NATIONAL ENERGY BOARD
IN THE MATTER OF the National Energy Board Act and the Regulations made thereunder;
AND IN THE MATTER OF an Application by TransCanada PipeLines Limited and TransCanada Keystone Pipeline GP Ltd. for orders pursuant to Parts I, III, IV and V of the National Energy Board Act.
TRANSCANADA PIPELINES LIMITED and TRANSCANADA KEYSTONE PIPELINE GP LTD.
TRANSFER APPLICATION
APPENDIX B
WRITTEN EVIDENCE
OF
TRANSCANADA PIPELINES LIMITED
and
TRANSCANADA KEYSTONE PIPELINE GP LTD.
JUNE 2006 TABLE OF CONTENTS
I. INTRODUCTION...... 1
II. REGULATORY STANDARD ...... 6
III. DEVELOPMENT AND STATUS OF THE KEYSTONE PIPELINE PROJECT...... 9
IV. TERMS OF THE TRANSFER...... 14
V. ANALYSIS OF THE EFFECTS OF THE TRANSFER ON THE TRANSCANADA MAINLINE...... 19
VI. IMPORTANCE OF THE TRANSFER TO THE KEYSTONE PIPELINE ...... 32
VII. THE KEYSTONE PIPELINE AND THE PUBLIC INTEREST ...... 35
VIII. CONCLUSION ...... 41
TransCanada and Keystone Transfer Application Appendix B Page 1 of 41
1 I. INTRODUCTION
2 Q1. What is the Keystone Pipeline Project (Keystone Project or the Project)?
3 A1. The Keystone Pipeline Project is a proposal to build a 2,960 kilometre (1,830 mile)
4 pipeline (Keystone Pipeline or Pipeline) that will have nominal capacity to
5 transport approximately 69 160 cubic metres (435,000 barrels) per day of light to
6 heavy grades of crude oil from Hardisty, Alberta to Wood River and Patoka,
7 Illinois. Construction is proposed to begin in late 2007, with commercial
8 operations scheduled to commence by the fourth quarter of 2009.
9 Appendix C to the Application, entitled Keystone Pipeline Project Maps includes
10 a map of the entire Keystone Pipeline in both Canada and the United States.
11 Q2. What pipeline facilities are involved in the Keystone Project?
12 A2. The Project involves new pipeline construction and the conversion from gas to
13 oil transmission of existing facilities that presently comprise part of the mainline
14 gas transportation system (Mainline) of TransCanada PipeLines Limited
15 (TransCanada).
16 The Canadian portion of the Project includes the construction of approximately
17 370 kilometres (230 miles) of new pipeline and the conversion of approximately
18 860 kilometres (530 miles) of 864 mm O.D. (34-inch) pipeline of Mainline Line
19 100-1 between Burstall, Saskatchewan and Carman, Manitoba (the Facilities), at a
20 total cost of approximately Cdn $664 million. Appendix C also includes a larger
21 scale map of the segment of the Pipeline that is located in Canada.
22 The Canadian segment of the Pipeline will be constructed, owned and operated
23 by TransCanada Keystone Pipeline GP Ltd. (Keystone), a "company" as defined
24 in the National Energy Board Act (Act) that is a wholly owned subsidiary of
TransCanada and Keystone Transfer Application Appendix B Page 2 of 41
1 TransCanada and is the general partner acting on behalf of TransCanada
2 Keystone Limited Partnership (Keystone LP).
3 There will be approximately 1 730 kilometres (1,070 miles) of new pipeline
4 construction in the United States.
5 The total cost of the Project is estimated to be U.S. $2.1 billion.
6 Q3. What regulatory approvals are required from the National Energy Board
7 (Board) to allow the Keystone Project to proceed?
8 A3. TransCanada and Keystone understand that approvals are required under Parts
9 I, III, IV and V of the Act and related regulations. Keystone requires a certificate
10 of public convenience and necessity (CPCN) in respect of all the facilities of the
11 Pipeline (Part III) that are located in Canada. TransCanada and Keystone require
12 leave of the Board to effect the transfer of the Mainline Facilities (Part V) by sale
13 and purchase. Toll and tariff-related approvals are required under Part IV. An
14 amendment is required to reflect removal of the Facilities from the original
15 CPCN that authorized construction of the Facilities in gas service. Further Board
16 orders will be necessary to put the Facilities into oil service as part of the
17 Keystone Pipeline.
18 Q4. Please describe the nature and expected timing of the regulatory applications.
19 A4. Applications for the requisite regulatory approvals for the Keystone Project are
20 being made in two steps. Commercial and design considerations require
21 approval of the transfer of the Facilities no later than the first quarter of 2007 so
22 this application for approval of the transfer of the Facilities (Transfer Application
23 or Application) is being made now. However, the application by Keystone
24 pursuant to section 52 of Part III of the Act for a CPCN cannot be filed until
25 supporting environmental impact assessments are conducted in the summer of
TransCanada and Keystone Transfer Application Appendix B Page 3 of 41
1 2006. It is therefore expected that late in 2006 Keystone will file an application
2 with the Board (Keystone Project Application) for other approvals required for
3 the Canadian segment of the Keystone Pipeline Project including the CPCN, and
4 of its proposed toll methodology and tariff pursuant to Part IV of the Act. A
5 concurrent application will be made pursuant to section 21(2) of Part I of the Act
6 for an order of the Board that varies Board Certificate of Public Convenience and
7 Necessity No. GC-1, issued to TransCanada on April 11, 1960, by removing the
8 Facilities, effective upon their transfer to Keystone.
9 Q5. What are the commercial and design considerations that require the Transfer
10 Application to be made now?
11 A5. In order to meet the targeted in-service date of the Keystone Project of the fourth
12 quarter 2009, Keystone must proceed now with both Canadian and United States
13 regulatory applications, material procurement, land acquisition, and ongoing
14 public and stakeholder consultations. Significant financial commitments must be
15 made in the first quarter of 2007, which in turn means that certainty in respect of
16 the transfer of the Facilities and the rate base impacts is required no later than the
17 first quarter of 2007. The determinations arising from this Transfer Application
18 are needed in order to evaluate the continued viability of the commercial
19 arrangements underpinning the Project and to continue the design of the
20 Pipeline on the proposed route.
21 Q6. What approvals are being sought in the Transfer Application?
22 A6. There are four. First, TransCanada is applying to the Board pursuant to section
23 74(1) (a) of Part V of the Act for leave to sell the Facilities to Keystone.
24 Second, Keystone is applying to the Board pursuant to section 74(1) (b) of Part V
25 of the Act for leave to purchase the Facilities from TransCanada.
TransCanada and Keystone Transfer Application Appendix B Page 4 of 41
1 Third, TransCanada is applying pursuant to section 59 of Part IV of the Act for
2 approval to reduce the Mainline rate base by the net book value (NBV) of the
3 Facilities on the date of their transfer to Keystone.
4 Fourth, Keystone is applying pursuant to section 59 of Part IV of the Act for
5 approval to include the NBV of the purchased Facilities in the Keystone Oil Plant
6 Under Construction at the date of the transfer and subsequently in Keystone rate
7 base (Oil Plant in Service) upon the commencement of operation of the Keystone
8 Pipeline for oil transmission.
9 TransCanada and Keystone ask that all of the approvals requested in the
10 Transfer Application be granted conditional upon the approval by the Board of
11 the Keystone Project Application and consequent issuance of a CPCN to
12 Keystone.
13 Q7. What is the purpose of this Written Evidence of TransCanada PipeLines
14 Limited and TransCanada Keystone Pipeline GP Ltd. (Evidence)?
15 A7. The purpose is to provide the requisite evidentiary support for the approvals
16 sought by TransCanada and Keystone (together, the Applicants) in the Transfer
17 Application. Through this Evidence and the various other appendices to the
18 Transfer Application, the Applicants demonstrate that the transfer of the
19 Facilities from TransCanada to Keystone should be approved as requested.
20 Q8. What are the essential conclusions of the Evidence?
21 A8. TransCanada’s analysis shows that the Facilities continue to be used and useful
22 in the provision of gas transportation service by the Mainline but are no longer
23 necessary to provide that service. The Mainline has sufficient capacity to serve
24 the forecast demand for gas transportation both before and after the transfer.
