Pipelines – Tolling Methodology
On September 2, 2015, NGTL filed an application with the NEB for approval of 87km of new gas pipeline and associated facilities’ in northwest Alberta and northeast British Columbia (the “Project”) to connect to the NGTL System.
The Project consists of the Tower Lake Section including 32 km of new NPS 30 pipe (the “TLS”) and the Groundbirch Mainline Loop including 55 km of new NPS 36 pipe (the “GBML”).
On October 6, 2016, the NEB issued its Report to the Governor in Council (“GIC”), in which it recommended the GIC approve the Project (“the Decision”). In the Decision, the majority of the Board also approved NGTL’s proposal to use its current rolled-in tolling methodology for the Project, including the TLS.
The map below shows the proposed route of the Project as recommended for approval by the NEB. The TLS is shown in purple and the GBML is shown in red.
Submission re TLS Tolling Methodology
West Coast Energy Inc. (“WCEI”), WEG, FortisBC Energy Inc., and the Pacific Northwest Group (collectively, the “Opposing Interveners”) made submissions opposing NGTL’s proposed rolled-in tolling methodology and argued for a stand-alone tolling methodology with respect to the TLS part of the Project.
The Opposing Interveners’ arguments included that:
• NGTL’s proposed tolling methodology (i.e. rolled-in) would be inconsistent with the principle of cost-causation;
• NGTL’s methodology would result in significant cross-subsidization from existing NGTL System shippers and disproportionately benefit new shippers using the TLS facilities;
• The level of integration between the TLS and the NGTL System is not sufficient to support NGTL’s proposed rolled-in tolling methodology; and
• Rolled-in cost methodology would provide NGTL with a regulatory (non-competitive) advantage over its competitors, as it allows NGTL to offer tolls for transportation of gas on the TLS well below the actual costs of service for the TLS.
With respect to cost-causation arguments, the costcausation principle provides that users of a pipeline system should bear the financial responsibility for the costs caused by the transportation of those users’ product through the pipeline. The Opposing Interveners argued that the proposed rolled-in methodology would shift all of the costs and risks associated with unused capacity on the TSL to existing users of the NGTL System. The Opposing Interveners argued that such treatment was contrary to the cost causation principle since it was a small group of producers, wishing to access markets serviced by the NGTL System, that were driving the expansion (the “TSL Producers”).
The Opposing Interveners submitted that stand-alone tolling for the TLS would adhere to the cost causation principle because the TSL Producers would bear the costs for connecting their gas supply to the NGTL System.
With respect to cross-subsidization, the Opposing Interveners noted that the TSL Producers would only pay in tolls a fraction of the total costs of providing service on the TSL. The remaining costs would be borne by existing shippers, who would receive little benefit from the expansion/extension. The resulting cross-subsidization would conflict with the cost causation principle.
With respect to integration, the Opposing Interveners argued that the TLS was not an expansion of the NGTL System, but rather, an extension. The Opposing Interveners noted that none of the facilities on the TLS parallel or share the route of the existing NGTL System. The TLS is proposed to connect to a single point at the outer extremities of the NGTL System.
The Opposing Interveners submitted that rolled-in tolls would not be appropriate in such circumstances.
NEB Majority Holdings re Tolling Methodology
The majority of the Board (the “Majority”) held that NGTL’s proposed rolled-in toll treatment for the TLS to be appropriate in the circumstances.
The Majority defined cross-subsidization as occurring where “revenue from a particular shipper group is insufficient to cover the costs caused by the transportation of their product.” The Majority rejected the Opposing Interveners’ submissions that crosssubsidization should be examined with respect to the TFS as a stand-alone pipeline, but rather, held that cross-subsidization should be considered in the context of the entire NGTL system.
The Majority held that the TLS facilities are fully physically and operationally integrated into the NGTL System, offering similar nature of service to all other lateral supply pipelines connecting to the NGTL System.
With respect to whether the TSL Producers or aggregate demand of all shippers caused the need for expansion, the Majority found that all NGTL System shippers contributed to the need for expansion. On this point, the Majority noted that:
• Annual well production decrease at 18% a year, meaning existing demand of all NGTL System shippers necessitates continued expansion;
• Access to competitive supply sources (such as the Montney play) is crucial to the participants in the Western Canadian Sedimentary Basin, both producers and purchasers, in light of ongoing natural decline in supply; and therefore
• All NGTL users, not just specific shippers utilizing the TSL facilities, benefit from the development of the economically viable resources to which the TSL facilitates access.
The Majority also supported its findings with reference to the principles of “no acquired rights” and “no unjust discrimination.” The Majority held that a departure from the rolled-in tolls would confer acquired rights to existing shippers, because those shippers would receive benefits from the expansion without incurring any additional costs. Further, if the NEB departed from rolled-in tolls with respect to the TSL, TSL shippers would be unjustly discriminated against relative to other lateral line shippers subject to rolledin tolls.
The Majority was not persuaded by WCEI and other Opposing Intervener’s arguments related to the anticompetitive effect of rolled-in tariffs. The Majority noted that:
1. The Project provides necessary additional infrastructure in the area, and that the TLS is not duplicative;
2. There was insufficient evidence to conclude the Project would have significant off-loading effects on WCEI’s competing infrastructure;
3. The net economic effect would be positive in light of the cost-efficiency of extracting resources from the Montney play; and
4. The Project will provide providers in the area with additional capacity and choice in choosing where to ship.
Dissent of NEB Member Parrish
Mr. Parrish disagreed with the Majority, and held that rolled-in tolling “will not result in economic efficiency or allow for competitive outcomes in the development of the Tower Lake area.”
Mr. Parrish agreed with the Opposing Interveners that rolled-in tariff methodology provided NGTL with a regulatory advantage over its competitors. Mr. Parrish would have ordered NGTL to re-apply for an alternative tolling methodology that respects both the user-pay principle [i.e. cost-causation] and allows for fair competition to access supply and the NGTL System.
Mr. Parrish noted that by NGTL’s logic, competitors that connect to the NGTL System could also be considered operationally integrated with the NGTL System. However, those competitors cannot offer service under NGTL’s Tariff and therefore cannot be considered commercially integrated. Mr. Parrish concluded that the fact service will be offered under the NGTL Tariff should not be determinative of whether proposed facilities are integrated with the NGTL System.
Comprehensive Review of Tolling in Northeast BC
Some of the Opposing Interveners supported the NEB initiating an inquiry to examine the appropriate tolling methodology for Northeastern BC.
The NEB concluded that determining the need for such a proceeding was outside the scope of the current proceeding considering NGTL’s Project application.
However, the NEB did not reject that there may be need for such a review of tolling methodology in the future. Rather, the NEB declined to make any determination on the issue given that many potentially affected parties did not participate in the proceeding that was currently before the Board. This part of the Decision was made on the basis of administrative law principles of natural justice rather than the substantive need for a review of tolling methodology.
