Construction of Adequate and Suitable Facilities – Unjust Discrimination
In this decision the Canada Energy Regulator (“CER”) directed Kingston Midstream Westspur Limited (“Kinsgston”) to provide adequate and suitable facilities to allow Secure Energy Services Inc. (“Secure”) to receive crude oil from, and deliver crude oil to, the Westspur Pipeline owned by Kingston.
Kingston is regulated by the CER as a Group 2 company and is the current owner and operator of the Westspur Pipeline. Currently product of the same crude type shipped on Westspur Pipeline is not batched or segregated. In June 2017, Crescent Point Energy (“Crescent Point”) filed a complaint with the National Energy Board (“NEB”) regarding operational practices on the Westspur Pipeline, then owned and operated by TEML Westspur Pipelines Limited. In 2019, a settlement agreement was reached among Tundra Energy Marking Limited (“TEML”) affiliates including TEML Westspur, and eight producers (the “Settlement Agreement”). As a result of the Settlement Agreement, Crescent Point withdrew its complaint. The Settlement Agreement was not filed with, or approved by, the NEB.
Since June 2016, Secure has owned and operated the Secure Alida Terminal. The Secure Alida Terminal is connected to the Kingston-owned Alida Terminal, which is approximately 350 metres from the Secure Alida Terminal, via two provincially regulated pipelines and related infrastructure. Secure was given notice to that the interconnection agreement to deliver crude oil to and from the Secure Alida Terminal was being terminated. Secure was effectively prohibited from delivering blended oil from the Secure Alida Terminal. For a while, Secure continued to operate at the Secure Alida Terminal by not passing the Saskatchewan System toll through to its customers but eventually had to, which resulted in Secure’s customers ceasing their deliveries to the Secure Alida Terminal, and Secure having to lay off staff and shut down the Secure Alida Terminal.
Service on the Westspur Pipeline Under Subsection 239(1) of the CER Act
Directing the Provision of Service to Secure
The CER held that a key principle that applies to Kingston is that a company operating an oil pipeline is under a prima facie duty to ship all oil tendered to it unless it can convince the CER that for some reason it cannot. Kingston presented evidence and arguments in support of its position that the denial of service to Secure is reasonable, not unjustly discriminatory and in the public interest. The CER found the submissions and arguments made to be, collectively and individually, unpersuasive and lacking in convincing evidence to give rise to reasons to restrict access to a common carrier pipeline.
The CER considered need and market interest, the potential effect on the Settlement Agreement, the impact on the quality of the crude steam and unjust discrimination. In respect of unjust discrimination the CER held that Section 235 of the Canadian Energy Regulator Act (“CER Act”) prohibits “unjust discrimination in tolls, service or facilities against any person or locality”. Together with subsection 239(1), this section requires that an oil pipeline offer service under the same terms and conditions to any party wishing to ship oil on its line. If it is shown that Kingston discriminated, the burden lies on Kingston to prove that the discrimination was not unjust.
The CER was of the view that the receipt and delivery points requested by Secure are similar to the receipt and delivery points that were provided to Kingston Marketing for the Manitoba Interconnect Westspur (“MIW”) facility. The CER found that Kingston discriminated against Secure by denying Secure’s requested service. Kingston argued that Kingston Marketing’s commercial arrangements (i.e., the Settlement Agreement and lease and in-stream purchases from shippers) put it in fundamentally different circumstances from Secure. The CER was of the view that these private commercial arrangements do not justify discrimination.
The CER found that in addition to addressing the specific relief requested by Secure, as a regulator, the CER must ensure that there is appropriate regulatory oversight of the Westspur Pipeline. This includes preventing the abuse of market power. The CER was of the view that, particularly in the case of a Group 2 company regulated on a complaint-basis, as Kingston has been to date, the CER should inquire and respond in a fulsome manner when a shipper or other interested party tenders evidence that gives rise to a reasonable perception of the abuse of market power. The CER must address this perception of market power to ensure the presumption – which exists in the context of Group 2 companies absent a complaint – that tolls are just and reasonable remains valid. The CER found that directing Kingston to provide delivery and receipt service to the Secure Alida Terminal addresses the perceived abuse of market power in the circumstances of this application.
Adequate and Suitable Facilities Under Subsection 239(3) of the CER Act
The CER explained that its authority under subsection 239(3) of the CER Act to require a company to provide adequate and suitable facilities is considered an extraordinary power. Before issuing such an order, the CER must consider if there would be an undue burden on the company. The onus was on Secure to meet the test under subsection 239(3) of the CER Act.
Existing facilities connect the Secure Alida Terminal to the CER regulated Kingston Alida Terminal. Kingston insisted that the existing facilities were not available to facilitate Secure’s access to the Westspur Pipeline. All attempts by Secure to negotiate access have been unsuccessful. This required the CER to consider whether to require Kingston to construct new facilities in order to allow Secure access to the Westspur Pipeline for common carrier receipt and delivery services. The CER was of the view that, in the absence of an agreement to purchase, transfer, or use the existing facilities, the construction of new connection facilities is appropriate and granted the relief sought by Secure. While the CER was mindful that requiring an extension of pipeline facilities is extraordinary, based on the facts of this case, it held that it was a solution that must be allowed.