25 Removal of the Facilities from gas service will have a small positive economic
TransCanada and Keystone Transfer Application Appendix B Page 5 of 41
1 impact on Mainline shippers. The effect of removal of the Facilities from the
2 Mainline rate base is a reduction in Mainline revenue requirement (through
3 reduced depreciation, return and taxes) that is largely offset by an increase in
4 fuel requirements.
5 The Applicants’ analysis of supply and demand for oil shows that additional oil
6 transportation capacity is urgently required, a conclusion that is supported by
7 the fact that Keystone has obtained binding contracts for shipment on the
8 Pipeline in volumes that are sufficient to underpin the Project.
9 Ultimately, the Evidence demonstrates that removal of the Facilities from
10 Mainline gas service and utilization of the Facilities in Keystone oil service would
11 be in the Canadian public interest, and that it would continue to be in the public
12 interest to operate the transferred Facilities in oil service. The Evidence also
13 concludes that the NBV of the Facilities (estimated to be $65 million at the time of
14 the transfer in May 2008) should be deducted from the Mainline rate base and
15 should be recognized by Keystone initially as Oil Plant Under Construction at
16 the date of the transfer and subsequently as Oil Plant in Service in the Keystone
17 rate base when the Facilities are put into oil service.
18 Q9. How is this Evidence organized?
19 A9. Commencing with a discussion of the applicable regulatory standard to be
20 applied to the Transfer Application (Section II), the Evidence then provides a
21 description of the history and present status of the Keystone Project (Section III).
22 It continues with a discussion of the terms of the proposed transfer (Section IV)
23 and an analysis of the potential effects of the transfer on the Mainline in respect
24 of capacity and economics (Section V). Then there is an examination of the
25 importance of the transfer to the Keystone Pipeline (Section VI), followed by a
TransCanada and Keystone Transfer Application Appendix B Page 6 of 41
1 discussion of the public interest (Section VII). The conclusion (Section VIII)
2 summarizes what the Applicants would have the Board determine.
3 The Evidence refers to and relies on the other appendices (C through L) to the
4 Application.
5 II. REGULATORY STANDARD
6 Q10. What do TransCanada and Keystone understand to be the regulatory standard
7 that is to be applied to this application?
8 A10. The Board has made clear that the standard is the public interest. Chapter 1 of
9 the National Energy Board Filing Manual (Filing Manual), issued in 2004, applies to
10 all applications. Section 1.1 states:
11 The National Energy Board’s (NEB or the Board) purpose is to promote 12 safety, environmental protection and economic efficiency in the 13 Canadian public interest through its regulation of pipelines, energy 14 development and trade as mandated by Parliament. As a result, 15 companies regulated by the National Energy Board Act (NEB Act) are 16 required to obtain the Board’s approval to, among other things: 17 • add new facilities or modify or abandon existing facilities;
18 • export or import oil and gas products; and
19 • set tolls and tariffs.
20 When seeking approval, applicants must submit applications or 21 information filings (collectively referred to as filings) to the Board that 22 are complete and enable the Board to: 23 • evaluate the overall public good that the request can create as 24 well as its potential negative aspects;
25 • weight the various impacts; and
26 • make an informed decision that balances, among other things, 27 the economic, environmental and social interests at that point in 28 time.
29 Within the Filing Manual, Guide R relates to Transfer of Ownership, Lease or 30 Amalgamation pursuant to section 74. It states:
TransCanada and Keystone Transfer Application Appendix B Page 7 of 41
1 When the pipeline is already regulated by the Board an Order or a 2 Certificate of Public Convenience or Necessity would have been issued 3 once the Board had determined that the facilities: 4 • would be constructed and operated in a safe and an 5 environmentally sound manner; and
6 • were required for the present and future public convenience and 7 necessity.
8 As a result, when a transaction involving the sale, conveyance, lease, 9 purchase or amalgamation of an NEB-regulated pipeline is to occur, the 10 Board needs assurance that, notwithstanding any changes in operation or 11 configuration that are expected to occur, it would continue to be in the public 12 interest to operate the facilities. (emphasis added)
13 Q11. What is the public interest standard?
14 A11. Courts and regulators have found that there is no precise definition of what
15 constitutes the public interest, nor are there firm criteria for determining the
16 public interest that could be applied in every situation.1 The Board has said:
17 The public interest is inclusive of all Canadians and refers to a balance of 18 economic, environmental, and social interests that changes as society’s 19 values and preferences evolve over time.2
1 Memorial Gardens Association (Canada) Ltd. v. Colwood Cemetery Co., [1958] S.C.R. 353; National Energy Board Decision EH-1-2000, Sumas Energy 2, Inc. (March 2004), referring to Ontario Energy Board E.B.R.O. 118, 119, 1985; The Regulator’s Role—Promoting the Public Interest. Notes for a Presentation by Mr. Kenneth Vollman, Chairman, National Energy Board, World Forum on Energy Regulation, May 24, 2000, Montreal, (Vollman Speech) at page 1-2. 2 NEB Strategic Plan 2006-2009 dated March 3, 2006 page 1 and footnote 1; see also Vollman Speech at page 1-2.
TransCanada and Keystone Transfer Application Appendix B Page 8 of 41
1 The Applicants understand that the public interest is not a question of law or fact
2 but is an opinion that necessarily involves accommodation of conflicting
3 economic interests.3
4 Q12. How do the Applicants address the public interest standard through their
5 Evidence in this Transfer Application?
6 A12. The Evidence supports conclusions by the Board that approval of the transfer of
7 the Facilities from TransCanada to Keystone, as proposed in this Transfer
8 Application, is in the Canadian public interest and that it would continue to be in
9 the public interest to operate the transferred facilities in oil service. Further
10 support for the public interest conclusions is found in other appendices.
11 Q13. Are the Applicants seeking a determination by the Board, in this Transfer
12 Application, that the Keystone Project is itself in the public interest?
13 A13. No. The Applicants recognize that the determination of public interest in respect
14 of the Keystone Project will be made by the Board in the Keystone Project
15 Application proceeding. What is sought in this Transfer Application is a
16 determination that the transfer, on the terms proposed by the Applicants, is in the
17 public interest provided that the Board makes a subsequent determination that the
18 Keystone Project is required by the present and future public convenience and
19 necessity.
3 ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board) [2006] S.C.J. No. 4 at para. 106.
TransCanada and Keystone Transfer Application Appendix B Page 9 of 41
1 III. DEVELOPMENT AND STATUS OF THE KEYSTONE PIPELINE
2 PROJECT
3 Q14. Please describe the development of the Keystone Pipeline Project to date.
4 A14. The development of the Keystone Project has been an open, competitive, and
5 collaborative process between TransCanada and the oil and gas producing,
6 refining and shipping communities.
7 In late 2003, TransCanada was approached by a group of Canadian petroleum
8 producers with a request to explore the potential of utilizing spare capacity on
9 the Alberta System and the Mainline for conversion to crude oil transportation to
10 provide an alternative means of transporting incremental oil sands production.
11 Collaborative efforts continued through the ensuing months to develop the
12 project and to examine the impacts of converting gas pipelines to crude oil
13 service culminating in a public announcement of the Keystone Pipeline Project in
14 February 2005. Information was disseminated to the broader industry through
15 information packages and open houses in order to introduce Keystone to the
16 business community and provide an opportunity for potential stakeholders to
17 ask questions and exchange information. On February 10, 2005, an open house
18 was convened to which approximately 34 companies with representatives based
19 in Calgary were invited. Twenty-seven people were in attendance representing
20 20 companies and the Canadian Association of Petroleum Producers (CAPP).
21 Modifications to the design and routing of the proposed pipeline were made as a
22 result of the consultations.
