Firm Service – Access to Capacity
In this decision, the CER denied the application from Enbridge Pipelines Inc. (“Enbridge”) to introduce firm service on the Canadian Mainline.
The CER found that the application would cause a foundational shift in Canada’s oil pipeline system by virtue of its temporal and volumetric scope. It could singlehandedly move the transportation of oil by pipeline in Canada from predominantly uncommitted service to mostly committed capacity.
The CER noted that many of Enbridge’s submissions had merit and that the application provided a strong justification for some firm service on the Canadian Mainline. However, the request from Enbridge to remove 90 percent of uncommitted capacity for periods of up to 20 years would have dramatically and suddenly changed and likely diminished overall access to the Canadian Mainline without a compelling justification. This could risk significant disruptions to the market without a reliable way to respond.
The CER concluded that Mainline contracting does not comply with Subsection 239(1) of the Canadian Energy Regulator Act (“CER Act”) and raises concerns in respect of sections 230 and 235 of the CER Act.
Common Carriage Obligation
Enbridge applied for firm service on 90 percent of the available capacity of the Canadian Mainline. Enbridge also requested a declaration that its proposed Open Season Procedures are appropriate and will lead to an open season that is fair, transparent, and consistent with Enbridge’s obligations pursuant to Section 239 of the CER Act. Section 239 describes the common carriage obligation.
The CER determined that to meet the common carriage obligation while offering firm service, an oil pipeline must meet two requirements; first, an appropriate open season should be conducted, and second, enough capacity should be made available for uncommitted volumes. At the same time, deciding whether the common carriage obligation is met requires a consideration of the details of the individual case.
Fair and Equal Opportunity to Access Firm Service
While the CER Act does not prescribe specific guidelines governing the open season process, in the past, the National Energy Board (“NEB”) has determined an open season process to be appropriate if, as minimum requirements, the process was communicated transparently and consulted on in advance and all parties had fair and equal access to participate in the open season.
The CER determined that aspects of the open season procedures could be appropriate in circumstances where the offered service terms do not create access barriers. However, Enbridge’s suggestion raised the concern that aspects of the offering would effectively limit some parties’ ability to access firm service through the open season.
The CER found that it was reasonably likely that the open season for Mainline contracting would be oversubscribed if it were to move forward. However, it adopted the view previously held by the NEB that it would not be in the industry’s best interest for the CER to dictate the terms and processes for open seasons.
The CER agreed that an open season that provides a fair and equal opportunity for all parties to access capacity, particularly when strongly and broadly supported by stakeholders, can help a pipeline company establish that any discrimination is justified. However, an open season cannot be expected to fully address discrimination faced by future shippers who cannot participate in the open season, nor prospective shippers who face unreasonable barriers to accessing the offering. As such, the CER was not persuaded that the open season would have fully addressed discrimination concerns related to the firm service offering.
Access to Capacity After Implementation of Firm Service
When determining whether an oil pipeline has met its common carriage obligation, the CER considers whether there will be sufficient access to capacity after the implementation of firm service. It found that after implementation of firm service, Enbridge’s proposed reservation of 10 percent of capacity for uncommitted volumes on the Canadian Mainline would not likely provide a meaningful option to access pipeline capacity.
The CER accepted that any reallocation of highly utilized capacity would be expected to result in impacts to parties, both negative and positive. However, the potential levels of apportionment on uncommitted volumes represent an excessive reduction of service quality and access to capacity for uncommitted shippers, when considering other relevant needs, benefits and impacts.
With no new capacity being added as part of the application, the CER found that reallocating capacity from 100 percent uncommitted to 10 percent uncommitted will likely lead to higher levels of apportionment on uncommitted volumes for material periods. Enbridge did not establish that a readily available expansion would reliably address concerns regarding uncommitted capacity, including service quality and access for uncommitted shippers, nor did it provide a compelling justification for the negative impacts on pipeline access.
Enbridge argued that Mainline contracting supports the following needs of Enbridge and the broader market. First, the need to manage Enbridge’s risk exposure. Second, the potential need for additional pipeline capacity from the Wester Canadian Sedimentary Basin (“WCSB”), and third, the need to respond to shippers’ requests. It also submitted that Mainline contracting is necessary for Enbridge to compete on a level playing field with other pipelines.
Enbridge presented the Canadian Mainline’s risk exposure as a key factor in justifying Mainline contracting. In the CER’s view, pipeline risks are a factor to consider when assessing an application for contracting on an oil pipeline, but a specific threshold of material or imminent risk is not necessarily a prerequisite for contracting generally.
The CER found that Enbridge faces some volume risk in the form of both supply risk and competitive risk. It also agreed that Enbridge is entitled to reasonable risk allocation. However, the CER did not find that this risk reasonably justifies the sudden and substantial changes to pipeline access and the other impacts that will potentially result from Mainline contracting.
Enbridge presented Mainline contracting as the only means to facilitate future Canadian Mainline expansions by providing valuable market signals for expansion and by providing assurance that existing capacity will continue to be utilized.
The CER agreed that Mainline contracting could provide some information and risk mitigation. However, it did not agree that it is a prerequisite for Enbridge to pursue future expansion projects.
As part of the need for Mainline Contracting, Enbridge also discussed the request from shippers for capacity and toll certainty and locking in refinery demand for WCSB supply.
The CER determined that there are operational challenges associated with supply unpredictability, and although companies confirmed that they were able to meet their refinery run rates, the CER recognizes that at times they incurred additional costs to do so. The CER considered these challenges to be compelling considerations in this application and weighed them against the absolute flexibility of 100 percent uncommitted capacity preferred by some opposing parties.
