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Review and Variance Application of TransCanada Keystone Pipeline GP Ltd. Concerning the Commission of the Canada Energy Regulator Decision in the RH-005-2020 Hearing, CER Letter Decision

Link to Decision Summarized

Facilities – Industrial System Designation

Application

TransCanada Keystone Pipeline GP Ltd (“Keystone”) filed an application seeking a review and variance of the CER decision for Phase 1 of the RH-005-2020 (“Decision”) proceeding (the “Review Application”). In the Decision, the CER determined that certain costs, such as certain drag reducing agent (“DRA”) expenses and the upgraded pressure control valves (“PCV”) capital program, were not recoverable through variable tolls and directed Keystone to recalculate and refile the 2020 and 2021 tolls to remove these costs from the variable tolls.

Decision

The CER determined that Keystone did not, on a prima facie basis, raise sufficient doubt as to the correctness of the Decision and dismissed the Review Application.

Pertinent Issues

In the Review Application, Keystone alleged the following four errors of law.

Costs of DRA are Recoverable in the Fixed Portion of Keystone’s Tolls

Keystone argued that the CER erred in determining that the costs of DRA are recoverable in the fixed portion of Keystone’s tolls (“Fixed Tolls”). Keystone asserted that the CER concluded that costs of DRA are not properly considered operating, maintenance, and administration (“OM&A”) costs if they are used to increase the capacity of the system, and that those costs of DRA used to increase the capacity are recoverable in the Fixed Toll. Keystone submitted that this finding is an error of law because:

  • it is inconsistent with the CER’s finding in the Decision that the definition of the Fixed Toll only included actual development, construction and acquisition costs incurred by Keystone within two years of the system going into service;
  • DRA was not contemplated at the time the system was designed and, as a result, DRA commodity costs could not have been included in the “development, construction and acquisition costs” for the purposes of the Fixed Toll; and
  • Keystone did not incur any DRA costs within the first two years of the system going into service and, as a result, DRA costs could not be included in the Fixed Toll.

Keystone also asserted that the Federal Court of Appeal’s decision in Nowlan v Canada (Attorney General), 2022 FCA 83 (“Nowlan”) states, at paragraph 38, that it is an error to interpret contractual provisions in a manner that is inconsistent with other interpretations of the same provisions.

The CER determined that Keystone failed on a prima facie basis to raise doubt regarding the correctness of the CER’s decision on this basis. The CER determined that the Decision does not contain the inconsistent findings alleged by Keystone, nor does it contain findings Keystone alleges the CER made. Also, the Nowlan case cited by Keystone does not stand for the proposition asserted by Keystone, and the CER’s findings discussed in the first ground of the Review Application are based on a consistent approach to contractual interpretation, which aligns with the principles from Nowlan.

Fixed Tolls are the Committed Shippers’ Payment for the Costs Required to Create Approximately 590,000 Barrels per Day of Capacity

Keystone argued that the CER made an error in finding that the Fixed Toll would be the committed shipper’s payment for the costs required to increase the Keystone’s system nominal capacity to approximately 590,000 barrels per day (“bpd”) because this finding is premised on another finding for which there is no evidence in support. According to Keystone, this finding is premised on Keystone bearing the risk that, if the facility set agreed to with the shippers did not achieve approximately 590,000 bpd of capacity, Keystone would be responsible for the costs of providing capacity to address the shortfall.

The CER noted that these alleged findings all have a common element: that Keystone was required to build an expansion that achieved 590,000 bpd of nominal capacity and, if it fell short, then Keystone was required to incur additional costs to continue to increase capacity to 590,000 bpd, which it could no longer recover through the Fixed Toll because the period to recover had passed.

Keystone could not recover those costs because it incurred them after the recovery period for costs to expand the system’s nominal capacity through the Fixed Toll had ended, which is a consequence of the tolling structure under the transportation service agreements (“TSAs”) and the timing of when Keystone incurred the costs.

The CER determined that Keystone failed on a prima facie basis to raise doubt as to the correctness of the CER’s decision on this basis. Keystone failed to establish on a prima facie basis that the CER’s impugned finding lacks an evidentiary foundation or that the CER made inconsistent findings.

Recoverability of Costs Resulting from Alleged Deficiencies in the Keystone Canada Pipeline System’s Design or Construction

Keystone argued that the CER erred by finding that Keystone cannot recover costs resulting from deficiencies in the Keystone’s system design and construction.

The CER determined that Keystone did not raise sufficient doubt as to the correctness of the Decision because the CER based its findings on cost recoverability pursuant to TSAs. The CER was not required to apply and did not apply the prudence test to make its findings on cost recoverability pursuant to the TSAs. With respect to the DRA costs, the CER based its finding that Keystone could not recover the costs of DRA through variable toll because Keystone used the DRA to increase the system’s nominal capacity, since costs to expand capacity are not recoverable as part of the variable toll. Finally, the NEB decisions that Keystone relied on to support its position do not support Keystone’s assertion that the appropriateness or reasonableness of how CER-regulated pipelines are designed and constructed is assessed using the prudence test.

Costs of Keystone’s Upgraded Pressure Control Valve Program are not Recoverable in the Variable Tolls

Keystone submitted that there was a breach of procedural fairness as well as an error of law arising from the CER’s interpretation of the TSA regarding its treatment of PCV costs. More specifically, Keystone submitted that: it was not provided a full and fair opportunity to know and respond to the case against it regarding recoverability of the upgraded PCVs program costs through the variable toll: it was not aware that Phillips 66 Canada Ltd. (“Phillips”) and Cenovus Energy Inc. (“Cenovus”) specifically disputed the issue and was not provided an adequate opportunity to respond; and it did not have a full and fair opportunity to respond to the case against it because the CER’s decision about PCV program costs was based on a fundamentally different rationale than the one contained in evidence.

The CER determined that Keystone failed to raise sufficient doubt regarding the correctness of the Decision. The CER found that Keystone had a full and fair opportunity to know and respond to the case against it. The CER did not make findings in the Decision that certain OM&A costs were excluded from recovery in the variable toll. Also, the CER is not required to align its findings with the rationale of witnesses or the positions of parties. Finally, an allegation of an error of law in a review application should not be based on arguments that could have been, but were not, raised before the CER reached its decision, such as the one proffered by Keystone in the form of its “pipeline repairs” argument raised for the first time in its submissions on its Review Application.

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