23 In April 2005, TransCanada solicited non-binding expressions of interest from
24 potential shippers. Receipt of expressions of interest totalling approximately
25 79 492 cubic metres (500,000 barrels) per day prompted TransCanada to continue
26 development of the project.
TransCanada and Keystone Transfer Application Appendix B Page 10 of 41
1 On November 3, 2005, TransCanada and ConocoPhillips Company (CPC)
2 announced that they had entered into a Memorandum of Understanding that
3 committed CPC to ship crude oil on the proposed Keystone Pipeline and gave
4 ConocoPhillips Pipe Line Company, a wholly owned subsidiary of CPC, the
5 right to acquire up to a fifty percent ownership interest in the Pipeline.
6 An Open Season process was conducted between November 1, 2005 and
7 December 4, 2005 to solicit binding shipper interest in the pipeline.
8 Confidentiality agreements were executed with 22 potential shippers. During
9 the Open Season process, presentations were made to 17 potential shippers. On
10 January 31, 2006, TransCanada announced that the Keystone Project had secured
11 firm, long-term contracts from shippers for transportation totaling
12 approximately 54 055 cubic metres (340,000 barrels) per day with contract
13 duration averaging 18 years. TransCanada also announced that it would file
14 applications with the Board in 2006 for project approvals.
15 Q15. What was offered to potential shippers through the discussion, negotiation
16 and Open Season process?
17 A15. The Keystone Pipeline offered competitive choices with a product offering that
18 distinguished it from the incumbent crude pipelines:
19 • Significant access to markets in southern Petroleum Administration
20 Defence District (PADD) II: The Keystone Project will increase access to
21 Wood River and Patoka by 69 160 cubic metres (435,000 barrels) per day.
22 • Tolls providing long term price certainty to the shipper: The
23 Transportation Service Agreements (TSAs) utilize a fixed and variable toll
24 design. The Keystone fixed toll is based on levelized 5, 10, 15, and 20 year
25 contracts. Keystone also adopted a postage stamp design for the fixed
TransCanada and Keystone Transfer Application Appendix B Page 11 of 41
1 portion of the toll. The fixed portion of the toll will not change over the
2 term of the contract and is designed to recover the capital invested. The
3 variable portion of the toll is a flow through of actual operating costs,
4 adjusted annually. Tolls vary based upon type of crude oil transported,
5 length of contract term chosen, and differing variable costs to the delivery
6 points.
7 • Risk sharing mechanisms on construction costs: Keystone will assume
8 certain construction risks to offer additional toll certainty and to align
9 with Shippers in the desire to minimize costs in the construction of the
10 pipeline. After regulatory approvals are obtained, Keystone will commit
11 to execute the project at a fixed re-estimated cost and will share any cost
12 overruns or savings with Shippers on a 50/50 basis.
13 • Economic expansion alternative: The Keystone Project will have an initial
14 contract capacity of 69 160 cubic metres (435,000 barrels) per day based on
15 utilization of TransCanada’s existing 864 mm O.D. (34-inch) natural gas
16 pipeline in Canada and new 762 mm O.D. (30-inch) pipeline in Canada
17 and the United States. Expansion to a nominal capacity of 93 800 cubic
18 metres (590,000 barrels) per day can be achieved quickly and economically
19 by adding pump facilities.
20 • Technical design that will provide significant improvements in product
21 quality over competitive pipeline systems. These improvements result
22 from the single bullet pipe design which has several advantages,
23 including no breakout tankage and large batches or batch trains resulting
24 in fewer, smaller interfaces between products.
TransCanada and Keystone Transfer Application Appendix B Page 12 of 41
1 Q16. Have transportation agreements been executed?
2 A16. Yes. Keystone has TSAs with shippers for the Canadian portion of the Keystone
3 Pipeline. Parallel Petroleum Transportation Service and Throughput
4 Agreements were executed with the same shippers or affiliates for the portion of
5 the Pipeline in the United States. In addition, Petroleum Tariff Rules and
6 Regulations for both Canadian and U.S. jurisdictions have been agreed to with
7 the shippers. Because of the highly competitive nature of the crude oil market
8 and associated transportation, Keystone and the shippers have agreed that
9 certain commitments contained in the TSAs are confidential. The TSAs are,
10 therefore, not being filed as part of the Transfer Application but a pro forma TSA
11 is expected to be filed as part of the Keystone Project Application later this year
12 after the competitive open season processes of various other pipeline proposals
13 have been completed. The Keystone Pipeline Tariff is included as Appendix F to
14 the Transfer Application.
15 Q17. Are any extensions or expansions of the Project being contemplated?
16 A17. Potential capacity expansions as well as extensions to the Heartland Industrial
17 Area near Fort Saskatchewan, Alberta and to Cushing, Oklahoma are
18 contemplated, subject to shipper interest. Concurrent with the Open Season,
19 Keystone solicited public non-binding expressions of interest for both the
20 Keystone Heartland and Cushing extension expansion projects. Significant
21 interest in both was indicated: approximately 39 750 cubic metres (250,000
22 barrels) per day in the Cushing extension and approximately 41 300 cubic metres
23 (260,000 barrels) per day in the Heartland extension. Keystone expects to
24 conduct a binding open season process later in 2006.
TransCanada and Keystone Transfer Application Appendix B Page 13 of 41
1 Q18. How will the Keystone Project be financed?
2 A18. The estimated capital cost of US $2.1 billion will be financed with capital
3 contributions from the project sponsor(s) through a combination of cash from
4 overall operations and access to capital markets in Canada and the United States.
5 Q19. What is the importance of the late 2009 expected in-service date of the
6 Keystone Pipeline?
7 A19. Late 2009 conforms to timing requirements, both upstream and downstream, of
8 the Keystone shippers. As an example, ConocoPhillips has publicly announced
9 the expansion of its Wood River and Borger refineries and is undertaking the
10 necessary and significant capital investment to run significantly more Canadian
11 heavy crude through those refineries, and has indicated that it will be in a
12 position to accept deliveries from Keystone by 2009. ConocoPhillips has also
13 invested significantly in development of oil sands production in the Surmont and
14 surrounding areas and will be utilizing that production as feedstock in its
15 downstream refineries. Other shippers are making significant investments that
16 also require transportation capacity by 2009.
17 Timing is also critical from a broader industry perspective. Transportation
18 capacity for crude oil out of the Western Canada Sedimentary Basin (WCSB or
19 Basin) will be very tight by as early as 2007 and constrained by 2009.
20 Q20. Are discussions with stakeholders ongoing?
21 A20. Yes. Appendix K: Public Consultation and Notification of Commercial Third
22 Parties, discusses the consultation that has been conducted and is ongoing in
23 respect of both the Mainline and the Keystone Pipeline. It also provides details
24 of the Open Season that was conducted by Keystone.
TransCanada and Keystone Transfer Application Appendix B Page 14 of 41
1 IV. TERMS OF THE TRANSFER
2 Q21. How will the transfer of the Facilities be effected and on what terms?
3 A21. TransCanada and Keystone have entered into an agreement that governs the
4 transfer of the Facilities (Transfer Agreement) and is included in the Application
5 as Appendix E: Transfer Agreement between TransCanada PipeLines Limited
6 and TransCanada Keystone Pipeline GP. Ltd. The essence of the Transfer
7 Agreement is that the Facilities will be transferred on May 1, 2008 at a price that
8 reflects their NBV at that time (currently estimated to be Cdn $65 million).
9 Keystone will be responsible for the ultimate abandonment and salvage of the
10 Facilities.
11 Q22. What are the Facilities that will be transferred?
12 A22. The specific Facilities are identified in Schedule A to the Transfer Agreement.
13 The Facilities include 864.26 kilometres of Line 100-1 864 mm O.D. pipeline
14 commencing at MLV 2 near Burstall, Saskatchewan and terminating at a point
15 3.49 kilometres upstream of MLV 37 near Carman, Manitoba. The Saskatchewan
16 and Manitoba pipeline sections are 612.30 kilometres and 251.96 kilometres
17 respectively.
