Facility Variance Application – Sunset Clause Extension – Tolling Methodology
On May 23, 2018, the NEB issued its Reasons for Decision MH-031-2017 (the “Decision”) regarding NOVA Gas Transmission Ltd.’s (“NGTL”) application to extend the sunset clause and vary Condition 4 of Certificate GC-125 in respect of the North Montney Mainline (“NMML”) project (the “Variance Application”).
Approval of the Variance Facilities
The NEB found that there was a need for the facilities described in the Variance Application (the “NMML Facilities”) and that the NMML Facilities were economically feasible.
In April 2015, the NEB recommended that the Governor in Council (“GIC”) approve the original NMML Project. The GIC approved the project in June 2015 and directed the Board to issue Certificate GC-125 (the “Certificate”). The Certificate included Condition 4, which was one of the subjects of NGTL’s Variance Application. The original NMML project was intended primarily for transporting gas for export from the proposed Pacific NorthWest Liquefied Natural Gas Project (the “PNW LNG Facility” or the “PNW LNG Project”). PNW subsequently decided not to proceed with the PNW LNG Facility.
Tolling Methodology
The Board found that approving NGTL’s existing tolling methodology for the NMML Facilities over the long-term would not result in just and reasonable tolls, due to the lack of adherence to the cost causation principle and goal of economic efficiency.
NGTL did not seek to vary or amend the original Toll Order TG-002-2015, as amended, (the “Original Toll Order”). However, recognizing that the Board might conclude that there was no longer a need for two time periods and deferral account, NGTL requested that the Board find it appropriate for NGTL to apply the same tolling methodology to the NMML Facilities as used to calculate tolls for all other facilities on the NGTL system. The Board noted that NGTL filed evidence to attempt to demonstrate that changed circumstances had mitigated the Board’s concerns regarding cost causation, cross-subsidization and risk.
Original Toll Order No Longer Appropriate
The Board found that the Original Toll Order was no longer appropriate for the NMML Facilities, given that the circumstances in the Variance Application had changed from those of the original NMML project. Namely, with the cancellation of the PNW LNG Facility, the development of the NMML Facilities would no longer be associated with liquefied natural gas development. Gas from the NMML Facilities would now all flow east to the existing NGTL system or into storage at Aitken Creek.
The Board found that it was no longer appropriate to use the Transition Period and Long-Term Phase as set out in the GH-001-2014 Report and Original Toll Order.
Provisional and Post-Provisional Tolling Periods
The Board ordered that for a provisional period of one year, starting from the date the Governor in Council approves the amendments to the original certificate (the “Provisional Period”), NGTL may apply its current toll methodology to the NMML Facilities. However, the Board ordered that the tolls charged on the NMML Facilities would be unconstrained tolls not subject to the FT-R toll ceiling (the “Provisional Tolling Methodology”).
On the commencement of the Post-Provisional Phase (begins at the end of the Provisional Period), unless NGTL receives approval of a new tolling methodology, the Board ordered that NGTL shall calculate the tolls for services on the NMML Facilities using a stand-alone tolling methodology. The stand-alone toll would be derived from a separate NMML Facilities cost pool and would recover these costs from the NMML shippers. Accordingly, NMML shippers would need to pay a stacked toll, comprised of this NMML toll, as well as the FT-R toll at Saturn.
The Board allowed NGTL to apply for a new tolling methodology on the NMML Facilities within one year of the issuance of the Decision that addressed the concerns outlined in its “Comments Regarding Tolling for the Post-Provisional Tolling Phase,” summarized further below.
Separate Cost Pools and Deferral Account
The Board ordered that NGTL maintain separate cost pools for the NMML Facilities and the existing NGTL system. The Board considered that separate cost pools would allow accountability for the costs related to the NMML Facilities to clearly rest with NGTL and the NMML Facilities’ shippers. The NMML Facilities’ cost pool would include establishing and maintaining separate accounting records for the NMML Facilities and, during the Provisional Period, holding in a deferral account any difference between North Montney cost of service (“COS”) related to the NMML Facilities and incremental revenue from NMML-related receipt contracts using the Provisional Tolling Methodology. The cost pool for the NMML Facilities shall be maintained for the life of the facilities, or until the Board directs otherwise.
