NATIONAL ENERGY BOARD
IN THE MATTER OF THE NATIONAL ENERGY BOARD ACT AND THE REGULATIONS MADE THEREUNDER
AND IN THE MATTER OF ENBRIDGE PIPELINES INC. LINE 9 TOLLS APPLICATION
AND IN THE MATTER OF COMPLAINTS BY SUNCOR ENERGY MARKETING INC. AND VALERO ENERGY INC. REGARDING THE PROPOSED TOLLS FOR LINE 9
AND IN THE MATTER OF HEARING ORDER RHW-001-2015
FILE: OF-TOLLS-GROUP1-E101-2014-04 01
WRITTEN EVIDENCE OF VALERO ENERGY INC.
FEBRUARY 17, 2015
I. Introduction and Background
Q.1 What is the purpose of this evidence?
A.1 On July 31, 2014, Enbridge Pipelines Inc. (“Enbridge”) filed an application with the National Energy Board (“NEB” or “Board”), pursuant to the Board’s OH-002- 2013 Reasons for Decision and approval of the Line 9B Reversal and Capacity Expansion Project (“Line 9 Project” or “Project”), seeking approval for the Line 9 Tolls Tariffs (the “Application” or “Tolls Tariffs Application”).
Shortly thereafter, Valero Energy Inc. (“Valero”) advised the Board that it objected to the Application, for the reasons set out in its letter to the Board of August 13, 2014. Valero’s complaint and objection to the Application were formally registered with the Board on November 26, 2014 (together, the “Valero Complaint”).
The purpose of this evidence is to address and supplement the Valero Complaint.
Q.2 Please briefly explain the business of Valero.
A.2 From its participation in the OH-002-2013 proceeding, the Board is aware that Valero - a corporation headquartered in Montreal - is a subsidiary of Valero Energy Corporation. Valero Energy Corporation, through its subsidiaries including Valero, is the largest independent refiner in North America. Unlike integrated oil companies that engage in exploration, production, refining and distribution of oil and refined petroleum products, Valero Energy Corporation is a pure refining and marketing company, focused on the refining of crude oil and downstream distribution of finished petroleum products produced from such crude oil. Similar to other pure refining companies, Valero must source its crude oil from independent third party producers and thus, reliable, cost-advantaged crude oil supplies are crucial to its refineries’ economic feasibility.
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In Canada, Valero owns and operates the Jean Gaulin Refinery at Lévis, near Quebec City (the “Refinery” or “Jean Gaulin Refinery”), which currently has a refining capacity of 235,000 barrels of oil per day, as well as significant logistics infrastructure related to the refinery, including the Montreal-East Terminal, the largest of its kind in Canada.
Since 1998, Valero has successfully implemented several significant investment projects at the Jean Gaulin Refinery, at a cost in excess of $1.5 billion, aimed at increasing throughput, modernizing equipment and providing the Refinery with flexibility to source crude supplies from the most advantageous and cost-effective sources. For example, in order to reduce feedstock costs, Valero modified the Refinery, allowing it to process a wider range of crude oils.
Specifically related to the Line 9 Project, Valero has invested approximately $150 million in its Montreal-East Terminal to enable receipt and shipping of crude delivered by Enbridge to Montreal. This investment consists of the refurbishing of tanks; the installation of large capacity pumps to load crude ships; the refurbishing of Valero’s main dock, which includes dredging; the installation of new crude loading arms and a vapor combustion unit. In addition, Valero built a new dock to replace the existing dock, which is now commissioned for crude service, in order to continue to receive product vessel deliveries.
In addition, Valero has invested approximately $50 million at its Refinery in Quebec for the processing of Canadian crude and committed to long-term shipping agreements through the purchase of two Aframax vessels for the transportation of crude from Montreal to Lévis.
Q.3 Please summarize Valero’s interest in the Line 9 Project.
A.3 Valero has historically sourced its crude oil as feedstock for the Jean Gaulin Refinery from various international sources, including the Mediterranean, Black
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Sea, North Sea, West Africa and South America regions. Valero has not historically been an Enbridge Mainline shipper.
However, consistent with its constant mandate to obtain the most economic crude sources to feed the Refinery, Valero has also sought greater flexibility in its supply sourcing and access to less expensive and more efficient North American crude.