18 The Facilities are subject to National Energy Board Certificate of Public
19 Convenience and Necessity No. GC-1 issued in April 1960, which is included as
20 Appendix D to the Transfer Application. The Facilities were initially approved
21 by the Board of Transport Commissioners (predecessor to the NEB) on May 24,
22 1956 and placed in service in 1957.
23 No upstream and downstream facilities will be stranded by the transfer.
TransCanada and Keystone Transfer Application Appendix B Page 15 of 41
1 Q23. What is the transfer price?
2 A23. The transfer price will be the NBV of the Facilities at the time the transfer takes
3 place in May 2008. TransCanada currently estimates that the NBV as at
4 December 31, 2005 of Cdn $76 million will be approximately Cdn $65 million at
5 the time of transfer.
6 Q24. Why is NBV the transfer price?
7 A24. NBV is a fair and reasonable price in the circumstances. It is prudent from the
8 perspectives of both seller and buyer, it facilitates cost-based competitive tolls
9 that have been tested in the market, and it is consistent with original cost rate
10 making, Board regulations and regulatory precedent. A transfer at NBV is in the
11 public interest, and no public interest would be served by a transfer at a price
12 that exceeds NBV.
13 Q25. Please elaborate.
14 A25. The Open Season was premised on tolls that reflected the NBV for the Facilities
15 to be included in the Keystone rate base. On that premise, Keystone secured
16 binding agreements for 54 000 cubic metres (340,000 barrels) per day for a
17 pipeline with nominal capacity of 69 160 cubic metres (435,000 barrels) per day.
18 The contracted volumes establish the commercial viability of the Keystone
19 Project, while the level of un-contracted capacity is indicative of sensitivity of the
20 market to the cost of transportation. A higher transfer price and consequent
21 higher tolls could jeopardize the contract commitments that are the basis for the
22 commercial viability of the Pipeline, and/or ultimately the timing of
23 implementation of additional crude oil transportation capacity.
24 Transfer of the Facilities at NBV is in accordance with the requirements of the
25 National Energy Board Oil Pipeline Uniform Accounting Regulations (OPUARs) and
TransCanada and Keystone Transfer Application Appendix B Page 16 of 41
1 National Energy Board Gas Pipeline Uniform Accounting Regulations (GPUARs)
2 which reflect the principles of original cost ratemaking. Section 15(4) of the
3 OPUARs stipulates that where facilities are purchased from an affiliated
4 company, the original cost of the facilities and accumulated depreciation is
5 recorded in the accounts of the purchasing company. Keystone is a company that
6 will be subject to the OPUARs and is an affiliate of TransCanada. The Facilities,
7 once transferred, will still be subject to regulation and will remain in utility
8 service. TransCanada and Keystone understand that section 15(4) of the
9 OPUARs reflects original cost ratemaking principles, that is, that utility
10 customers are required to compensate the utility for the original cost of the total
11 investment of constructed and acquired property, less depreciation. A change in
12 ownership of utility assets should not result in utility customers paying “twice”
13 for the same assets in utility service by virtue of the purchaser paying a premium
14 to net book value and seeking to have rates set to recover that premium.4 When
15 assets are transferred from one regulated utility to another regulated utility, the
16 concern is not whether value is being transferred away from utility customers
17 but that an appropriate accounting is made of the asset’s contribution to utility
18 rate base, and that one customer group is not being favoured at the expense of
19 another.5
4 See, e.g. Paul J. Garfield, Wallace F. Lovejoy, Public Utility Economics (New Jersey: Prentice-Hall Inc. 1964) page 91. 5 See Alberta Energy and Utilities Board, Decision 2003-040, ATCO Group Affiliate Transactions and Code of Conduct Proceeding, Part B: Code of Conduct, May 22, 2003, page 81.
TransCanada and Keystone Transfer Application Appendix B Page 17 of 41
1 There are Board precedents for affiliate transfers to be made at NBV. In both the
2 GH-4-93 InterCoastal Pipe Line Inc. case6 and the OH-2-97 Interprovincial
3 Pipeline Inc. (IPL) Line 9 Reversal case7, the Board approved transfers at NBV.
4 In InterCoastal, the sale at NBV of a portion of IPL (now Enbridge Pipelines Inc.)
5 pipeline to an affiliate for conversion from oil service to gas service was
6 specifically approved by the Board, citing the Board Regulations. The Line 9
7 Reversal case involved the transfer of pipeline, a pump station and terminal from
8 IPL’s Older System to IPL’s Line 9. In that case, a transfer of assets at NBV
9 contributed to the economic viability of the transferee (Line 9) through lower rate
10 base and consequent lower revenue requirement and tolls. Transfer at NBV was
11 a component of agreements between IPL, CAPP and the refiners that sponsored
12 the reversal. The NBV transfer price was contested by parties seeking to have the
13 Board direct that the price should be fair market value (FMV). The Board
14 reviewed all the components of the applicable agreements and found that, taken
15 as a whole, the proposals of IPL were reasonable. The effect was approval of the
16 asset transfer at NBV.
17 The policy of the Federal Energy Regulatory Commission (FERC) of the United
18 States is to approve transfers of utility assets at NBV. In Trunkline Gas Company,
19 the FERC approved the transfer at NBV of natural gas pipeline assets to an
20 affiliate for conversion to transportation of refined petroleum products. The
21 application was opposed by shippers that argued that the transfer should take
22 place at market value which they said was higher than NBV. The FERC applied
23 a public interest standard, reasoning that the facilities were no longer essential to
6 National Energy Board Reasons for Decision InterCoastal Pipe Line Inc. and Interprovincial Pipe Line Inc., GH-4-93, Facilities, Tariff & Toll Methodology, April 1994, (InterCoastal) page 110. 7 National Energy Board Reasons for Decision In the Matter of Interprovincial Pipe Line Inc. Application dated 1 May 1997 for the Line 9 Reversal Project and an application dated 17 July 1997 by United Refining Company for designation of a priority destination on Interprovincial Pipe Line Inc., OH-2-97, December 1997, (Line 9 Reversal) pp 60-73.
TransCanada and Keystone Transfer Application Appendix B Page 18 of 41
1 maintain gas service to current or anticipated firm gas customers, that there was
2 no requirement to sell the facilities at market value or to a non-affiliated
3 purchaser, that a sale to an affiliate at NBV did not result in a gain to the utility,
4 and that the NBV sale was not unfair to current customers.8
5 As discussed in Section VI and Appendix J, the Canadian public interest is
6 served by increasing capacity for crude oil transportation service and doing so in
7 a timely way, both of which are facilitated by acquisition of the Facilities by
8 Keystone at NBV in 2008. There is no public interest served by a transfer at a
9 price higher than NBV. A higher price would be detrimental to crude oil
10 shippers through higher tolls. The time taken to test the higher price in the
11 market would inevitably result in delay and likely in increased apportionment of
12 oil production from Western Canada. At the same time, a higher price would
13 not provide any additional benefit to Mainline shippers, given that the proceeds
14 of the sale would not belong to those shippers but to the shareholders of the
15 owner of the Mainline.9 A transfer at NBV is in the overall interest of both the oil
16 and gas sectors of the energy industry.
17 The end result of a transfer at NBV is an economically efficient utilization of an
18 existing asset that is in the Canadian public interest.
19 Q26. How was the NBV of the Facilities determined?
20 A26. Details of the calculation of NBV are included in Appendix H: Economic Impact
21 of the Transfer on the TransCanada Mainline.
8 See, e.g. Trunkline Gas Company, 94 FERC 61,381 (2001); Southern Natural Gas Co., 100 FERC 61,284 (2002). 9 ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board), [2006] S.C.J. No. 4.
TransCanada and Keystone Transfer Application Appendix B Page 19 of 41
1 V. ANALYSIS OF THE EFFECTS OF THE TRANSFER ON THE
2 TRANSCANADA MAINLINE
3 Q27. Please describe the analysis that was conducted by TransCanada of the
4 potential effects of the transfer on the Mainline.
