Just and Reasonable Rates – Economic Efficiency
In this decision, the CER considered an application filed by NOVA Gas Transmission Ltd. (“NGTL”) for approval of a new service and related matters. The CER issued its decision on January 19, 2022, and in this letter announced its reasons for the decision. In its decision, the CER:
(a) denied the proposed Firm Transmission – Linked North Montney (“FT-L (NM)”) Service and tolling methodology for the FT-L (NM) Service;
(b) denied the Rate Schedule FT-L (NM) Service that includes the proforma Service Agreement and proforma Schedule of Service under the NGTL Gas Transportation Tariff (the “Tariff”), and consequential amendments to the Table of Contents and General Terms and Conditions under the Tariff;
(c) approved the designation of the Willow Valley Interconnect (“WVI”) as a Group 1 delivery point for the purpose of Firm Transportation – Delivery (“FT-D”) Service and other delivery services in accordance with the rate design approved for the NGTL System, as may change from time to time; and
(d) did not affirm the tolling methodology approved in the RH-001-20191 Decision and Order TG-002-2020 for existing NGTL System services that utilize the North Montney Mainline (“NMML”).
NGTL requested approval of the proposed FT-L (NM) Service. The FT-L(NM) Service would provide linked receipt services from the NMML to the WVI delivery point, where the NGTL System will interconnect with the Coastal GasLink pipeline. NGTL and PETRONAS Energy Canada Ltd. (“PETRONAS”) negotiated the FT-L (NM) Service to connect PETRONAS’ gas supply on a short-haul path between designated receipt points along the NMML and the WVI delivery point.
NGTL further requested that the CER designate the WVI as a Group 1 delivery point for the purpose of FT-D service and other delivery services in accordance with the rate design approved for the NGTL System. As a Group 1 delivery point, the WVI delivery point would be subject to the Group 1 delivery point floor rate, which is the lesser of the East Gate and West Gate FT-D service rates.
In its application, NGTL acknowledged that the requirement of Condition 2 of Order TG-002-2020 would be triggered upon gas delivery at the WVI under either FT-L (NM) Service or FT-D service. NGTL requested an affirmation from the Commission that the NMML Tolling Methodology approved in the RH-001-2019 Decision for existing NGTL System services that utilize the NMML be maintained.
FT-L (NM) Service and Tolling Methodology
As an initial matter, the CER determined that NGTL did not prematurely file the application for FT-L (NM) Service. Phase 1 volumes are intended to begin shipping in 2024. The service tolling methodology is intended to apply to Phase 1 and 2 volumes.
In assessing the FT-L (NM) Service and tolling methodology, the CER considered whether competition was present in northeast British Columbia (“NEBC”) and, if present, what role the existence of competition should play in determining if the FT-L (NM) Service would result in tolls that were just, reasonable, and not unjustly discriminatory. The CER also considered if the FT-L (NM) Service adhered to tolling principles, including cost causation and economic efficiency.
NGTL argued that in a competitive environment, the availability of competitive alternatives often eliminates the potential for abuse of market power by a pipeline. The CER disagreed with this argument. The CER found that while there is competition in NEBC, it is far from a perfectly competitive market. NGTL holds significant market power in NEBC. The existence of some competition does not eliminate the market power held by pipeline companies or the potential for abuse. Given the market power of NGTL and others in these circumstances, NEBC is not a context where competitive forces are sufficient to justify allowing the market to work with limited regulatory oversight. The CER accepted that the FT-L (NM) Service was created in response to a credible competitive alternative, as PETRONAS could ship volumes on either NGTL or Westcoast Energy Canada Ltd. (“Westcoast”). PETRONAS’ stated that without the FT-L (NM) Service, it would have preferred the Westcoast alternative to shipping on NGTL based on the lower cost on Westcoast.
The CER found that it was appropriate for NGTL to develop a specialized service for liquid natural gas (“LNG”) volumes when it was clear that its current service offerings were uncompetitive. However, the CER further found that these service offerings must still result in tolls that are just, reasonable, and not unjustly discriminatory. The CER held that, unlike previous cases, NGTL failed to meet its onus to establish that the FT-L (NM) Service was consistent with tolling principles, particularly the cost causation and economic efficiency principles.
Just and Reasonable Tolls
The CER held that the cost causation principle means 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 without unjustified cross-subsidization by other rate payers.
(a) Cost Causation
The CER determined that tolls from the FT-L (NM), designed mainly to cover incremental costs, do not satisfy cost causation principles and that NGTL did not establish circumstances that justify a departure from the cost causation principle. The Commission was also of the view that the FT-L (NM) Service inappropriately shifts the burden of the risk of cost overruns onto shippers who are not using the FT-L (NM) Service.
The CER found that a toll specifically designed to recover incremental costs but not address existing system costs is a significant, and in this case unjustified, departure from the cost causation principle, particularly where the company has significant fixed costs. The proposed design creates the potential for inappropriate cross-subsidization of PETRONAS by existing shippers by not addressing existing system costs. A user of a pipeline system should bear financial responsibility for the costs caused by the transportation of their product through the pipeline. Pipelines, in general, have significant fixed costs that are recovered through tolls. If every service offered on a pipeline recovered only the incremental costs, then a pipeline would be unable to recover its large, fixed costs and, therefore, would not be financially viable.