Such an opportunity presented itself when Valero learned from Enbridge in the latter half of 2011 that Enbridge was working on a proposal to reverse its Line 9 pipeline segment. At the time, Line 9 was under-utilized and Valero understood that the pipeline would not be reversed and put into service without shippers backing the project. Valero was interested in new crude supply for the Jean Gaulin Refinery utilizing Line 9, if Valero could be assured of an attractive delivery cost for such new supply. Also, Valero had to consider whether it could commit to the significant amount of capital investment Valero would need to make to accommodate the Line 9 reversal as well as the other commercial commitments it would need to make to crude suppliers and logistics service providers.
Valero ultimately decided to participate in the Enbridge Open Season in May and June of 2012, for capacity on the Line 9 Project to Montreal, Quebec for delivery to the Jean Gaulin Refinery. Having negotiated its terms with Enbridge (explicitly including toll certainty as described below), Valero committed to a long term ship-or-pay Transportation Services Agreement (“TSA”) for delivery of crude from Edmonton to Montreal for a 10-year term, with one five-year renewal option and executed the TSA on June 15, 2012.
A copy of the pro forma version of the TSA, filed as Exhibit B8-3 in the OH-002- 2013 proceeding and which in material respects is the same as that executed by Valero, is provided as Appendix A to this evidence, along with an amendment to
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Valero’s TSA which is described in more detail in response to Question 14 below.1 It should also be noted that, while not included in this evidence, numerous other amending agreements exist which modify key dates under Valero’s TSA.
Q.4 Please summarize the status of the Line 9 Reversal Project.
A.4 Enbridge filed its application for approval of the Line 9 Project with the NEB on November 29, 2012. The Project was reviewed in the course of the NEB’s OH- 002-2013 proceeding and received facilities approval under Board Order XO- E101-003-2014 (“2014 Order”) and toll methodology approval under Board Order TO-012-2014. The Project was originally estimated to go into service in 2013, which timing was subsequently extended to 2014. Valero worked with Enbridge throughout the fall of 2014 to provide Linefill and accommodate Enbridge’s desire to get the pipeline up and running. However, the start date has been seriously delayed as Enbridge worked to satisfy the conditions of the 2014 Order.
Q.5 Have there been any recent developments?
A.5 Yes. On February 6, 2015, the Board released its approval of the Enbridge submissions concerning certain conditions in the 2014 Order, allowing it to then file an application for Leave to Open (“LTO”).2 In fact, Enbridge filed its LTO application within hours of the 2015 Order having been issued.
Q.6 Has Enbridge kept Valero apprised of these developments?
A.6 Yes. By letter also dated and delivered on February 6, a copy of which is
1 The Amending Agreement dated December 16, 2014 excludes certain confidential information contained in its schedules, as requested by Enbridge. 2 See Order MO-001-2015 (the “2015 Order”) and accompanying correspondence: https://docs.neb- one.gc.ca/ll-eng/llisapi.dll?func=ll&objId=2680267&objAction=browse&viewType=1. Page | 4
attached as Appendix B to this evidence, Enbridge promptly advised Valero of the 2015 Order, and also confirmed that Enbridge:
(i) hadn’t determined whether the additional conditions imposed by the NEB’s February 5 decision are acceptable to it; (ii) hadn’t received LTO from the NEB in respect of the pipeline; and (iii) hadn’t received approval of the NEB of its Tolls Tariffs Application
and accordingly Enbridge believes it has not received all “Carrier Approvals” as that term is defined in the TSA.
In that same letter, Enbridge notified Valero, notwithstanding the fact that the pipeline may go into service on the basis of interim tolls,3 that it is apparently Enbridge’s express intention to terminate the TSA in the event that the Application is not approved by the NEB in form and substance acceptable to Enbridge. Valero does not consider that the Board’s determination of just and reasonable Line 9 tolls is a proper basis for terminating the TSA.
II. The Transportation Services Agreement
Q.7 Please summarize the negotiation of the TSA.