5 A27. When TransCanada was approached by a group of Canadian petroleum
6 producers with a request to explore the potential of utilizing spare capacity for
7 conversion to crude oil service, it undertook an analysis of what capacity might
8 be available and what the impacts of removal of that capacity would be on
9 Mainline shippers and other stakeholders. There were three basic elements to
10 the analysis. One was to compare the forecasts of Mainline flows with the
11 Mainline capacity with and without the Facilities. Second was to determine the
12 impacts on the Mainline revenue requirement of removal of the Facilities from
13 the Mainline rate base. The third was to determine the impact of the removal of
14 the capacity on the fuel requirements of Mainline shippers. The analysis was
15 updated for this Application.
16 Q28. What conclusions were reached as a result of the analysis?
17 A28. TransCanada concludes that there will be sufficient capacity available on the
18 Mainline to meet forecast total flows after the Facilities are transferred to
19 Keystone, and that, on a net cost basis, Mainline gas customers should be
20 indifferent. TransCanada also concludes that removal of the Facilities from the
21 Mainline rate base would reduce the Eastern Zone toll by approximately 1 cent
22 per year by providing a $113 million reduction in the revenue requirement on a
23 net present value basis over a ten year period. Fuel requirements, however,
24 increase by approximately $98 million on a net present value basis over the same
25 time period. The result is a small positive economic impact to Mainline shippers
26 of $15 million.
TransCanada and Keystone Transfer Application Appendix B Page 20 of 41
1 Q29. What has TransCanada done to assess whether, and to what extent, Mainline
2 capacity may exceed projected throughput in the future?
3 A29. TransCanada has prepared the Canadian Mainline Throughput Study
4 (Throughput Study or Study), which is included as Appendix G to the
5 Application. The purpose of the Throughput Study is to assess throughput on
6 the Mainline, and in so doing, to define a range of excess capacity which may
7 exist in the future.
8 Q30. Was the Throughput Study prepared solely for the purpose of supporting the
9 Transfer Application?
10 A30. The Throughput Study consists of two analyses. The first results in a Base Case
11 forecast of Mainline throughput for general corporate purposes. The analysis
12 draws on work conducted by TransCanada’s Strategy and Planning Department
13 and benefits from the use, not only of public information, but of aggregate
14 customer confidential information and internal TransCanada analyses, models
15 and assessments. The first analysis is done annually for general corporate
16 purposes and was not specifically undertaken to support the Transfer
17 Application. The second analysis which forms part of the Throughput Study
18 was done for the purpose of supporting the Application.
19 The second analysis is a statistical approach which incorporates the uncertainty
20 in Western Canada Sedimentary Basin (WCSB) supply, demand and the
21 Mainline’s share of total ex-Basin flows into the analysis. In order to arrive at a
22 conclusion on the impact of taking capacity out of service, TransCanada was of
23 the view that a range of outcomes needed to be examined. The statistical
24 analysis incorporates a range of outcomes for WCSB supply (conventional and
25 unconventional), MacKenzie Delta supply, WCSB demand, and for the
26 Mainline’s share of total ex-Basin gas flows.
TransCanada and Keystone Transfer Application Appendix B Page 21 of 41
1 Q31. What conclusions has TransCanada drawn from the Throughput Study?
2 A31. The Throughput Study demonstrates that in the Base Case, the Mainline will
3 have sufficient capacity to transport all forecasted volumes after taking into
4 account the capacity effects associated with the transfer. The statistical analysis
5 demonstrates that the conclusion that the Mainline will have sufficient capacity,
6 holds over a wide range of probabilities of supply, demand and the Mainline’s
7 share of flows. Indeed, even in the high flow forecasts, which have a low
8 probability, there is sufficient capacity.
9 Q32. Please summarize the methodology for assessing Mainline utilization which
10 underpins the Throughput Study.
11 A32. Throughput on the Mainline is affected by three factors: the supply performance
12 of the WCSB and potential Northern gas sources; the level of Western Canada
13 demand upstream of the Mainline; and the allocation of gas destined for export
14 from Western Canada to alternate transportation systems. In general terms, the
15 methodology underpinning the Throughput Study is to first aggregate sources of
16 supply (conventional, unconventional and northern) then subtract Western
17 Canada demand to yield the total ex-basin gas flow. Utilization rates on all
18 systems out of the Basin are then developed based on contracts, netbacks,
19 historic utilization rates and regional market conditions.
20 At the point in time when total Western Canada gas exports begin to decline,
21 throughput on all pipelines not protected by long-term transportation contracts
22 declines proportionately to each pipeline’s share of exports so that flows on all
23 such pipelines decline by the same percentage in any one year.
24 The Throughput Study presents a range of throughputs; the Base Case, and the
25 ten, fifty, and ninety percentile (P10, P50 and P90) results from the statistical
TransCanada and Keystone Transfer Application Appendix B Page 22 of 41
1 analysis which represent a broad range of possible flow scenarios. The study
2 demonstrates that there will be Mainline capacity in excess of the upper end of
3 this range of average annual throughput post-transfer.
4 Q33. How did TransCanada assess, and what was, the capacity impact of removing
5 the Facilities?
6 A33. The Facilities are part of the Prairies section of the Mainline. TransCanada
7 utilized simulations of the 100% Design Capability for the Prairies section with
8 and without the Facilities for both the summer and winter seasons to determine
9 the change in capacity. The result was a decrease in capacity of approximately
10 500 MMcf/d for both seasons without the Facilities. The 100% Design Capability
11 is the total capability available to transport the forecast throughput irrespective
12 of the type of service.
13 Q34. Please explain the Base Case.
14 A34. The Base Case represents TransCanada’s best estimate of future throughput, and
15 is underpinned by a detailed evaluation of North American and Western
16 Canadian natural gas supply, demand and relative prices to determine total ex-
17 Basin flow and the throughput for each ex-Basin pipeline. The Throughput
18 Study contains detailed analysis of and data supporting TransCanada’s
19 assessment of these parameters.
20 Q35. What are the ten, fifty, and ninety percentile forecasts?
21 A35. In addition to the Base Case forecast TransCanada used a statistical analysis to
22 generate a range of throughput outcomes. It developed probability distributions
23 for each of WCSB gas supply, Western Canada demand, and Mainline share of
24 total Basin export flows. The detailed statistical methodology used to generate
25 the P10, P50 and P90 ranges is described in the Throughput Study.
TransCanada and Keystone Transfer Application Appendix B Page 23 of 41
1 The P50 forecast describes, on a statistical basis, the annual average flow that can
2 be expected to be exceeded half the time. The P10 and P90 forecasts are intended
3 to show the range around the P50 forecast, and describe, on a statistical basis, the
4 average annual flow that can be expected to be exceeded ninety and ten percent
5 of the time, respectively.
6 Q36. What is the range of excess capacity available on the ex-Basin Pipelines?
7 A36. Table 1 presents the excess capacity ex-Basin for each of the four forecasts. In
8 2009, post-transfer, excess ex-Basin capacity on an average annual flow basis
9 ranges from approximately 1.2 Bcf/d to 3.6 Bcf/d in the P90 and P10 cases,
10 respectively.
Table 1: Ex-Basin – Excess Capacity (Average Flows) (Bcf/d)
Forecast 2007 2009 2010 2015
10 Percentile 3.31 3.64 4.39 6.30
50 Percentile 2.77 2.42 2.84 3.44
Base Case 2.66 2.40 2.91 3.36
90 Percentile 2.23 1.22 1.32 0.66
11 The Base Case and the range of statistical forecasts for ex-Basin annual average
12 flow are presented in Figure 1 and compared to average annual capacity. There
13 is sufficient capacity for all forecasts.
