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Information Request No. 1 Inc. to Inc. February 1, 2021

Enbridge Pipelines Inc. () Canadian Mainline Contracting Application (Application) File OF-Tolls-Group1-E101-2019-02 02

Suncor Energy Inc. Information Request No. 1 to Cenovus Energy Inc.

Table of Contents 1.1 Competitive Toll Settlement (CTS) Exit Toll Levels and Evidence of Market Power ...... 1

1.2 Dr. Webb’s “Data Validation Effort”—Sustainment Capital Additions ...... 4

1.3 Dr. Webb’s “Data Validation Effort”—Carrier Property in Service (CPIS) for the Year 2019 .. 5

1.4 Dr. Webb’s “Data Validation Effort”—Receipt and Delivery Terminalling Revenue ...... 7

1.5 Dr. Webb’s Explanation for Including a “Market Access Revenue Adjustment” in his Canadian Mainline Revenue Requirement Calculations ...... 9

1.6 Dr. Webb’s Cost of Service and “Probability” Analyses, and Market Power Assertions ...... 11

1.7 Negotiation of Enbridge’s MLC Proposal and Ability to Exercise Market Power ...... 13

1.8 Benefits of Negotiated Rates Relative to Cost-Based Rates ...... 15

1.9 The Historical Role of Cost in Setting Tolls on the Enbridge Mainline...... 17

1.10 Incentives under Indexed Cost-Based Ratemaking Regimes ...... 21

1.11 Conversion from Common Carriage to Contract Carriage for Existing Capacity ...... 23

1.12 Economic Regulation of Natural Monopolies ...... 25

1.13 Market Power of Negotiating Parties ...... 28

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 1 of 28

Information Request No. 1

1.1 Competitive Toll Settlement (CTS) Exit Toll Levels and Evidence of Market Power

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at page 25 (PDF page 27 of 84) (C10219-3).

(ii) Written Evidence of The Brattle Group, December 7, 2020, at page 6 (PDF page 8 of 157) (C10215-3).

(iii) Enbridge, Response to CER IR 5, at PDF pages 62-65 of 104 (C09909-2).

(iv) Enbridge, Response to CER IR 5.17.c, Attachment – Impact of Exchange Rate Fluctuations (C09909-7).

(v) Enbridge, CTS Application, Appendix 1 - Competitive Toll Settlement dated July 1, 2011 (the “CTS”), approved June 24, 2011 in NEB Order TO-03-2011, Section 2.3, at pages 2-3 (PDF pages 6-7 of 122) (A1Y9R7).

Preamble: In reference (i), Dr. Webb argues that the fact that “MLC [Mainline Contracting] tolls are similar to the tolls that were being charged under the CTS” is a “high-level quantitative reason to believe that MLC does not represent an exercise of market power.”

In reference (iii), Enbridge acknowledges that the foreign exchange (FX) rate fluctuations have caused a deterioration of the distance and commodity relationships that govern cost-based tolls. Enbridge states in reference (iii): “since all IJT [International Joint Tariff] movements (which are set in US$) incorporate Canadian Mainline movements to deliver internationally or to Eastern , the IJT tolls under the CTS are, in essence, paying more for the same commodity and distance travelled on the Canadian Mainline as compared to the CLT [Canadian Local Toll] movements on the Canadian Mainline.” Reference (iv) illustrates this deterioration as reflected in the evolution of CTS tolls for the to Gretna light crude CLT movement.

Relying on the information provided by Enbridge in reference (iii), The Brattle Group (Brattle) explains in reference (ii) that “[b]ecause of currency exchange rate fluctuations occurring over the term of the CTS—notably a devaluation in Canadian vs. U.S. currency—the effective Hardisty-to-border toll level embedded in the CTS IJT US$/bbl toll (and implicitly Enbridge’s proposed US$5.70/bbl IJT base toll) has increased by approximately 40% when expressed in C$/bbl.”