The Board found that NGTL had not demonstrated that the NMML Facilities would result in any objectively identifiable and significant incremental delivery revenues. Accordingly, the NEB directed that no incremental delivery revenue may be allocated to the cost pool.
Integration and Nature of Service
The Board found that the NMML Facilities would be integrated with the existing NGTL system and would offer similar services as those offered on the existing NGTL system. However, the NEB found that integration and similarity of services were not sufficient alone to support the use of rolled-in tolling, as applied for by NGTL, over the long-term. The Board explained that it must also consider whether the tolling methodology adequately addressed cost causation.
The Board found that the degree of integration for the NMML Facilities was less than it would be for joint-use type facilities within a system’s existing footprint, such as additional looping or a compressor station along existing pipeline right-of-way, which would be physically used by both new and existing system shippers. The Board noted that the NMML Facilities were in a distinct right-of-way beyond the terminus of the existing NGTL system, and would only be physically utilized by an identifiable set of shippers.
Cross-Subsidization
The Board found that applying the existing NGTL tolling methodology over the long-term for service on the NMML Facilities would result in excessive levels of cross-subsidization of the NMML Facilities by existing NGTL shippers. However, during the Provisional Period, with the FT-R ceiling removed, the Board found that the degree of cross-subsidization would not be excessive. For the Post-Provisional Period, the tolling methodology for the NMML Facilities must reflect greater adherence to the cost causation principle.
The Board noted NGTL’s estimate that the FT-R revenue associated with the NMML Facilities over 20 years would be $3.19 billion, while the NMML Facilities COS over the same period was expected to be $2.88 billion. NGTL claimed that the difference was a “net benefit” to the existing NGTL system of $317 million, or an annual average of approximately $22 million.
However, the Board found that the $317 million figure did not account for the costs that would be incurred in transporting NMML shippers’ gas on the existing NGTL system. Were one to subtract from the $317 million, the COS associated with transporting such gas on the existing NGTL system, the “net” would, in fact, be a negative amount of significant value. In the Board’s view, such revenue would not be an adequate contribution toward the costs on the existing NGTL system caused by the NMML shippers.
The Board found that existing system shippers without contracts on the NMML Facilities only indirectly contribute to the need for, and use of, the facilities, by generating demand for maintaining declining system supply. Rolling in the costs of the NMML Facilities into a single NGTL system cost pool and allocating the costs equally to receipt and delivery shippers on the system did not reflect this reality. The Board found that in these circumstances, the tolls charged to shippers on the NMML Facilities must be sufficient to cover the costs NMML Facilities shippers cause on the existing NGTL system, as well as costs they cause on the NMML Facilities, less any portion of the NMML Facilities costs that are caused by, and rightfully attributable to, existing system shippers.
Economic Efficiency
The Board found that applying the existing NGTL tolling methodology to the NMML Facilities failed to provide proper price signals, thereby failing to both protect against over-investment and promote the efficient development and use of pipeline systems. Because users of the NMML Facilities would not be charged tolls commensurate with the costs they cause on the system, the Board found that, in this case, NGTL’s tolling methodology was inconsistent with the goal of economic efficiency.
The Board found that applying NGTL’s existing tolling methodology to the NMML Facilities would fail to hold the responsible parties accountable for the significant incremental costs to construct and operate those facilities. Applying the toll ceiling further contributed to the problematic price signals.