A.7 Valero worked with Enbridge on the terms of the TSA for several months before executing a final version at the end of the Enbridge Open Season in June 2012. Valero believes that it was critical in these negotiations for Enbridge to obtain the long-term volume and thus revenue commitments it required to implement the Line 9B reversal project. For Valero, it was critical to obtain the toll certainty it required to make the long-term commitment to Enbridge with regards to Line 9,
3 In accordance with Board Order TOI-001-2014, as amended by Order No. AO-1-TOI-001-2014. Page | 5
as well as its own capital investments and other long-term commercial commitments with its upstream crude suppliers and logistics services providers.
Towards the end of the TSA negotiations, Enbridge proposed to raise the indicative Line 9 toll to Montreal by $0.21/bbl. Valero agreed to this increase on the understanding that the Line 9 tolls would only escalate from January 1, 2013 on by an agreed-upon inflation escalator (in addition to LMCI adjustments, discussed below).
Q.8 What provisions of the TSA are relevant to the Valero toll complaint?
A.8 Article 6 and Schedule B of the TSA are the most relevant TSA provisions with respect to setting the tolls that are the subject of the Valero Complaint. Articles 17 and 21 are also relevant to this proceeding.
Q.9 What methodology did Enbridge and Valero agree to in the TSA for setting the tolls?
A.9 Simply put, Enbridge and Valero agreed to a base toll, set at a particular point in time - January 1, 2013 - which could thereafter only be adjusted for two reasons.
Schedule B of the originally proposed TSA included a placeholder for the Committed Tolls, with a notation that the toll schedule would be added at a later time. Subsequent drafts of the TSA showed Schedule B evolving, first to reference the base tolls as “Estimated Committed Tolls” and then as “Initial Committed Tolls.” While the parties continued to negotiate what the base toll would be, Valero sought to ensure that such tolls would be locked-in as of January 1, 2013, without further substantive escalation.
To this point, the original draft of the TSA proposed by Enbridge included Article 6.02, which initially read as follows:
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“The Committed Tolls shall be adjusted annually, effective July 1 of each Year, by 75% of the GDPP Index multiplied by the Committed Tolls in effect immediately prior to such change.”
Again, Valero required toll certainty as a condition to making any long-term / high volume commitment on Line 9. This requirement was paramount as Valero negotiated the TSA with Enbridge. Among other modifications to the original TSA requested by Valero, in March 2012 Valero requested a very specific change to the language of Article 6.02 of the TSA to ensure such certainty. Valero’s proposal back to Enbridge read as follows:
“Starting after January 1, 2013, and except as provided in Section 6.04, the Committed Tolls shall only be adjusted annually, effective July 1 of each Year, by 75% of the GDPP Index multiplied by the Committed Tolls in effect immediately prior to such change.” [emphasis added]
The Valero proposal was acceptable to Enbridge. Thus, the executed version of the TSA provides that the initial tolls applicable to Line 9 would be set as of January 1, 2013 to be equal to the International Joint Toll pursuant to the Enbridge 2011 Competitive Tolling Settlement (“CTS”), plus a distance and commodity adjusted charge of $0.21/bbl to Montreal.
After January 1, 2013, the tolls were only to be adjusted in two ways: (i) annually, effective July 1 of each year, by 75% of the GDPP Index (a Gross Domestic Product at Market Prices Index, as defined in the TSA), and (ii) by an adjustment to include any incremental tolls resulting from an NEB order with respect to the LMCI (as referenced in Section 6.04 of the TSA).
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Q.10. In response to Information Request 1.2 from the Board in OH-002-2013, Enbridge stated that one of the parameters of the commercially negotiated tolling methodology for the Line 9 Project was “toll certainty to shippers by indexing tolls”. Do you agree?
A.10 Yes. While the TSA also includes a provision (Article 6.04) that allows for tolls to be adjusted for approved LMCI charges, the accepted and agreed-upon method for achieving that toll certainty was the revised wording of Article 6.02, noted above. A copy of the Enbridge response to that Information Request is attached as Appendix C to this evidence.
Q.11 Article 17 of the TSA obliges both Enbridge and Valero not to request the Board to set tolls for the Line 9 Project that are inconsistent with the TSA. Are the committed tolls proposed by Enbridge in its Application in accordance with the TSA?
A.11 No, the Application is inconsistent with the terms of the TSA because after January 1, 2013, Committed Tolls are only to be adjusted for the following:
a. Three-quarters of GDPP per year starting in 2013 (Section 6.02); and b. Approved LMCI charges (Section 6.04).