Because of the consideration of the benefits against the absolute uncommitted capacity, the CER noted that the benefits of Mainline contracting primarily accrue to a distinct group of market participants. This group has successfully operated its facilities in the absence of firm service. No party suggested that their economic viability would be threatened in the absence of Mainline contracting. However, there was evidence of serious impacts, including on potential viability, for some producers affected by the potential burdens of Mainline contracting.
With respect to securing refinery demand for WCSB supply, the CER agreed that Mainline contracting, and the associated sunk toll obligations, would create an incentive for committed shippers to utilize WCSB production over other supply sources for the length of their contract terms. But the CER was not convinced that this incentive would have a material practical impact on the demand for western Canadian crude oil.
The CER noted that efficiency gains are possible and generally in the public interest. While various efficiency gains under the Mainline Contracting Proposal were reasonably likely, the CER found that their significance is uncertain and needs to be measured against other contextual considerations. In this proceeding, the CER generally found that the net benefits were not sufficiently specified or supported by evidence.
Summary of Findings on the Common Carriage Obligation
Firm service under Mainline Contracting, as structured at the time of this decision, does not meet Enbridge’s common carriage obligations. Considering the common carriage framework, the CER, in summary, found that there would be an uneven distribution of access to the Canadian Mainline. Generally, enough access to capacity after implementation of firm service needs to be decided on a case-by-case basis. In this case, Enbridge did not provide a basis for the uneven distribution.
After weighing the benefits and adverse effects of Mainline Contracting, the CER determined that the benefits would accrue to Enbridge and a specific set of current shippers. The adverse effects would not be distributed similarly but be carried by a different group of shippers and stakeholders, primarily a group without material refining interest. Further, some benefits are purely speculative or not material.
Considering all available forecasts, the CER sees a considerable likelihood of constrained egress, such that apportionment issues would persist for some time and likely worsen for uncommitted shippers under Mainline Contracting. As a result, Mainline Contracting would not lead to access that complies with the common carriage obligation.
The common carriage and unjust discrimination assessments involve separate statutory obligations. Considerations related to the common carriage obligation overlap with those relevant to unjust discrimination noted in sections 235 and 236 of the CER Act, which prohibits unjust discrimination in tolls, services or facilities. The burden to prove that any discrimination is not unfair is placed on the company applying the tolls or providing the service.
The CER determined that the tolls, terms and conditions provided in the application would result in an uneven and disproportionate concentration of benefits without enough justification.
Proposed Tolling Methodology and Terms and Conditions of Service
Enbridge’s proposed tolling methodology included committed, uncommitted, receipt and delivery tankage, and receipt and delivery terminalling tolls. The CER had significant concerns regarding the likelihood that the Mainline Contracting tolling methodology would reliably lead to just and reasonable tolls. The CER considered the proposed method of establishing tolls, the international joint tariff methodology, specific attributes of the proposed toll design, including the base toll design and the toll premiums, discounts, surcharges, and adjustments, the potential for abuse of market power and compared the proposed tolls to cost of service tolls and projections of returns on equity (“ROEs”) under the proposed methodology.
Enbridge’s proposed tolls for committed and uncommitted service are the product of negotiations and not cost-based. As base tolls for proposed services, Enbridge proposed 6.10 $US/bbl for the flex service term committed base toll. As the uncommitted base toll and committed base toll, Enbridge proposed 5.99 $US/bbl and 5.70 $US/bbl, respectively. The base tolls could be subject to surcharges for changes in applicable law, abandonment and decommissioning.
Enbridge proposed a range of contract terms from 8 to 20 years. It noted that opposing parties’ proposals for significantly shorter terms ignored the fact that Mainline Contracting is aimed to mitigate Enbridge’s long-term risk. Enbridge proposed different types of firm service contracts as options for priority service, including five requirements contract types and three take-or-pay contract types.
The CER found that the risks Enbridge sought to mitigate do not justify the long contract terms. Further, the contract term was too long considering the impacts such long-term contracts would put on shippers and potential barriers to the ability of some to access committed service. Alternative flex service term contracts proposed were not considered acceptable as the open season would likely be oversubscribed.
The combination of the proposed international joint tariff methodology, the uncertainty and disparity involving local tolls and costs associated with the US Lakehead System, and the long-term 20-year fixed toll approach obscured whether the proposed methodology would produce just and reasonable Canadian Mainline tolls. Nonetheless, the CER was persuaded that the available evidence indicates that the proposed tolls could produce unreasonable returns and unreasonably exceed the cost of service tolls on a sustained basis on the Canadian Mainline.
The CER found a lack of compelling reasons to incent long-term commitments to the degree proposed in this application. Favouring committed shippers through the components embedded within the overall toll design and various terms and conditions was not justified and raised concerns about discrimination between the services.
The CER denied the implementation of Mainline Contracting and Enbridge’s proposed terms, conditions and tolls. The open season will not proceed, and the existing interim tolls and conditions of service remain in effect.
The CER approved the continuation of Enbridge’s exemption from the requirement to keep the system of accounts described by the Oil Pipeline Uniform Accounting Regulations, but Enbridge must file its financial surveillance reports in full.
The CER also approved adding the Destination Verification (“DSV”) Procedure to the Canadian Mainline tariffs. The CER directs Enbridge to file its updated Rules Tariff and the DSV Procedure document with the CER.