Similarly, the table below directly illustrates the growth in C$-denominated shipping cost on the Canadian Mainline over the course of the CTS in terms of the Hardisty-to-border Canadian Mainline residual portion of the CTS IJT Hardisty-to-Chicago heavy crude toll that is the primary toll of focus in Enbridge’s Mainline Contracting Application. As the table demonstrates, while the US$-denominated Hardisty-to- Chicago heavy crude benchmark toll has increased by approximately 10% from 2011 to 2018-2019, the cumulative increase in the corresponding C$-denominated Canadian Mainline residual benchmark toll (obtained by subtracting the relevant border-to- Chicago Lakehead local toll) was 34% by 2018 and 42% by 2019. (Note that this table does not extend to 2020 because the surcharge for the Canadian portion the Line 3 Replacement Project surcharge was included in the CTS IJT toll in that year, but there

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 2 of 28

was no corresponding increase in Lakehead local tolls associated with the US portion of the Line 3 Replacement Project.)

Evolution of Residual Hardisty to Border Toll Under CTS Heavy Crude

Unit 2011 2012 2013 2014 2015 2016 2017 2018 2019 CTS Benchmark IJT Toll (Hardisty to Flanagan) US$/bbl [1] $3.92 $3.97 $4.03 $4.04 $4.25 $4.13 $4.23 $4.30 $4.33 Lakehead Local Toll (Border to Flanagan) US$/bbl [2] $2.01 $1.85 $2.18 $2.49 $2.44 $2.58 $2.43 $2.23 $2.24 Residual Hardisty to Border Toll Under CTS US$/bbl [3] $1.91 $2.12 $1.85 $1.55 $1.81 $1.54 $1.80 $2.07 $2.09 Foreign Exchange Rate US$/C$[4]1.001.001.010.910.810.770.780.810.77 Residual Hardisty to Border Toll Under CTS C$/bbl [5] $1.91 $2.12 $1.83 $1.70 $2.23 $2.00 $2.30 $2.55 $2.71

Cumulative Percent Changes: CTS Benchmark IJT Toll (Hardisty to Flanagan) [6] 0% 1% 3% 3% 8% 5% 8% 10% 11% Residual Hardisty to Border Toll Under CTS [7] 0% 11% ‐4% ‐11% 17% 5% 21% 34% 42%

Sources / Notes: [1]: EELP IJT Tariffs filed each July, accessed through FERC eTariff, converted to US$/bbl. [2]: EELP Local Rates Tariffs filed each July, accessed through FERC eTariff, converted to US$/bbl. [3] = [1] ‐ [2] [4]: CER 5.17.c Attachment ‐ Impact of Exchange Rate Fluctuations. [5] = [3] / [4] [6]: Cumulative percent change of [1]. [7]: Cumulative percent change of [5].

In light of the substantial increase in the effective cost of shipping on the Canadian Mainline during the CTS term, as driven and exacerbated by shifting FX rates since 2011, Suncor seeks to understand the basis of Dr. Webb’s claim that Enbridge’s applied-for MLC tolls being “similar to the tolls that were being charged under the CTS” constitutes evidence that the MLC tolls do not reflect an exercise of market power.

Request: Is it Dr. Webb’s position that the fact of CTS provisions having been agreed to by Enbridge, the Canadian Association of Producers (CAPP) and Canadian Mainline shipper parties in 2011 means that any possible toll level that might evolve by the end of the CTS term is necessarily reflective of a competitive toll level and is not a supracompetitive toll level?

Is it Dr. Webb’s position that when Enbridge, CAPP and Canadian Mainline shipper parties agreed to the terms of the CTS in 2011, they implicitly accepted and/or endorsed as reasonable any possible toll levels that might evolve by the end of the CTS term?

Please explain your answer and specifically reconcile Dr. Webb’s position with the provisions of Section 2.3 of the CTS, which states that “[t]he rate design and rates contained in the CTS will be without prejudice to any positions that may be taken by any party in respect to matters governed by the CTS for periods following expiry.”