However, under the heading “Tolling Methodology” at paragraph 3 of its Application, Enbridge asserts that: “Surcharges, including Mainline surcharges, such as the CTS Section 20.1 surcharge, are then added to the Uncommitted and Committed IJT Tolls.”
Notwithstanding the clear language and intent of the TSA, Enbridge has included several Mainline surcharges in its calculation of the Line 9 tolls for which it seeks Board approval. Appendix A to NEB No. 348/FERC No. 1.0.0 filed with the Application is a worksheet supporting those tolls, which identifies amounts for
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“CTS Section 20.1 Surcharge”, “OAS True-up”, and “Line 5 Claim True-up”, all of which relate to Mainline surcharges, for inclusion in Line 9 Committed IJT Tolls.4
These additional surcharges are inconsistent with the methodology embodied in the Valero TSA and the Board’s approval of the proposed tolling methodology for Line 9, as set out in its Reasons for Decision OH-003-2013, at pages 118 -121.
Q.12 Please explain the interplay between the CTS and the Line 9 tolls agreed to under the TSA.
A.12 As noted in the Application, the Enbridge Mainline tolls are currently fixed by the terms of the CTS approved by the NEB, and those tolls, as Enbridge says, may be adjusted for a variety of reasons. The CTS, which established the concept of an IJT for the Mainline, is specific to the Mainline, and fixes tolls thereon until 2021. The CTS specifically and repeatedly affirms the stand-alone nature of Line 9, and explicitly states that tolls for service on Line 9 will reflect its separate and stand- alone rate base. For example, Section 31.2 of the CTS says:
“Line 9 tolls are currently set on a standalone basis and will continue to be set on a standalone basis under the CTS regardless of whether Line 9 is used for East to West or West to East service or is used for partial East to West and partial West to East service. Standalone tolling under the CTS continues to treat Line 9 assets as separate and distinct assets from the Enbridge Mainline assets. Standalone tolling under the CTS continues to base Line 9 tolls on the separate and distinct Line 9 rate base.”
4 NEB No. 348/FERC No. 1.0.0 has been superseded by NEB No. 357/FERC No. 1.0.0 effective January 1, 2015, in which the tolls reflect adjustments for LMCI costs. Copies of the NEB No. 349 and 357 Committed Rates Worksheets are attached as Appendix D to this Evidence. Page | 9
The CTS also states at Section 31.4:
“In the event that Enbridge files an application to reverse service on Line 9 or a portion of Line 9 and such reversal is approved by the NEB, the stand alone toll for the transportation of hydrocarbons on Line 9 in a West to East service (“Line 9 Local Tolls”) shall be adjusted annually, up or down, at a rate of 75% of the GDPP Index.”
The toll rates under the CTS were also used as an economic starting point for toll discussions under the Line 9 TSA. While the CTS tolls were used as a baseline or component of the Line 9 tolls, Valero never agreed to a wholesale incorporation of the CTS tolls and allowable adjustments into the Line 9 TSA.
There is no basis in the CTS for Enbridge to now claim, as it has, that all “surcharges, including Mainline surcharges” are properly to be added to the Mainline mileage applicable to the Line 9 Committed IJT Tolls, since Enbridge has in fact agreed otherwise in the TSA.
Q.13 Please explain the statement in Schedule B that “Actual Committed Tolls will be adjusted accordingly to equal the International Joint Toll pursuant to the 2011 Competitive Tolling Settlement...”.
A.13 As indicated above, the January 1, 2013 CTS tolls were to be the basis for the Line 9 tolls. However, because those CTS tolls were not known at the time the TSA and Schedule B were finalized in June 2012, the TSA needed to provide for an adjustment mechanism to true-up the “Committed Tolls” in Schedule B with the actual approved CTS tolls “as of January 1st, 2013”.
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III. Tolling Principles
Q.14 Is Valero asserting that there can be no adjustments to the Line 9 Committed Tolls, other than for LMCI charges and inflation?
A.14 No. As Enbridge points out in its Application, and Valero agrees, there may well be adjustments, involving surcharges, as and when Enbridge and committed shippers negotiate and agree on costs relating to safety and integrity measures concerning Line 9. In fact, Valero and Enbridge recently agreed to amend their TSA to provide for the recovery in tolls of certain specific costs incurred and to be incurred by Enbridge related specifically to the Line 9 Project. A copy of this amendment is included as part of Appendix A to this evidence.