No Unjust Discrimination
The Board found that charging different tolls to Variance Facilities shippers would not result in unjust discrimination, based on the following:
(a) gas on the NMML would be transported over a different route than gas anywhere else on the NGTL system;
(b) gas from the Variance Facilities’ receipt points would be transported on the NMML to the existing NGTL system at Saturn, and would not be commingled with other gas streams until it enters the existing NGTL system at Saturn; and
(c) it was possible to determine the exact route taken by the volumes while they are on the NMML.
Competition
As summarized above, the Board found that NGTL’s proposed tolling of the NMML Facilities would not respect the user pay principle, and would result in improper price signals, due to the excessive level of cross-subsidization from existing NGTL system users. Accordingly, under rolled-in tolling and applying NGTL’s current toll methodology, the NMML Facilities would have an unfair advantage in attracting gas from producers in the area who wish to access NIT. The NEB found that this advantage could cause undue harm to competitors.
The Board found, however, that the tolling methodology approved for the Provisional Period would have minimal impact on Westcoast’s ability to compete. The NEB noted that NGTL may only use the Provisional Tolling Methodology for one year, less than the four year Transition Period approved in the GH-001-2014 Report. Further, if NGTL fails to file a toll application that is approved by the Board, then, at the end of the Provisional Period, the NMML Facilities would be subject to stand-alone tolling.
NEB Comments Regarding Tolling for the Post-Provisional Tolling Phase
NGTL has one year following the issuance of the Decision to re-apply to the Board with a new tolling methodology for the NMML Facilities before defaulting to stand-alone tolling. Such an application may be for tolling on the NMML Facilities alone, for tolling the NMML Facilities as part of a toll zone, or as part of an application for tolling on the entire NGTL system.
As with any tolling methodology subject to NEB jurisdiction, the Board noted that any Post-Provisional Tolling Methodology (“PPTM”) developed by NGTL must result in tolls that are just, reasonable and not unduly discriminatory. The Board went on to provide some additional guidance to NGTL for the PPTM, based on the evidence provided in the Variance Application proceeding:
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The PPTM should reflect greater adherence to the cost causation principle, considering the extent incremental revenue covers the incremental COS of the new facilities as well as the extent that revenues make a meaningful financial contribution to the cost of using services on the existing NGTL system.
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The PPTM must make a proposal for the disposition of costs accumulated in the deferral account for the NMML Facilities.
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To send proper price signals and adhere to the principle of cost causation, the PPTM should account for: 1) the costs to use the existing NGTL system; and 2) the incremental costs caused by the construction and operation of the NMML Facilities, less the portion of the costs attributable to the existing system users’ indirect use of, and need for, the NMML Facilities.
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While existing FT-D shippers benefit from and contribute to the need for continued sources of gas supply, the proportion of costs from the NMML Facilities allocated to existing system shippers’ tolls should reflect the fact that existing system shippers only indirectly contribute to the need for, and the use of, the NMML Facilities. NGTL may address these concerns in the PPTM by:
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developing a separate cost pool for the NMML Facilities, whereby the costs from the NMML Facilities are allocated to the NMML cost pool and the existing NGTL system cost pool in proportions reflecting the fact that NMML shippers are the main drivers of the costs of the NMML Facilities;
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applying a toll surcharge to shippers on the NMML Facilities, in addition to the toll these shippers would pay under NGTL’s existing toll methodology; and/or
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creating a toll zone, including the NMML Facilities, which would result in an increased allocation of the costs caused by the NMML Facilities shippers to the FT-R tolls.
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As the FT-R shippers on the NMML Facilities and NGTL are largely the beneficiaries from the decisions that define the scope and costs of NMML Facilities, so should they bear the proportionate risk for these decisions. Accordingly, the PPTM should promote efficient use of existing NGTL infrastructure and discourage overbuilding.
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If NGTL applies with a PPTM as part of an application for tolling on the entire NGTL system, then the PPTM must account for the changed circumstances and evolution of the system since the Board first approved NGTL’s rate design methodology in the RHW-1-2010. In the Board’s view, demonstrating cost causation with the existing tolling methodology, particularly with the toll ceiling, is difficult in the case of major supply extensions, like the NMML Facilities.
