Examination Decision – Tolling Methodologies in Northeast BC
On January 26, 2017, the NEB Chairperson authorized Board Member L. Mercier to initiate an examination to determine whether an inquiry of the tolling methodologies or tariff provisions of one or more of the Group 1 NEB-regulated natural gas pipeline companies operating in Northeast BC was warranted.
In this NEB letter decision, the NEB determined that it would not hold an inquiry, because:
(a) doing so would introduce undue uncertainty to the Northeast BC supply basin;
(b) an inquiry might not effectively resolve the issues; and
(c) the NEB’s established processes – including Filing Manual revisions and upcoming toll applications – were better suited to address these potential issues.
Although the NEB declined to hold an inquiry, it found that it was necessary to review the tolling methodologies of NOVA Gas Transmission Ltd. (“NGTL”) and Westcoast Energy Inc. carrying on business as Spectra Energy Transmission (“Westcoast”). The NEB wants to ensure adherence to established tolling principles, fair competition and efficient infrastructure development in Northeast BC. The Board found that capital expansion and depreciation policies were closely interrelated in this context and that reviewing these policies was also required.
Concerning Alliance Pipeline Ltd. (“Alliance”), the NEB held that:
The Board does not require additional information from Alliance for the purposes of this Examination, given the recent approval of its New Services Offering proposal. The New Services Offering that Alliance has recently implemented places the volume/revenue risk and the preponderance of cost risk on the pipeline. Firm shippers on Alliance accept the risks associated with their contracting decisions and the utilization levels of their contracted services. In addition, the capital cost of new interconnections and facility expansions are paid for by the requesting party(ies) receiving the benefits and not by existing shippers. This reflects a stand-alone tolling methodology and provides a direct link between risks/costs borne by parties requesting new infrastructure and the benefits received by these parties.
Background
NGTL, Westcoast, and Alliance (the “Pipeline Companies”) are all Group 1 NEB-regulated natural gas pipeline companies. The Pipeline Companies compete for customers within the resource-rich gas formation in Northeast BC, vying to attract shippers seeking to transport gas produced in that area to market on the competing Pipeline Companies respective systems. Each of the Pipeline Companies operates under distinct tolling methodologies and tariff provisions.
Other Processes to Consider Issues
Filing Manual Revisions
To ensure issues related to fair competition are addressed in future applications, the NEB stated that it would consider revisions to its Filing Manual. For example, modifications could include:
(a) Changes to filing requirements regarding notification of commercial third parties; and
(b) Additional filing requirements for facility extension applications using the pipeline’s existing toll methodology including requirements that an applicant: (i) address whether the project could proceed on a stand-alone basis; and (ii) justify rolled-in tolling treatment for proposed facilities, including quantification of costs and benefits.
The Board stated that any such revisions would be developed through the NEB’s established process for Filing Manual revisions, which would include industry consultation.
Upcoming Toll Applications
To assess the potential issues regarding competition between NGTL and Westcoast, the NEB found that additional information concerning each company’s toll methodology, capital expansion policy and depreciation policy was required. The Board determined that it would consider this information in each company’s respective 2019 final tolls application.
Boards Concerns Regarding NGTL Tolling Methodology
The Board found that whether NGTL’s tolls adhere to the principles of cost causation and economic efficiency was an issue. The NEB’s expressed concerns about NGTL’s existing tolling methodology included the following:
• NGTL’s current toll methodology does not appropriately recognize changes to system usage.
• Most of the contracts underpinning new extensions on the NGTL System are for a shorter duration than the extension facilities’ depreciable life.
• Inefficient use of existing system infrastructure can result if system extensions are not tolled appropriately.
• If NGTL’s tolls do not appropriately respect the user-pay principle, then NGTL will be afforded a competitive advantage in seeking to extend its system into Northeast BC.
• NGTL’s criteria for system extensions is also an issue, given that NGTL’s decisions to construct facilities, based on those criteria, may result in the underutilization of extensions.
The NEB noted that in the Komie North (GH-001-2012), Towerbirch (GH-003-2015) and North Montney (GH-001-2014) applications as well as this examination, parties expressed concerns that NGTL’s toll methodology may be providing it with an unfair competitive advantage to expand into Northeast BC. Other parties raised concerns that NGTL’s significant capital expenditures have increased system costs and risks.