TransCanada and Keystone Transfer Application Appendix B Page 24 of 41
Figure 1: Distribution of Export Average Annual Flows
Bcf/d 16 14 12 10 8
6 P10 P50 4 P90 Capacity * 2 Base Case 0 2006 2008 2010 2012 2014 2016 2018 2020
* Design Annual Capacity is 14.89 Bcf/d pre-transfer and 14.45 Bcf/d post-transfer.
1 Q37. Does the level of ex-Basin excess capacity vary under peak flow conditions?
2 A37. Yes. For any given annual average flow, there will be a range of daily flows that
3 will sometimes exceed the average and sometimes be less than the average. In its
4 statistical analyses TransCanada developed peak flow curves to account for the
5 daily volatility of flow. The method used to generate the peak flow curves is
6 described in the Throughput Study. Table 2 presents the excess capacity ex-
7 Basin for each of the three forecasts under peak conditions. In 2009, post-
8 transfer, excess ex-Basin capacity under peak conditions range from
9 approximately 1.0 Bcf/d to 3.7 Bcf/d in the P90 and P10 cases, respectively.
TransCanada and Keystone Transfer Application Appendix B Page 25 of 41
Table 2: Ex-Basin – Excess Capacity (Peak Flows) (Bcf/d)
Forecast 2007 2009 2010 2015
10 Percentile 3.28 3.67 4.49 6.62
50 Percentile 2.68 2.33 2.79 3.43
90 Percentile 2.06 0.97 1.06 0.42
1 The range of statistical forecasts for ex-Basin peak flows are presented in Figure 2
2 and compared to peak capacity. There is sufficient capacity for all forecasts.
Figure 2: Distribution of Export Peak Flows Bcf/d 18 16 14 12 10 8 6 P10 P50 4 P90 2 Capacity* 0 2006 2008 2010 2012 2014 2016 2018 2020
* Observed peak capacity is 16.09 Bcf/d pre-transfer and 15.57 Bcf/d post-transfer.
TransCanada and Keystone Transfer Application Appendix B Page 26 of 41
1 Q38. What is the range of excess capacity available on the Mainline?
2 A38. Table 3 presents the excess capacity on the Mainline for each of the four forecasts.
3 In 2009, post-transfer, excess Mainline capacity on an annual average flow basis
4 ranges from approximately 1.1 Bcf/d to 2.5 Bcf/d in the P90 and P10 cases,
5 respectively.
Table 3: Mainline – Excess Capacity (Average Flows) (Bcf/d)
Forecasts 2007 2009 2010 2015
10 Percentile 2.29 2.49 2.92 3.95
50 Percentile 1.91 1.86 2.20 2.72
Base Case 1.86 1.82 2.17 2.82
90 Percentile 1.50 1.14 1.34 1.36
6 The Base Case and the range of statistical forecasts for Mainline average annual
7 flow are presented in Figure 3 and compared to annual average capacity. There
8 is sufficient capacity for all forecasts.
TransCanada and Keystone Transfer Application Appendix B Page 27 of 41
Figure 3: Mainline Throughput Forecast Average Annual Flows Bcf/d 9 8 7 6 5 4 3 P10 P50 2 P90 Capacity * 1 Base Case 0 2006 2008 2010 2012 2014 2016 2018 2020
* 100% Design Capability is 7.77 Bcf/d pre-transfer and 7.26 Bcf/d post-transfer.
1 Q39. Has TransCanada considered capacity and throughput impacts of Mainline
2 peak flow as well as annual average flow?
3 A39. Yes. Similar to the ex-Basin, for any given average annual flow on the Mainline,
4 there will be a range of daily flows that will sometimes exceed the average and
5 sometimes be less than the average.
6 Q40. What does the peak flow analysis demonstrate about throughput relative to
7 capacity on the Mainline?
8 A40. Table 4 shows excess Mainline capacity in 2009 on a peak day basis post-transfer
9 ranging from approximately 0.4 Bcf/d to 2.0 Bcf/d in the P90 and P10 forecasts,
10 respectively.
TransCanada and Keystone Transfer Application Appendix B Page 28 of 41
Table 4: Mainline – Excess Capacity (Peak Flow) (Bcf/d)
Forecast 2007 2009 2010 2015
10 Percentile 1.72 2.02 2.46 3.68
50 Percentile 1.26 1.26 1.66 2.27
90 Percentile 0.71 0.40 0.61 0.66
1 The range of statistical forecasts for the Mainline Peak Flows are presented in
2 Figure 4 and compared to peak capacity. There is sufficient capacity for all
3 forecasts.
Figure 4: Mainline Throughput Forecast Peak Flow Bcf/d 9 8 7 6 5 4 3 P10 2 P50 P90 1 Capacity* 0 2006 2008 2010 2012 2014 2016 2018 2020
* Mainline 100% winter design capability is 7.99 Bcf/d pre-transfer and 7.47 Bcf/d post-transfer.
TransCanada and Keystone Transfer Application Appendix B Page 29 of 41
1 Q41. For the Prairies section of the Mainline, has the proportion of Firm
2 Transportation (FT) contracts relative to total flows changed over time?
3 A41. Yes. Figure 5 shows the historical FT contract level and the FT contract profile as
4 of May 2006 for the Prairies section of the Mainline. All contracts with Empress
5 or Saskatchewan receipts and deliveries to locations in Saskatchewan, Manitoba
6 and east of Manitoba have been included. To the extent that customers either
7 sign new contracts for FT service during the Mainline’s Open Season capacity
8 offerings, renew existing firm services at the contract renewal deadline, or
9 provide non-renewal notice of their existing FT contracts, FT contract levels
10 measured at any single point in time will differ.
Figure 5: Prairies Firm Contract Level
Bcf/d 9
8
7
6
5
4
3
2
1
0 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Historical Throughput Average Annual Flow Forecast (P50) 100% Winter Design Capability Peak Flow Forecast (P50) FT Contracts
TransCanada and Keystone Transfer Application Appendix B Page 30 of 41
1 Q42. Why is the Prairies FT contract profile relevant?
2 A42. The Prairies FT contract profile is relevant because it is the total contract demand
3 level at which the Mainline is committed to provide annual firm transportation
4 service. The Throughput Study shows TransCanada’s expectation of WCSB ex-
5 basin, and Mainline flows, of which only a portion could be related to existing
6 firm service contract commitments. The chart shows that FT contracts have
7 fluctuated between 4 and 5 Bcf/d since 2002. This level of firm contracting is
8 substantially below Prairies capacity pre and post transfer.
9 It is also relevant because demand for firm services has underpinned the creation
10 and expansion of the Mainline to date, and is therefore a key piece of information
11 that will influence TransCanada’s position as to what level of capacity is required
12 in the future.
13 An application by TransCanada to the Board for approval to construct additional
14 Mainline capacity must be supported by customer requests for firm
15 transportation services (encompassed by FT, STS, STS-L, LTWFS, FST services).
16 TransCanada must also determine that there is a reasonable expectation of a long
17 term requirement for an increase in capacity. The current FT contract levels and
18 expiry profile indicate that the capacity is sufficient both today and in the post
19 transfer period.
20 Q43. How has TransCanada evaluated future requirements for pipeline capacity
21 into the Central Canadian market?
22 A43. Currently, pipeline capacity into Central Canada exceeds total Ontario and
23 Québec demand. TransCanada is forecasting strong demand growth in Central
24 Canadian markets and ongoing exports to the U.S. Northeast. However,
25 TransCanada expects that even with growing Central Canadian demand,
TransCanada and Keystone Transfer Application Appendix B Page 31 of 41
1 capacity will exceed that required to serve Ontario and Québec demand after
2 taking into account forecast deliveries to the U.S. Northeast. TransCanada
3 expects that capacity into Central Canada will be in excess of demand in Central
4 Canada and deliveries to the U.S. Northeast and will grow from approximately
5 2 Bcf/d in 2005 to over 4 Bcf/d in 2015. TransCanada’s assessment of Central
6 Canadian capacity relative to demand is described in more detail in Section 3.8 of
7 the Throughput Study.