In Dr. Webb’s view, would it be reasonable for the parties to an indexed multi-year tolling agreement such as the CTS to expect that at the expiration of the agreement the tolls would be evaluated and potentially “re-based” to incorporate the effects of depreciation of pre-existing capital assets, new capital investment and changes in costs, throughput or other operating conditions during the term of the agreement? If not, why not?

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 3 of 28

In Dr. Webb’s opinion, are there any circumstances in which Canadian Mainline tolls being charged at levels similar to those that have or would evolve under the auspices of the CTS could represent an exercise of market power?

If yes, please identify and provide examples of such circumstances.

If no, please explain the basis for Dr. Webb’s position that proposed toll levels that are consistent with those arising under the CTS exit toll represent a “high-level quantitative reason to believe that MLC does not represent an exercise of market power.”

Does Dr. Webb acknowledge that there has been a deterioration in the distance and commodity relationships in the CTS tolls?

If no, please explain Dr. Webb’s reasoning in disagreeing with the information presented by Enbridge in reference (iii) as summarized in the preamble.

If yes, please explain whether and how Dr. Webb took account of the deterioration in the distance and commodity relationships in the CTS tolls when arguing that MLC tolls being similar to CTS toll levels is high level quantitative evidence of the MLC tolls not representing an exercise of market power.

Is it Dr. Webb’s position that cumulative increases of 30-40% or more in the effective cost of shipping on the Canadian Mainline during the CTS term is consistent with his assertion that MLC tolls being similar to current CTS toll levels represents high level quantitative evidence that the MLC tolls do not reflect an exercise of market power?

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 4 of 28

1.2 Dr. Webb’s “Data Validation Effort”—Sustainment Capital Additions

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 37-39 (PDF pages 39-41 of 84) (C10219-3).

(ii) MJW – Appendices A and B, December 7, 2020, at pages 6-7 and 10-11 (PDF pages 7-9 and 11-12 of 13) (C10219-4).

(iii) Enbridge, Response to Cenovus IR 1.1.a, Attachment – Canadian Mainline and Lakehead Plant and Capital Expenditure Schedule (C07657-3).

(iv) Enbridge, Response to Cenovus IR 2.8.a, Attachment – Sustainment Capital Expenditures (C08986-3).

Preamble: In reference (i), Dr. Webb states that he agrees with “Enbridge’s approach regarding the projections for sustainment capital,” however he claims that “Enbridge’s calculations of ‘the average of 2011 to 2019 historical costs inflated to 2021 real dollars’ are incorrect.” In Appendix MJW-B1 of reference (ii), Dr. Webb illustrates his understanding of Enbridge’s calculation of projected sustainment capital costs and shows how his calculation arrives at a different result. In reference (i), Dr. Webb explains that his adjustment to Lakehead and Canadian Mainline sustainment capital additions results in a decrease to his estimate “Avg. COS Rate” of approximately US$0.09/bbl.

It appears that Dr. Webb believes that Enbridge developed its sustainment capital costs from the historical sustainment capital data in reference (iv) rather than the historical data in reference (iii). It appears that Dr. Webb is attributing his diverging results to an “error” in Enbridge’s calculations instead of a difference in underlying historical data. However, if Dr. Webb were to replace the annual nominal amounts for Lakehead and the Canadian Mainline in rows 3 and 12 of Appendix MJW-B1 of reference (ii), respectively, with the historical sustainment capital data in reference (iii), the “Variance / Correction” amounts as shown in rows 11 and 20 would change to $0.

Suncor seeks to better understand the basis of Dr. Webb’s choice of inputs for sustainment capital.

Request: Please confirm that Dr. Webb’s calculation of 2021 projected sustainment capital costs match that of Enbridge (to the nearest million) if the historical nominal sustainment capital amounts are replaced with the data from reference (iv).