NGTL argued that the FT-L (NM) Service would result in net benefits to shippers, as the incremental revenue from the FT-L (NM) Service would exceed costs. The CER found that the proposed net benefit is smaller and less certain than suggested by NGTL and that there is a high degree of uncertainty associated with the forecast benefit. Therefore, the CER was not persuaded that potential net benefits to shippers are certain or valuable enough to mitigate the risk of potential cross-subsidization of existing system costs resulting from the transfer of risk of cost overruns to other shippers inherent in the proposed tolling methodology.
(b) Economic Efficiency
The CER held that, in the context of regulated tolls, economic efficiency generally means that tolls should promote proper price signals, which will protect against over-investment and promote the efficient development and use of pipeline systems.
The CER found that the FT-L (NM) Service does not sufficiently promote efficient use of pipeline systems to justify a departure from the cost causation principle. When viewed as a package of Phase 1 and Phase 2 volumes, the FT-L (NM) Service does not primarily use underutilized capacity and thus will not maximize utilization on the NGTL System sufficiently to justify the departure from the cost causation principle. The CER was further not convinced that the proposed toll represented fair market value. The CER noted that the evidence required to demonstrate that the toll has been maximized and the toll is of fair market value is more than simply that the toll is the product of negotiations between two arm’s length shippers.
Considering these findings, including NGTL’s failure to adequately justify a departure from the cost causation principles, the CER determined the FT-L (NM) Service does not promote proper price signals and is overall not economically efficient.
(c) No Acquired Rights
The CER held that, generally, if tolls are otherwise just and reasonable, long-term transportation contracts do not violate the acquired rights principle simply by virtue of being long-term contracts, particularly if there is some indexing mechanism in place to ensure that the contracted shipper is subject to changing costs on the pipeline system.
The CER found that PETRONAS may not bear financial responsibility for the costs caused by the transportation of its gas under FT-L (NM) Service. This raises concerns regarding the acquired rights principle. Specifically, if PETRONAS is not paying for its present costs incurred, it is not paying for future costs incurred associated with the FT-L (NM) Service by virtue of its contracted use of the FT-L (NM) Service. This could be considered an acquired right.
(d) Conclusion Regarding Just and Reasonable Tolls.
The CER was not convinced that the FT-L (NM) Service results in just and reasonable tolls. The application was not premature, and it was appropriate for NGTL to develop a specialized service for LNG volumes in the face of competition. However, the FT-L (NM) Service did not satisfy cost causation or economic efficiency principles, and the FT-L (NM) Service could therefore not be approved.
The CER noted that unjust discrimination is prohibited by s. 235 of the CER Act. In the case of NGTL, all traffic is natural gas and, therefore, traffic of the same description, as required by s. 230 of the CER Act.
The CER denied the FT-L (NM) Service as NGTL failed to establish that the proposed tolls would be just and reasonable. The CER consequently found that there is no need for the CER to make a finding on FT-L (NM) Service with regards to unjust discrimination.
The CER, however, noted its concerns with the Optional Limited NOVA Inventory Transfer (“NIT”) Access (“OLNA”) feature of FT-L (NM) Service. The CER determined that, contrary to submissions from NGTL, the toll for OLNA is not similar to the Firm Transportation – Receipt (“FT-R”) toll. The OLNA toll is lower and, as a result, discriminatory. OLNA and FT-R Service both apply to traffic of the same description (gas), and both carry gas over the same route, from receipt points on the NMML to the NIT hub. The CER was not persuaded that the OLNA and FT-R Service are not substantially similar services.
Willow Valley Interconnection Delivery Point
The CER approved the designation as a Group 1 delivery point for the purpose of FT-D service and other delivery services as included in the rate design approved for the NGTL System. No party raised concerns regarding the proposed designation. Further, considering the potential benefits and adverse impacts on Canada’s natural gas markets, the CER found that new delivery points in the North Montney will increase the integration of that region to other markets and result in overall benefits to Western Canada Sedimentary Basin producers and others.
Implications of Prior Orders
NMML Tolling Methodology
The CER considered the impacts of the commencement of gas deliveries at the WVI delivery to determine if tolls would remain just and reasonable and not unjustly discriminatory. This included impacts to the findings in Decision RH-001-2019 regarding the extent of integration and utilization between the NMML and the rest of the NGTL System, qualitative benefits of the NMML to NGTL System shippers, and continued compliance with the cost causation and economic efficiency principles.
The CER determined that it did not have sufficient information to determine whether, upon commencement of gas deliveries at the WVI delivery point, that the existing NMML Tolling Methodology would continue to result in tolls that are just and reasonable and not unjustly discriminatory. The CER recognized the commercial uncertainty associated with delay but considered it prudent and reasonable to delay this determination pending receipt of better information that will be available in the future. The CER, therefore, denied NGTL’s request without prejudice.