to establish bid floors by receipt point or region, but was not granted unlimited pricing discretion. The NEB set the following limitations on Alliance’s pricing discretion:
(a) The bid floor for seasonal services may be set between 100 per cent and 125 per cent of the corresponding fixed five-year toll;
(b) The bid floor for interruptible services may be set at any level up to 125 per cent of the corresponding fixed five-year toll;
(c) Discounting is permitted for interruptible services due to its limited availability however, discounting of seasonal services below the firm service toll so as not to undermine the value of firm service will not be allowed; and
(d) Firm shippers using Priority Interruptible Transportation Service (“PITS”) will pay a maximum of 125 per cent of the corresponding five-year toll.
The NEB held that it provided both Alliance and its shippers with the tools required to adapt to an evolving business environment, and found the proposed NSO to be just and reasonable. The NEB indicated that it expects these tools to be used to achieve positive outcomes for market participants.
RCV
With respect to the RCV, Alliance submitted that it would only apply the RCV to the following cost categories, on the basis that they were outside of Alliance’s reasonable control:
(a) Pipeline integrity, pipe replacements and re-routes;
(b) Property and business tax;
(c) NEB cost recovery;
(d) Compressor fuel tax; and
(e) Environmental levies, such as carbon taxes and greenhouse gas compliance costs.
Alliance further submitted that the RCV was appropriate, as Alliance had assumed cost and revenue risk with respect to other portions of the NSO through the at-risk tolling model. None of the interveners made comments on the RCV. Accordingly, the NEB found that these costs were reasonably outside the control of Alliance, and held that deferral accounts for the RCV were appropriate.
Conversion of Existing Agreements to NSO
Some interveners argued that they should remain entitled to Authorized Overrun Service (“AOS”) on the basis that their previous transportation contracts, which had been renewed past the proposed in-service date of the NSO, afforded this service offering.
Alliance stated that it offered conversion options to each of the existing shippers with contracts extending past the proposed in-service date of the NSO, and that the conversion services would result in a lower toll than previously existed for the equivalent capacity. Alliance also argued that the NEB has the authority to affect contracts between Alliance and existing shippers by finding that the tolls were just and reasonable, and was expressly able to do so under the terms of the existing transportation contracts, which allowed for changes to Alliance’s tariff.
The NEB agreed with Alliance on this issue, finding that renewal shippers do not have a perpetual right to continue to receive service under their existing contracts, since the contracts themselves explicitly contemplate changes to the tariff. Therefore the NEB granted Alliance’s request for a conversion of existing agreements to the NSO.
Streamlined Regulatory Process and QSRs
Alliance requested an 8-week regulatory process, similar to the 10-week timeline approved in the TransCanada Mainline, as adopted in the RH-003-2011 Reasons for Decision. Alliance also requested continued relief from filing QSRs as it was not aware of any reason for discontinuing the exemption.
The NEB took the view that a streamlined process was not necessary at this time, choosing instead to determine the process to follow at the time of any future application related to the NSO. With respect to the QSR, the NEB denied the requested relief, holding that the appropriateness of the exemption no longer exists, and that the NEB requires transparent information due to the unique nature of the NSO. The NEB therefore ordered Alliance to file the following information annually:
(a) Rate of return on common equity and total capital;
(b) Audited financial statements; and
(c) Five years of time series data on integrity spending.
The NEB also ordered Alliance to file the following information on a quarterly basis:
(a) Income statements including revenues and expenses by service type;
(b) Expenses related to RCV cost categories;
(c) Rate base information divided into major categories;
(d) Daily throughput data in GJ, cubic meters and Bcf and key points;
(e) Capacity of the system at each key point, and explanations for any deviations from nameplate capacity;
(f) Deferral account balances;
(g) Details for transactions over $100,000;
(h) Bid information determined in consultation with shippers; and
(i) AECO-C and Chicago city gate price information.
Decision
In the result, the NEB held that:
(a) The new services and associated terms and conditions, are approved as filed;
(b) The proposed toll methodology will produce firm tolls that are just and reasonable, and not unjustly discriminatory and accordingly, the firm tolls are approved as filed;
(c) The approved tolls and tariff will apply to all transportation services provided by Alliance on or after December 1, 2015;
(d) Alliance’s proposal for recovering costs that are outside of its control and difficult to forecast through an RCV surcharge and deferral accounts is appropriate. Alliance is required to provide details of the cost categories eligible for inclusion in the RCV to enhance transparency for shippers and the NEB;
(e) Alliance’s abandonment surcharge methodology and deferral accounts are approved. Alliance is expected to provide the NEB information or studies to support a collection period of 40 years on the next NEB review of set-aside and collection mechanisms;
(f) Alliance is required to implement a reserve account to hold cash earnings above a threshold level, to be established by a compliance filing. Prior to making any distributions from the reserve account, Alliance must file a depreciation study, for NEB approval;
(g) Alliance’s request to implement a streamlined regulatory process is denied; and
(h) Alliance’s request for continued relief from the requirement to file QSRs is denied.
