Gas – Tolls
In this decision, the CER denied the application from Canadian Natural Resources Limited (“CNRL”) pursuant to section 226 and subsection 239(2) of the Canadian Energy Regulator Act (“CER Act”) requesting an order to receive, transport, and deliver gas on the Pierson pipeline and an order prescribing a just and reasonable toll. The CER did order Nottingham Midstream Limited (“Nottingham”) to provide interruptible service for the Pierson pipeline.
The Pierson pipeline is a 10 km natural gas pipeline that delivers gas from Manitoba to the Wolstitmor Gas Gathering system in Saskatchewan. The Pierson pipeline is owned by a subsidiary of Nottingham with no employees and existing only for the purpose of meeting organizational requirements found in the National Energy Board Act.
In 2006, CNRL entered into a Gas Purchase Agreement with Nottingham’s predecessors for the purchase of gas at the Pierson Battery. In April 2017, Nottingham entered into a verbal agreement with CNRL to modify the 2006 Gas Purchase Agreement for net-zero pricing, which adjusted negative monthly invoices, so the purchase price paid to CNRL was not negative. On 30 April 2020, Nottingham sent a letter to CNRL stating that Nottingham would no longer continue net-zero pricing. Nottingham proposed a return to the terms specified in the 2006 Gas Purchase Agreement. In May 2020, CNRL stopped shipping gas on the Pierson pipeline and began flaring. CNRL and Nottingham had been engaged in negotiations for a new gas purchasing or handling agreement. As one component of the negotiations for an agreement in 2020, Nottingham proposed a capital fee of $2.50/mcf (for volumes up to 25,000 m3/d), $2.00/mcf (for volumes from 25,000 – 40,000 m3/d), and $1.50/mcf (for volumes over 40,000 m3/d).
CNRL argued that Nottingham’s proposed capital fees are unjust, unreasonable and unjustly discriminatory against CNRL. CNRL submitted that the fees have no basis in operator expenses of capital investment and do not reflect the cost of providing service on the Pierson pipeline.
Views of the CER
The CER noted that the Pierson pipeline is a small part of a bigger system. To allow the meaningful use of the pipeline, shippers need to have access to the downstream Wolstitmor Gas Gathering System. It noted that without the use of these two sets of facilities, there is no market for gas shipped on the Pierson pipeline. The CER further noted that it does not require tolls in a specific form, only that a company demonstrates that their tolls are just and reasonable and not discriminatory.
Was CNRL Discriminated Against for Access to and Service on the Pierson Pipeline?
In determining if CNRL was discriminated against, the CER evaluated whether Nottingham abused its market power. It further considered if the terms of a gas purchase agreement between Nottingham and another party were substantially similar to the terms proposed to CNRL in 2020.
As part of this proceeding, evidence was filed to demonstrate the behavior during and process of negotiations between CNRL and Nottingham. This evidence suggested that CNRL saw flaring its gas as a substitute for shipping its gas on the Pierson pipeline. Further, CNRL waited two months in 2020 to respond to the gas handling agreement proposed by Nottingham. This indicated that Nottingham did not control the pace of negotiations. Therefore, and because CNRL submitted a list of alternatives it saw to obtain value from its gas, the CER determined that Nottingham did not abuse market power.
CNRL submitted that if the gas purchase agreement of Nottingham with Tundra Oil & Gas Ltd. (“Tundra”), executed in March 2021, is more favourable than Nottingham’s final offer to CNRL, then Nottingham has discriminated against CNRL. The CER evaluated that gas purchase agreement, which was filed confidentially, and considered it and the comparison to the offer to CNRL in light of the circumstances of the Pierson pipeline. The CER determined that the terms proposed to CNRL were substantially similar to those terms in the Gas Purchase Agreement with Tundra. Accordingly, Nottingham did not discriminate against CNRL when it denied CNRL access to the Pierson pipeline.
Is Ordering Interruptible Service Appropriate?
The CER accepted that, at the time of the proceeding, the capacity of the Pierson pipeline was fully contracted. As a result, there was no existing capacity to be offered as a firm service. However, the CER noted that there may be available capacity from time to time. During the proceeding, Nottingham noted its willingness to offer interruptible service, which, by its nature, would not impact Tundra’s priority to ship gas on the Pierson pipeline. In accordance with the principle of economic efficiency and no unjust discrimination in service, the CER ordered Nottingham to offer interruptible service.
What is a Just and Reasonable Toll to be Charged for Interruptible Service?
Nottingham proposed a gas handling agreement with four principles under which it would offer interruptible service: (i) a capital charge of $2.50/mcf for volumes up to 15,000 m3/d and $1.50/mcf for volumes in excess of this level; (ii) recovery of a volumetric allocated share of operating costs based on actual throughput; (iii) recovery of Nottingham’s external costs to participate in this complaint proceeding; and (iv) all solution gas volumes delivered by CNRL must meet the prevailing compression levels of the Pierson pipeline gas stream.
Despite the difference between firm service, as agreed to between Tundra and Nottingham, and interruptible service, requested by CNRL, the CER found that, in this proceeding, tolls for interruptible service would be just and reasonable if they are substantially similar to those from the gas purchase agreement between Tundra and Nottingham.
The CER agreed with Tundra and Nottingham’s assertions that the terms of the July 2020 offer to CNRL, as they related to the capital charge beginning at $2.50/mcf, were substantially similar to the terms of the Nottingham – Tundra gas purchase agreement. The CER noted that the fact that CNRL does not have any rights over the capacity of the pipeline or to discounted services in the future simply because it had historically paid tolls on the Pierson pipeline.
The CER found it appropriate to base the recovery of operating costs on actual throughput. This would align with the cost causation principle.
The CER determined that it was not appropriate to include costs to participate in this complaint proceeding in the calculation of tolls to be charged to CNRL. Tolls and tariffs are regulated on a complaint basis. Attempts by CNRL and Nottingham to negotiate were unsuccessful, and CNRL brought forward a complaint. Under complaint-based regulation, this is an appropriate series of events.
The CER was convinced that it is appropriate that all gas volumes delivered by CNRL to the Pierson pipeline must meet the prevailing compression levels of the gas stream. Defining limits of the transported gas is a standard method for the pipeline operator to meet the objective of safe and efficient operation.
This application did not include a request for the extension of facilities. Accordingly, CNRL’s term requiring the operating pressure of the Pierson pipeline to be increased is beyond the scope of this proceeding. As sophisticated parties, CNRL and Nottingham are able to negotiate these arrangements within the limits of the CER Act.