Q.15 In its OH-002-2013 decision, didn’t the Board conclude that the Line 9 Committed IJT Tolls had to be the same as the Mainline IJT tolls in order to avoid unjust discrimination?
A.15 No. The Board’s concern in that proceeding related to toll methodology, and in particular, the common carrier obligations of Enbridge, but not any specific tolls. The Board did say that it was appropriate for the IJT tolls to common Line 9 and Mainline delivery points to align (of course, Montreal, the destination for Valero’s committed volumes, is not a Mainline delivery point).
However, not having been asked to approve specific tolls, the Board could not and did not go so far as to say that any distinction between the Line 9 and Mainline IJT tolls would be discriminatory. At best, the Board’s finding was that if tolls to the common Line 9 and Mainline delivery points were aligned, that would not be discriminatory.
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Q.16 Wouldn’t Enbridge be unjustly discriminating between shippers if it were to apply the Mainline surcharges to Mainline shippers but not Valero?
A.16 No. While the tolls may be different, Valero understands that the National Energy Board Act (“Act”) prohibits unjust discrimination in tolls, and requires that tolls be charged equally to all persons under substantially similar circumstances and conditions for traffic of the same description. Valero also understands that discrimination in rates can arise when a utility does not treat users equally in the absence of any distinction between them, or when a utility treats all its users equally when distinctions between them warrants different rate treatment.
The tolls that are charged to Mainline shippers under the CTS were negotiated at a different time and in a different context than the TSA for Line 9. More specifically, the significant, long-term financial commitments made by Line 9 shippers via the TSA are specific to and underpin the feasibility of that project. Valero is not aware that the Enbridge Mainline is underpinned by similar long- term financial commitments.
The Line 9 committed shippers, including Valero, have provided unique levels of financial support and have assumed unique levels of risk. The Line 9 committed shippers, who have voluntarily agreed to lock themselves into substantial long- term volume commitments, are not similarly situated to Mainline shippers, who can simply opt not to ship on the pipeline if costs escalate. As such, Valero believes there is no unjust discrimination that would arise in having differing toll levels to common delivery points on Line 9 and the Mainline.
Q.17 Are there other Enbridge shippers similarly situated to Valero?
A.17 Yes, with regards to Line 9, Valero believes Suncor is similarly situated.
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It is also Valero’s understanding and belief that there are other committed shippers on stand-alone systems similar to Line 9, which connect to and utilize the Mainline for a portion of their total transportation route (including shippers on the Flanagan South pipeline segment from Flanagan, Illinois to the U.S. Gulf Coast) who in some manner are not subject to Mainline surcharges.
IV Conclusion and Relief
Q.18 Please summarize your evidence.
A.18 The Committed Tolls proposed by Enbridge in its Application are not in accordance with the methodology and the TSA negotiated between Enbridge and Valero. According to the TSA, after January 1, 2013, Line 9 tolls can only be adjusted (i) annually by 75% of the GDPP Index and (ii) as necessary to accommodate LMCI surcharges. Enbridge’s Application, which asserts that other surcharges should be included in the tolls to be charged to Valero, is inconsistent with the TSA. The tolls proposed by Enbridge are also unjust and unreasonable because they do not allocate the economic risks in a manner agreed to by Enbridge and Valero. Finally, the tolls are unjustly discriminatory because other similarly situated shippers are effectively exempted from paying the Surcharges while Valero is not.
Q.19 What relief is Valero seeking?
A.19 Valero does not believe that the Enbridge Application should be approved. Valero asks the Board to conclude and find that:
(a) the applied-for tolls are not consistent with the negotiated toll methodology and the TSA; (b) Line 9 Committed Tolls for Valero may only be adjusted by Enbridge in accordance with the TSA, that is, an annual inflation adjustment and any
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necessary adjustment for LMCI charges; (c) any other adjustments to the Line 9 Committed Tolls for Valero, including for Mainline or other surcharges, will require an amendment to the TSA pursuant to Article 21.11 of the TSA;
and to make the necessary order or orders to give effect to these findings.
Q.20 Does this complete the Valero evidence?
A.20 Yes, at this time.
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