8 Q44. Please describe the cost savings that would be achieved as a result of the sale
9 of the Facilities to Keystone.
10 A44. There would be a reduction in the Mainline’s rate base of $65 million, comprised
11 of the estimated net book value of pipeline assets and land rights from the sale of
12 the Facilities at May 1, 2008 which will result in lower return, depreciation and
13 income tax expenses for Mainline customers. There will also be lower property
14 taxes, and Operations, Maintenance and Administration (OM&A) expenses on an
15 on-going basis. The reduction in line pack associated with the Facilities will also
16 decrease return and income tax expense. TransCanada has calculated that the
17 Mainline revenue requirement savings will range between $10 and $20 million
18 annually, for the 10 year period after the transfer. The net present value of these
19 savings equates to approximately $113 million, assuming a discount rate equal to
20 the Mainline’s 2006 cost of capital (8.57%).
21 Q45. Will Mainline customers experience a toll reduction as a result of the transfer
22 of the Facilities to Keystone?
23 A45. Yes. The annual revenue requirement savings will result in an average Eastern
24 Zone toll decrease of 1.0¢/GJ over the ten year period.
TransCanada and Keystone Transfer Application Appendix B Page 32 of 41
1 Q46. Are the reductions in revenue requirement and toll offset by other factors?
2 A46. Yes. Mainline fuel is provided in kind by shippers. Removal of the capacity of
3 the Facilities will cause fuel requirements and fuel costs to go up at all flow levels
4 assuming no changes are made to compressor efficiencies.
5 Q47. What is the impact of the increase in fuel requirements?
6 A47. TransCanada has calculated that additional Mainline fuel costs will range
7 between $8 and $23 million annually, for the 10 year period after the transfer.
8 The net present value of these costs equates to $98 million, assuming a discount
9 rate equal to the Mainline’s 2006 cost of capital (8.57%).
10 Q48. What is the net impact of the transfer on Mainline shippers?
11 A48. The result is small overall positive impact to Mainline shippers of $15 million.
12 Details of the calculations of impacts on revenue requirements and fuel
13 requirements as well as the net impact are included in Appendix H: Economic
14 Impact of the Transfer on the TransCanada Mainline.
15 VI. IMPORTANCE OF THE TRANSFER TO THE KEYSTONE
16 PIPELINE
17 Q49. What is the importance to the Keystone Project of the transfer of the Mainline
18 Facilities to Keystone?
19 A49. Use of the Facilities in the Keystone Pipeline reduces the Keystone capital cost
20 from that which would exist in a pipeline design that utilized entirely new
21 facilities. In addition, a significant number of pump stations will be located at or
22 adjacent to existing compressor stations on the Mainline to minimize impacts
23 from construction activities, reduce capital and operating expenditures and
24 utilize existing power infrastructure.
TransCanada and Keystone Transfer Application Appendix B Page 33 of 41
1 Q50. Please explain further.
2 A50. Significant benefits are associated with the integration of existing gas facilities
3 into the design of the Keystone Pipeline. The primary benefit is reduced capital
4 expenditures. To the extent the Facilities can be re-deployed at their depreciated
5 book value, the capital cost of the Keystone Pipeline is lower than it would be if
6 new pipe was required for that particular span. Lower transportation costs will
7 result in higher producer netbacks, taxes, and royalties to Canadian interests. In
8 addition, despite efforts to control construction costs, projects such as this one
9 are nevertheless subject to potential fluctuations in prices of commodities,
10 including, for example, the price of steel. To the extent existing pipe in the
11 ground is redeployed, risk associated with the escalation of construction cost is
12 mitigated and the demand for steel pipe is reduced.
13 Another significant benefit is the minimization of environmental impact. The
14 use of existing facilities will minimize disturbance of right of way and will
15 reduce the environmental impact associated with the Project as compared to the
16 installation of new pipe. Using existing facilities is the preferred alternative to
17 installing entirely new pipeline, potentially greenfield pipeline, because it meets
18 the primary goal of environmental protection which is minimizing disturbance to
19 the biophysical environment. The Keystone Project allows for continued
20 development to meet the societal demand for crude oil, while striving to
21 minimize associated impacts on the environment by eliminating the need for
22 completely new facilities and their associated impacts.
TransCanada and Keystone Transfer Application Appendix B Page 34 of 41
1 Q51. What is the importance of the transfer price of NBV to the Keystone Pipeline
2 Project?
3 A51. The transfer at NBV of the Facilities to Keystone is a fundamental commercial
4 foundation of the Project. The capital cost of the Canadian portion of the
5 Keystone Pipeline is approximately Cdn $664 million.
6 Q52. Please explain.
7 A52. The Keystone shippers’ contract commitments are premised on the use of the
8 Facilities in crude oil service at NBV. The Transportation Service Agreements
9 contain provisions that provide shippers with an option to terminate the
10 agreement if the initial cost estimates exceed a certain threshold. To the extent
11 the Facilities were transferred at a price greater than NBV, the threshold could be
12 exceeded with consequential termination of shipper commitments.
13 The competitive nature of crude oil transportation is such that interested
14 shippers have other options to transport their product. There are various
15 elements that have influenced shippers to sign firm commitments in what can
16 only be described as a highly competitive marketplace:
17 • Competitive Tolls: the composition of which relies in part on the transfer
18 of the Facilities into the Keystone rate base at NBV;
19 • Deliveries into an attractive market: Southern PADD II;
20 • An innovative design; and
21 • The provision (to ConocoPhillips) of an option to acquire equity.
22 Should the Application as filed not be approved, Keystone believes that a
23 component of its value proposition falls away which could jeopardize the
24 contract commitments and ultimately the timing of implementation of additional
25 crude oil transportation capacity.
TransCanada and Keystone Transfer Application Appendix B Page 35 of 41
1 VII. THE KEYSTONE PIPELINE AND THE PUBLIC INTEREST
2 Q53. Are public interest aspects of the Keystone Pipeline relevant to this Transfer
3 Application?
4 A53. Yes. Public interest considerations are relevant to this Transfer Application
5 because the Board will determine whether the operation of the Facilities in oil
6 service continues to be in the public interest (NEB, Filing Manual, Guide R).
7 Essentially, the Applicants are asking the Board to make a finding that it is in the
8 Canadian public interest that the Facilities be converted from gas service to oil
9 service, subject to the condition that the Keystone Pipeline Section 52 application
10 is subsequently approved. Public interest aspects of the Keystone Pipeline are
11 therefore germane to the issue being decided in the Transfer Application.
12 Q54. What is Keystone’s view of the public interest as it relates to construction of
13 incremental crude oil pipeline capacity?
14 A54. Keystone believes that maximizing the value of the crude oil resource is in the
15 Canadian public interest. The value for burgeoning Canadian crude production
16 and the associated netbacks, taxes and royalties will be enhanced when:
17 (i) Oil pipeline capacity is constructed from Western Canada to downstream
18 markets in sufficient quantities to ensure that crude oil production is not
19 apportioned or stranded;
20 (ii) Crude oil pipeline capacity is directed to markets with demonstrated
21 demand, low existing Canadian penetration and available refinery capacity
22 capable of processing Canadian product;
23 (iii) Pipeline facilities are designed and built with an efficient use of capital and
24 resources while minimizing environmental impact; and
TransCanada and Keystone Transfer Application Appendix B Page 36 of 41
1 (iv) Increased competition and choice is provided to Canadian crude oil
2 shippers.
3 The Keystone Project does satisfy these public interest elements and meets the
4 requirements of upstream producers and downstream refiners in a cost
5 effective/capital efficient manner.
6 Q55. What analysis was performed of the need for additional crude oil pipeline
7 capacity?
8 A55. Part of TransCanada’s response to the initial producer inquiries was to consider
9 the demand and supply for crude oil transportation capacity. TransCanada
10 concluded that production of crude oil in Western Canada will outstrip existing
11 capacity over the next few years and new incremental crude oil pipeline capacity
12 will be required. This conclusion formed the fundamental stimulus for the
13 development of the Keystone Project.
