Gas – Pipeline Abandonment
In this decision, the CER considered whether to approve an application (the “Application”) from NOVA Gas Transmission Ltd. (“NGTL”) to abandon part of the NGTL System. The CER denied NGTL’s Application.
NGTL operates the NGTL System, an extensive natural gas pipeline system consisting of approximately 24,300 kilometres (“km”) of pipeline and other facilities in Alberta and British Columbia.
On October 31, 2018, NGTL applied under section 74 of the National Energy Board Act (“NEB Act”) for leave to abandon 84.4 km of pipeline, seven meter stations, and associated facilities including valves and sales taps (the “Project”). The facilities proposed for abandonment (“Project Facilities”) included the Etzikom Lateral and were all part of the NGTL System.
Under section 74 of the NEB Act, there is no legislated test that the CER must apply when considering whether to grant leave to abandon. In considering the Application, the CER indicated it was guided by the established regulatory framework, including relevant past decisions of its predecessor, the National Energy Board (“NEB”). On that basis, the CER found that the default test was the public interest test.
The CER noted that neither the CER nor the NEB appeared to have considered a similar case in which a pipeline requested that the Regulator step in to allow the termination of contracts associated with facilities that are no longer economic. Nevertheless, the CER indicated it was of the view that contracts between commercial parties on a CER-regulated pipeline cannot restrain the CER’s ability to decide on applications in the public interest.
The CER noted that producers and other parties made significant investments tied to specific facilities on the NGTL System, and shipper contracts have ongoing renewal rights. Given these renewal rights, the fact that NGTL does not have an explicit right to terminate contracts and the apparent lack of established history of such rights being terminated by NGTL, the CER found it reasonable that shippers would not generally expect that their contracts may be terminated by NGTL. The CER indicated that while it did not view NGTL’s contractual obligations as absolute, it viewed the proposed Project-related termination of contracts as a significant matter. The significance of this matter must be overcome by evidence demonstrating that the Project, as proposed, would be in the public interest.
NGTL’s primary rationale in applying to abandon the Project Facilities was that they were no longer economic and were not expected to become economic in the future based on their expected costs and revenues. The CER agreed that consideration of the economic viability of the Project Facilities on their own is required and must then be balanced with any public interest considerations (consistent with the NEB’s finding in MH-3-2000).
However, the CER found that NGTL’s assessment of whether the Project Facilities should be abandoned was flawed. NGTL’s comparison of future costs and revenues failed to account for the disconnect between the toll revenues associated with the Project Facilities and the value of the services they provide. Consequently, NGTL’s calculations failed to capture important public interest considerations, raising doubt about NGTL’s overall assessment of and decision to abandon the Project Facilities.
NGTL also submitted that it and its rate payers would be subjected to an undue burden if the CER denied the Project. The CER found that while the expected future revenue-to-cost deficiency appears significant relative to the size of the Project Facilities, NGTL provided no evidence of how or when it determined the point at which a deficiency is no longer acceptable and no evidence of how the deficiency in question compared with those of other facilities on the NGTL System. Further, there was no evidence of NGTL having explored alternative tolling arrangements for the Project Facilities which might have reduced the burden on NGTL and its rate payers (and improved the aforementioned economics of the Project Facilities), while at the same time providing shippers on the Project Facilities with an outcome preferable to their proposed abandonment. Accordingly, the CER was not persuaded that denial of the Application would lead to an undue burden on NGTL or its rate payers.
Overall, the CER was not persuaded that the Project was in the public interest. The CER therefore decided to deny NGTL’s Application.
CER Guidance for Future Consideration
The CER stated that when NGTL submits future abandonment applications involving matters such as contract terminations and potentially negative impacts on users of the facilities, the CER expects NGTL to demonstrate that a more effective process was carried out to identify and assess the facilities for abandonment.
In cases where there are matters such as contract terminations and potentially negative impacts on users of the facilities, the CER instructed that NGTL’s process for assessing and identifying facilities for abandonment should include characteristics such as the process:
being conducted in a predictable, transparent, and fair manner;
ensuring equitable treatment of shippers across the NGTL System;
being responsive to the needs, inputs, and concerns of all impacted parties;
factoring in the relative impacts of abandonment versus continuation of service on all impacted parties;
considering all options for reducing future revenue-to-cost shortfalls prior to filing an application for leave to abandon with the CER;
providing shippers with the ability to meaningfully plan for and mitigate the impacts of the potential termination of service;
allowing impacted parties to make more informed decisions, by including criteria for identifying instances where the abandonment construction schedule should be established so as to avoid creating uncertainty that may require parties to make costly, irreversible choices to continue their business operations prior to a CER decision on the abandonment application; and
having been informed by meaningful Tolls, Tariff, Facilities & Procedures Committee consultations.
As part of such a process, the CER indicated it would expect that the criteria for identifying facilities and how NGTL considers alternatives to abandonment would be documented and available to, at a minimum, NGTL’s shippers.