Canada Mainline – Tolls – Long-term Adjustment Account (LTAA) – Pricing Discretion
In this decision, the NEB considered TransCanada PipeLines Limited (“TransCanada”)’s application for approval of tolls for January 1, 2018 to December 31, 2020 and associated approvals (the “Application”). The Application was made pursuant to Parts I and IV of the National Energy Board Act (“NEB Act”) and certain directives in the NEB Decision RH-001-2014 and Order TG-010-2014. The NEB approved the Application as applied for, with the exception of directing TransCanada to return 100 percent of the Long-Term Adjustment Account (“LTAA”) balance to shippers in the 2018-2020 period using the over-collection method.
In Decision RH-001-2014, the NEB approved the components of the Mainline 2013-2030 Settlement Agreement (the “Settlement”) reached between TransCanada and its three largest customers, Enbridge Gas Distribution Inc. (“EDGI”), Union Gas Limited (“Union), and Énergir, L.P. (“Énergir”), formerly known as Gaz Métro Limited Partnership. In that decision, the NEB approved the toll design for the TransCanada Mainline System (“Mainline”) for the 2015 to 2020 period but directed TransCanada to file an application for approval of the 2018 to 2020 Mainline tolls by December 31, 2017.
Prior to making the Application, TransCanada reached an agreement with the three parties to the Settlement regarding tolling matters for the 2018 to 2020 period.
TransCanada filed the proposed revenue requirements, rate bases and supporting schedules for 2018 to 2020 tolls. TransCanada explained that the revenue requirements and rate bases were updated using a consistent approach with that used in the RH-001-2014 Compliance Filing for 2015 to 2017 tolls (the “Compliance Filing”) and that the 2018 revenue requirement was based on TransCanada’s 2018 budget.
Intervenors challenged the following issues:
(a) the disposition and allocation of the LTAA in the 2018 to 2020 period;
(b) the appropriateness of continued pricing discretion for Interruptible Transportation (“IT”) service and Short-Term Firm Transportation (“STFT”) service; and
(c) the appropriateness of TransCanada’s proposed allocation of costs and revenues related to Dawn Long-Term Fixed Price (“Dawn LTFP”) service.
Long-Term Adjustment Account
The NEB denied TransCanada’s proposed LTAA treatment for the 2018 to 2020 period. The NEB found that the Application’s approach to return – approximately 3.9 percent of the $1.1 billion LTAA balance each year to shippers in the 2018 to 2020 period – represented an unreasonably large intergenerational cross-subsidy. The NEB found that TransCanada’s proposed treatment of the LTAA would not adhere to the cost-based/user-pay tolling principle and would cause unreasonable intergenerational inequity. Therefore TransCanada’s proposed treatment of the LTAA did not produce just and reasonable tolls. The NEB found that an alternative allocation method was required.
Section 62 of the NEB Act requires that all tolls must be just and reasonable. In determining whether tolls are just and reasonable, the NEB has historically relied on fundamental tolling principles, including the principle of cost-based/user-pay tolls. The NEB stated that tolls should be, to the greatest extent possible, cost-based and that users of a pipeline system should bear the financial responsibility for the costs caused by the transportation of their product through the pipeline. Similarly, the NEB indicated that all reasonable efforts should be made to minimize cross-subsidization.
The cost-based/user-pay principle can be applied in consideration of costs over time, which can be referred to as intergenerational equity. In other words, one generation of shippers subsidizing the costs of another generation of shippers should be avoided.
The NEB decided, to better align with established tolling principles, that 100 percent of the LTAA be returned to shippers in the 2018-2020 period using the over-collection method. The NEB found that returning the entire LTAA balance to shippers in the 2018 to 2020 period will help the overall competitiveness of the Mainline’s services and promote increased utilization to the benefit of the Mainline and its shippers.
The NEB approved the continuation of the existing pricing discretion for IT and STFT services for the 2018 to 2020 period.
For the 2018-2020 period, the NEB found that pricing discretion continued to provide an incentive to shippers to contract for firm transportation service to meet firm requirements. Pricing discretion also contributed to the Mainline by achieving positive net revenues. The use of pricing discretion to maximize overall Mainline revenue was an exercise of balance between providing an incentive for shippers, who have firm requirements to contract for the firm service they required, and responding to market opportunities if and when they arise.