14 TransCanada then engaged Thomas H. Wise of Purvin & Gertz to conduct an
15 independent assessment of market conditions. The Purvin & Gertz report is
16 included as Appendix I: Outlook for Crude Oil Exports and Pipeline Capacity
17 from Western Canada. Purvin & Gertz estimates that the 2005 level of crude oil
18 production was 370 226 cubic metres (2.14 million barrels) per day. As a result of
19 increasing production from the oil sands, crude oil production available for
20 export is expected to increase by about 119 079 cubic metres (749,000 barrels) per
21 day by 2010 and 236 091 cubic metres (1,485,000 barrels) per day by 2016. In
22 addition, existing crude oil export pipeline capacity out of the Basin is
23 insufficient to accommodate the forecasted crude oil supply growth. Purvin &
24 Gertz also noted that the May 2006 forecast of crude oil production prepared by
25 CAPP is significantly higher than that of Purvin & Gertz. Purvin & Gertz point
26 out that crude oil pipeline capacity would become tight as early as 2007 based on
TransCanada and Keystone Transfer Application Appendix B Page 37 of 41
1 CAPP’s crude oil projections. These forecasts indicate that, without additional
2 pipeline capacity, the upstream industry in Alberta could be faced with
3 significant pipeline apportionment which will strand production, depress prices,
4 and reduce taxes and royalties.
5 Q56. Are there other proposed pipelines that can meet the demand of crude
6 transportation sooner than Keystone?
7 A56. The Applicants believe that no other pipeline proposal can practically meet a
8 2009 in-service target to transport significant volumes of growing crude oil
9 production.
10 Keystone is on target to be in service in late 2009. It has conducted an open
11 season and executed transportation agreements. The integration of the Facilities
12 into the Keystone Pipeline reduces the time and cost associated with greenfield
13 construction on the Canadian segment of the project. Regulatory applications
14 and right of way development on the U.S. segment are progressing on schedule.
15 The Applicants understand that there are other projects proposing to transport
16 significant volumes of crude oil out of the WCSB to various markets. The
17 Enbridge Gateway project and the Kinder Morgan TransMountain III Expansion
18 project will serve offshore markets. The Enbridge Alberta Clipper project targets
19 similar markets to Keystone. These projects are in various states of development
20 but none are in a position to meet an in-service target of 2009. All have either
21 publicized timelines that are proposing later in-service dates, are based on
22 substantial looping of existing lines, or are proposing greenfield development
23 through difficult terrain. As of this date, no other project has announced the
24 execution of transportation service agreements with shippers.
TransCanada and Keystone Transfer Application Appendix B Page 38 of 41
1 Q57. What conclusion should be drawn from these analyses?
2 A57. The conclusion is that the Keystone Project represents an opportunity for
3 Western Canadian producers to expand markets and gain more flexibility in
4 marketing the large production increases that are expected in the next few years.
5 The introduction of this fourth significant crude oil pipeline will enhance
6 competitive alternatives for Canadian producers and downstream refiners.
7 Shippers will have greater flexibility to choose a transportation alternative that
8 maximizes the netback price of their crude. All of this is in the Canadian public
9 interest.
10 Q58. What are the target markets of the Keystone Pipeline?
11 A58. Keystone’s target markets include those refineries in south PADD II some of
12 which are investing in expansions and additional technology to accommodate
13 both heavier and lighter crude slates produced in Canada. The Patoka Terminal
14 hub interconnects with pipelines having over 238 500 cubic metres (1.5 million
15 barrels) per day of capacity to these markets. As well, the Keystone Pipeline will
16 connect to the Mobil pipeline at Patoka which will provide PADD III market
17 access.
18 According to the United States Energy Information Administration (EIA), U.S.
19 demand for petroleum products has increased by over 17 percent or 476 952
20 cubic metres (3 million barrels) per day over the past 10 years and is expected to
21 increase further. The EIA estimates that total U.S. petroleum consumption will
22 increase by approximately 842 615 cubic metres (5.3 million barrels) per day over
TransCanada and Keystone Transfer Application Appendix B Page 39 of 41
1 the next 20 years representing average demand growth of about 42 131 cubic
2 metres (265,000 barrels) per year.10
3 At the same time, domestic U.S. crude supplies continue to decline. For example,
4 domestic crude production in PADD II continues to decline at an average rate of
5 about 3 percent per year. Over the past 20 years, PADD II crude oil production
6 has decreased by over 95 390 cubic metres (600,000 barrels) per day11 or 60
7 percent. Forecasts indicate that the decreased domestic production from PADD
8 II is accompanied by declining onshore production in PADD III.
9 The United States has historically compensated for decreases in domestic
10 production through increased imports from Canada and foreign offshore
11 sources. Canadian crude supply is well positioned to help fill the gap between
12 increased U.S. demand and reduced U.S. domestic supply. The
13 Enbridge/Lakehead system has been historically positioned to serve northern
14 PADD II and penetration of Canadian crude to those refineries is relatively high.
15 Canadian crude has much lower penetration into markets located in the lower
16 PADD II region12: the Express/Platte system supplies up to 20 668 cubic metres
17 (130,000 barrels) per day of Canadian and U.S. domestic crude into Wood River
18 and the Enbridge/Lakehead/Mustang system supplies up to 15 898 cubic metres
19 (100,000 barrels) per day into Patoka. Initially, Keystone will connect to
20 refineries in the southern PADD II market area, with delivery to Wood River and
21 Patoka. Ultimately, Keystone plans to extend the system to serve additional
22 refineries that serve Cushing, Oklahoma.
10 EIA Annual Energy Review 2004, EIA Annual Energy Outlook 2006. 11 EIA, Crude Oil Production by State. 12 See Appendix I, Purvin & Gertz, “Outlook for Crude Oil Exports and Pipeline Capacity from Western Canada”, page 19.
TransCanada and Keystone Transfer Application Appendix B Page 40 of 41
1 Q59. Was the TransCanada/Keystone analysis of the market corroborated?
2 A59. Yes. The analysis was corroborated through expressions of interest and the
3 results of the binding Open Season process despite the existence of other pipeline
4 options out of Western Canada.
5 Q60. Have the Applicants conducted an analysis of the relative public interest of
6 retaining the Facilities in gas transportation service or transferring them to
7 crude oil service?
8 A60. The Applicants have concluded that the public interest benefits embodied in the
9 critical and probable requirement for additional crude oil transportation capacity
10 to accommodate growing crude supplies and refining requirements surpasses
11 any potential and improbable adverse impacts incurred by gas shippers.
12 TransCanada and Keystone retained Gordon Engbloom of Confer Consulting
13 Ltd. to provide an assessment of the economic aspects of the public interest in
14 respect of the proposed transfer. Mr. Engbloom’s views are contained in
15 Appendix J: Written Evidence of Gordon Engbloom. Mr. Engbloom concluded
16 that the conversion of the Facilities to crude oil service was demonstrated to be in
17 the public interest. His conclusions were based on the apparent need for new
18 crude oil pipeline capacity, the effects of failure or delay in meeting that need,
19 the imminent prospect of Keystone providing additional capacity, the Keystone
20 contractual commitments, the absence or transitory nature of impacts on the
21 quality and cost of service to Mainline customers, the competitive environment
22 for crude oil pipelines and the appropriateness of the NBV transfer price.
23 TransCanada and Keystone accept and endorse Mr. Engbloom’s evidence.
TransCanada and Keystone Transfer Application Appendix B Page 41 of 41
1 VIII. CONCLUSION
2 Q61. What would the Applicants have the Board conclude and determine from this
3 Evidence and the other appendices to the Transfer Application?
4 A61. TransCanada and Keystone ask the Board to conclude that transfer of the
5 Facilities is in the Canadian public interest and that the Transfer Application
6 should be approved as requested.
7 Q62. Does this conclude the written evidence of TransCanada and Keystone?
8 A62. Yes. At this time.