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The Board suggested that NGTL evaluate and justify the appropriateness of any proposed ceiling and floor rates for its FT-R service, particularly with respect to the distance sensitivity of its tolling methodology. In the Board’s view, NGTL’s tolling methodology is insufficiently distance sensitive to address a major supply extension like the NMML Facilities. Simply removing the toll ceiling is not sufficient to address the deficiencies identified in this Decision.
Need for the NMML Facilities
Based on its evaluation of the new facts and changed circumstances since the GH-001-2014 proceeding, the NEB found that there continued to be a need for the NMML Facilities.
Given its views on natural gas supply, markets and the existence of 20-year FT-R contracts, the NEB found that the NMML Facilities were expected to be used at a reasonable level over their economic life and that demand charges are likely to be paid. As a result, the NEB found that the NMML Facilities were economically feasible. Based on this finding and the new facts and changed circumstances, Condition 4 was no longer required.
Gas Supply
The NEB found that there was adequate supply to support the project, based on the following:
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North Montney gas production was currently cost competitive with other sources of production in the Western Canadian Sedimentary Basin (“WCSB”) and North America;
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many shippers on the NMML Facilities have significant resources, have made large investments in developing their natural gas assets, and have substantial long-term growth and investment plans; and
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North Montney supply assessment had increased since the original NMML proceeding.
Markets
The NEB found that the absence of the PNW LNG Project demand did not diminish the need for NMML Facilities, based on the following:
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The significant North American market would be able to absorb the project volumes.
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In the short term, additional North Montney production would largely be used to help replace natural declines on the NGTL system and might displace other sources of gas production in the WCSB.
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In the long-term, as integrated North American markets continue to evolve, gas demand would be expected to continue to seek out low-cost sources of gas supply, which could result in expansions on the NGTL system to accommodate North Montney production growth, as well as increases to export capacity.
Firm Transportation Contracts
The NEB found that the 20-year terms and limits on primary and secondary terms for NMML FT-R contracts supported long-term use of the NMML Facilities.
Although the original NMML Application was underpinned by over 2 Bcf/d of FT-D contracts, the FT-R contracts on the Variance Facilities were no longer underpinned by any FT-D contracts. The NEB found that this was consistent with the NGTL Tariff, which does not require shippers to hold reciprocal receipt and demand contracts on the NGTL system.
The NEB suggested that shippers and NGTL continue to explore optimal system design processes as production in the Basin continues to evolve. Pipelines in the North Montney area do not have excess capacity available. It is not the responsibility of the NEB to protect producers in one area of the WCSB from competition from potentially lower cost sources of gas supply in other areas. As long as the tolls set on the NMML Facilities respect the cost causation principle and are set in a way that promotes proper price signals, producers in differing areas of the WCSB can compete on a level playing field.
Aboriginal Matters
Proponent Consultation
The NEB found that:
(a) NGTL had undertaken an appropriate level of consultation with potentially affected Aboriginal groups, considering that the Variance Application involved changes to the previously-assessed and approved NMML project related to commercial aspects, and did not require any additional land; and
(a) NGTL designed and implemented appropriate consultation activities with Aboriginal communities that met the requirements and expectations set out in the Board’s Filing Manual, commensurate with the setting, nature and magnitude of the Variance Application.
Crown Consultation
The NEB found that:
(a) there had been adequate consultation and accommodation for the purpose of the Board’s decision on the NMML Facilities, including the mandated consultation performed by NGTL and the consultation undertaken through the Board’s project assessment process; and
(b) any potential adverse impacts as a result of the NMML Facilities on the interests, including rights, of affected Aboriginal groups are not likely to be significant and can be effectively addressed.
As a result of the above, the NEB found that the requirements of section 35 of the Constitution Act, 1982 had been met, such that approval of the NMML Facilities was in keeping with the honour of the Crown.