The NEB found that the necessity of unlimited pricing discretion for IT and STFT services in a scenario of a segmented Mainline, higher contracting, and lower uncontracted pipeline capacity would require a re-evaluation. For the post-2020 toll application, the NEB directed TransCanada to justify the continuation of unlimited pricing discretion for IT and STFT services, as well as information on contracts, forecast flows, and available capacity by segment.
Transportation by Others Arrangements
The NEB found that the proposed Transportation by Others (“TBO”) arrangements applied for by TransCanada provided economic and timing benefitstomeet TransCanada’s aggregate requirements and were reasonable. These TBO arrangements included the following features:
(a) TBO costs for 2018 were based on the contract and rate assumptions included in its 2018 budget, and this cost is held constant for 2019 and 2020 at $305.3 million;
(b) TBO costs increased due to new contracts associated with the Dawn LTFP service that commenced in November 2017;
(c) foreign exchange rate changes resulted in an increase of $5 million per year from the amount in the Compliance Filing; and
(d) a reduction in the negotiated Great Lakes Gas Transmission St. Clair to Emerson rate contributed to a reduction of TBO costs of $19 million.
The NEB accepted TransCanada’s justification that it entered into TBO arrangements as an alternative to the construction of incremental facilities, or where the economics of operating existing facilities and the service provided by a third-party pipeline offered a better means of meeting TransCanada’s aggregate requirements.
Other Revenue Requirement Items and Rate Base
The NEB accepted the proposed components of the 2018-2020 revenue requirement and rate base as applied for by TransCanada as reasonable.
TransCanada updated components of the 2018 to 2020 revenue requirement and rate base using a consistent approach to that used in the Compliance Filing and was based on its 2018 budget. Certain costs were increased by an annual inflation factor of two percent, municipal taxes were increased by three percent, and TBO and Pipeline Integrity and Insurance Deductibles were held constant at the 2018 level.
Discretionary Miscellaneous Revenue
The NEB found the discretionary miscellaneous revenue (“DMR”) forecast applied for by TransCanada to be reasonable. This DMR forecast was based on the following:
(a) DMR forecast for 2018 to 2020 was lower compared to the Compliance Filing forecast of DMR, in which the DMR level was forecast to be $60 million for each year from 2018 to 2020; and
(a) in the Application, the DMR forecast was updated to $32 million for 2018 and $25 million for both 2019 and 2020, which reflected a continued trend towards more firm contracting on the Mainline that was occurring since the RH-003-2011 Decision.
TransCanada further explained that, as Mainline shippers increasingly rely on firm contracts to meet their market requirements, the use and resulting revenues from discretionary services was expected to be reduced. Depreciation
The NEB approved the proposed depreciation rates applied for by TransCanada.
TransCanada stated that its proposed changes to depreciation rates increase the depreciation rate expenses of $110.4 million, $105.7 million and $113.3 million for 2018, 2019 and 2020, respectively. TransCanada submitted that the depreciation expenses were higher than in the Compliance Filing primarily due to an increase in the depreciation rates and higher capital additions.
Allocation of Dawn LTFP Net Revenues
The NEB found the proposed allocation of the Dawn LTFP Net Revenue to the segments based on the path weighted distance in each segment, as applied for by TransCanada, to be reasonable.
TransCanada submitted that the Dawn LTFP Net Revenue would be allocated to the segments based on the path weighted distance in each segment. With 1,500 TJ/d of Dawn LTFP service being provided using 50 percent through the northern route and 50 percent through the southern route, the Dawn LTFP Net Revenue would be allocated 9.64 percent to the Eastern Triangle segment, 53.72 percent to the Northern Ontario Line segment and 36.64 percent to the Prairies segment.
Dawn LTFP net revenues (revenue less abandonment surcharges and certain costs) totalled $240 million, $246 million, and $249 million for each of 2018, 2019 and 2020, respectively. TransCanada submitted that, absent the net revenues associated with Dawn LTFP, the revenue requirement used to derive 2018 to 2020 Mainline tolls would be approximately 16 percent higher.
The NEB approved the Application as applied, with the exception of directing TransCanada to return 100 percent of the LTAA balance to shippers in the 2018-2020 period using the over-collection method.