Facilities Required to Provide Adequate and Suitable Connections
In considering whether an extension of facilities should be ordered it is necessary to consider the type of facilities that would be required. The CER found that must also consider whether batching and segregation of Secure’s product is required. The CER found that the service Secure has requested and the quality of oil it proposes to deliver to the Westspur Pipeline are permitted by the Westspur Tariff. The CER was not convinced that the geographical location of existing facilities, which previously operated at the same time without issue, justified the imposition of any restrictions or additional facilities requirements on Secure. The CER held that batching facilities are not needed to provide service to Secure as requiring batching would be unjustly discriminatory.
Need and Public Interest
The CER must consider whether requiring Kingston to provide an extension of facilities is necessary or in the public interest. In this case, regardless of whether need is considered separately from public interest, the result would be the same. The onus was on Secure to demonstrate that connections are necessary or in the public interest. The CER found that Secure demonstrated that it needs receipt and delivery connections to the Westspur Pipeline for the operation of its Secure Alida Terminal and that overall, the requested connection facilities are in the public interest as it is in the public interest to allow competition.
The CER held that consideration of the public interest alone is not sufficient to grant the relief of an extension of facilities as the CER must also consider whether there is an undue burden on Kingston. This must be considered and balanced against public interest considerations. The CER found that there is no undue burden on Kingston from being ordered to provide new facilities as Secure agreed to pay the reasonable costs in that regard.
Tolls for Requested Service
The CER found that the toll between the MIW and the Westspur Pipeline, currently $0.10/m3, provides an upper cap for the potentially just and reasonable and not unjustly discriminatory toll for the interconnection between the Secure Alida Terminal and the Westspur Pipeline and therefore, approved a toll of $0.10/m3.
Like any other shipper, Secure would be subject to the tolls and terms and conditions of service specified in the CER tariff filed by Kingston for the Westspur Pipeline. The CER found that Secure has demonstrated that it would be discriminatory for Kingston to require Secure to enter into a take-or-pay agreement as there is no requirement for a take-or-pay agreement in the Westspur Tariff. The CER agreed with Secure’s submission that the terms and conditions of access to a pipeline must be reflected in the applicable tariff in order to comply with the open access principle.
The CER held that the mechanism for rolling in capital costs to the rate base is clear when a pipeline operates under a cost-of-service toll methodology. The mechanism for rolling in capital costs is unclear when market-based rates are used, as in this case. The CER accepted the argument from Crescent Point that costs in this case should be borne by the user as this is supported by the principle of cost causation.
Terms of Service
The terms of service for a pipeline are set out in its tariff, as defined in section 225 of the CER Act. Secure, as a part of its requested relief, asked that the CER prescribe terms for the Alida Delivery and the Alida Receipt pursuant to section 226 of the CER Act, including service on terms that are not unjustly discriminatory and consistent with Kingston’s published tariff for the Westspur Pipeline. As set out in section 235 of the CER Act, Kingston, as the pipeline company, must not make any unjust discrimination in tolls, service or facilities against any person or locality.
The CER found that the requested service is permitted under the Westspur Tariff. Adding the service as requested by Secure was consistent with common carriage requirements. The CER therefore directed Kingston to file an updated Westspur Tariff with Secure’s Alida Terminal listed as a receipt and delivery point in a timely manner in advance of the connection facilities being operational. The CER noted that it is generally supportive of parties resolving or reaching settlement agreements as long as those agreements do not negatively impact statutory obligations. All terms and conditions of access to a pipeline must be reflected in a public tariff. Otherwise, such terms and conditions, even if negotiated, cannot be relied on.
Regulatory Oversight and Disposition
Throughout the hearing, a number of issues were raised regarding Kingston’s conduct and the Settlement Agreement. In addition to the CER’s authority to grant the specific relief requested by Secure, the CER has authority in the broadest possible terms under the CER Act to ensure that there is appropriate regulatory oversight of the Westspur Pipeline. Section 226 of the CER Act provides that the CER may make orders with respect to all matters relating to traffic, tolls and tariffs. The CER may also inquire into any matter under the CER Act and the CER may conduct compliance audits.
The CER was of the view that these concerns support the potential need for further regulatory oversight over Kingston and the Westspur Pipeline. The CER reminded Kingston that all pipeline companies are expected to comply with the CER Act, applicable regulations, and decisions, orders, and directives of the CER. Kingston must provide shippers with enough information regarding tolls and tariffs to enable them to determine whether a complaint is warranted. There may also be shippers without the resources to make a complaint and the regulation of Group 2 companies relies on the CER being able to review service and tolling issues for the benefit of all interested parties.
The CER therefore directed Kingston to file comments with the CER as to whether it should be regulated as a Group 1 or Group 2 company. Kingston was further directed to provide any reasons it believes it should continue to be regulated as a Group 2 company. The CER also recommended a financial regulatory audit of Kingston.