The Board found that, to date, NGTL tolling had not caused any significant underutilization on the Westcoast system, noting Westcoast’s system being fully contracted and recently expanded. The Board acknowledged the risk that such effects could occur in the future.
Board’s Concerns Regarding Westcoast Tolling Methodology
The NEB noted that, while Westcoast’s toll methodology and system expansions had not faced the same level of scrutiny as NGTL’s, some of the same concerns regarding adherence to tolling principles were present. Like NGTL, for Zone 3 of its system, Westcoast rolled-in the cost of system extensions and used postage stamp toll.
The Board noted that Westcoast did not have a written policy regarding capital investments in expansions and extensions. The Board found that Westcoast should develop, document, and file such information. The Board explained that this capital investment policy and accompanying explanation and analysis of Westcoast’s depreciation policy and practices would inform the Board of the risks faced by Westcoast and its shippers.
Directions to NGTL and Westcoast
The Board directed NGTL and Westcoast to file information with each company’s respective 2019 final toll application. The NEB ordered that this information be filed regardless of whether NGTL or Westcoast reached a negotiated settlement with its shippers.
NEB Direction to NGTL
The NEB directed that NGTL file with its 2019 final toll application the following:
(a) Policies Affecting Capital Spending for System Extensions: An analysis of how NGTL’s Tariff and Guidelines for New Facilities ensure appropriate cost accountability for shippers requiring receipt extensions; the analysis should describe any changes proposed to introduce stronger cost accountability for receipt shippers and NGTL. The analysis should also include an overview of how NGTL’s Tariff (e.g., Rate Schedule FT-R and Appendix E to NGTL’s Gas Transportation Tariff), Guidelines for New Facilities, 2017 Annual Plan, and the Facilities Design Methodology, when applied together with NGTL’s toll methodology, contribute to: (a) the optimization of NGTL’s extension additions; and (b) the utilization of its existing infrastructure.
(b) Depreciation Policy and Practices:
(i) an analysis of NGTL’s current depreciation study that assesses: how NGTL’s system-wide depreciation rates recognize the changing flows on its system and the changing utilization levels on mainline sections/segments;
(ii) whether the service life for receipt facilities in the depreciation study are aligned with the receipt contract terms so that captive customers are not burdened with responsibility for receipt extensions after receipt contracts have terminated; and
(iii) the steps that NGTL proposes to take to ensure that the costs of any undepreciated receipt pipeline facilities that are being or will be underutilized or not used will be allocated fairly to shippers and NGTL in the future.
(c) Tolling Methodology and Tariff Provisions: An analysis of NGTL’s tolling methodology and tariff provisions that addresses whether the current methodology should be retained for all or part of the existing NGTL system.
NEB Directions to Westcoast
The NEB directed that Westcoast file with its 2019 final toll application the following:
(a) Policies Affecting Capital Spending for System Extensions and Expansion:
(i) Develop, document and file with the Board Westcoast’s internal policies, procedures, and practices for capital investments in expansion and extension facilities in Zone 3;
(ii) Provide an analysis of how Westcoast’s policies, procedures, and practices ensure appropriate cost accountability for Westcoast and shippers requiring facility additions in Zone 3; and
(iii) Depreciation Policy and Practices: An analysis of the depreciation study that Westcoast is required to file as per TG-003-2016 that assesses:
(i) whether the service life estimates for facilities in Zone 3 in the depreciation study are aligned with the terms (including estimated renewals) of the transportation contracts in Zone 3; and
(ii) if the service life in the depreciation study is greater than the estimated terms of the transportation contracts. When the service life is greater, Westcoast has to explain the steps that Westcoast proposes to take to ensure that the costs of any undepreciated pipeline facilities that are being or will be underutilized or not used will be allocated fairly to shippers and Westcoast in the future.
(b) Tolling Methodology and Tariff Provisions: An analysis of Westcoast’s Zone 3 tolling methodology and tariff provisions that addresses whether the current methodology should be retained.