Please explain Dr. Webb’s view as to why sourcing historical sustainment capital costs from reference (iii) instead of reference (iv) represents an “error.”

To the extent Dr. Webb now believes that his analysis should have utilized reference (iii) instead of reference (iv), please incorporate this change into an updated analysis and provide updated Cost of Service results and supporting appendices / exhibits reflecting this and any other necessary corrections.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 5 of 28

1.3 Dr. Webb’s “Data Validation Effort”—Carrier Property in Service (CPIS) for the Year 2019

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 37-39 (PDF pages 39-41 of 84) (C10219-3).

(ii) MJW – Appendices A and B, December 7, 2020, at pages 6-7 and 10-11 (PDF pages 7-9 and 11-12 of 13) (C10219-4).

(iii) Enbridge, Response to CER IR 1.7.b, Attachment 2 – Part A – Model Simulation 3055 kbpd median.xlsx.

(iv) C05091-4 Item 4(b) - Rate Base Information.

Preamble: In reference (i), Dr. Webb states: “I compared the 2019 CPIS balances relied on by the Enbridge COS to the corresponding amounts recorded by Enbridge in their 2019 annual reports to the regulatory authorities (i.e., the FERC Form 6 for the Lakehead Pipeline and CER Annual Report for the Canadian Mainline) …[T]he CPIS balances of the Canadian Mainline, relied on by Enbridge, are lower than the amounts reported in CER ‘C05091-4 Item 4(b) – Rate Base Information. Based on this observation, I made adjustments to the Canadian Mainline CPIS balances as of 2019 end of year.” In reference (i), Dr. Webb explains that his adjustment to the Canadian Mainline 2019 CPIS results in an increase to his estimate “Avg. COS Rate” of approximately US$0.06/bbl.

It appears that the “discrepancy” Dr. Webb identified between the 2019 CPIS balances reported in the CER Annual Report and the amounts included in Enbridge’s COS model is exactly equal to the sum of closing balances of accumulated Allowance for Equity Funds Used During Construction (AEDC) and Allowance for Interest During Construction (AIDC) (see, reference (iii), tab “EPI 2019-21,” cells C19 and C27). By including an upward adjustment to the Canadian Mainline CPIS in 2019 and not making any corresponding adjustments to the 2019 AEDC and AIDC balances, it appears that Dr. Webb may be “double-counting” the Canadian Mainline’s balance of accumulated Allowance for Funds Used During Construction (AFUDC) through 2019 in his Canadian Mainline revenue requirement calculations.

Suncor seeks to better understand the basis of Dr. Webb’s upward adjustment to 2019 CPIS balances in his Canadian Mainline revenue requirement calculations, and in particular whether this adjustment may reflect an inadvertent error on the part of Dr. Webb.

Request: Does Dr. Webb agree that the discrepancy in 2019 CPIS balances between Enbridge’s COS model (reference (iii)) and the 2019 CER Annual Report (reference (iv)) is due to the fact that the 2019 CER Annual Report is reporting CPIS balance inclusive of AFUDC?

If no, what is the basis of Dr. Webb’s conclusion that Enbridge erroneously understated the 2019 Canadian Mainline CPIS balances by the precise amount of 2019 year-end accumulated AFUDC that is

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 6 of 28

separately tracked and incorporated into Canadian Mainline rate base in Enbridge’s CER IR 1.7(b) model?

If yes, does Dr. Webb now believe the inclusion of AFUDC within the CER Annual Report Item 4(b) carrier property amounts is the plausible explanation for the “discrepancy,” such that his upward adjustment to 2019 CPIS was unnecessary and serves to inappropriately inflate his estimated cost of service and cost-based rates? If not, why not?

To the extent Dr. Webb now believes he should not have upwardly adjusted Enbridge’s Canadian Mainline CPIS balances, please incorporate this change into an updated analysis and provide updated Cost of Service results and supporting appendices / exhibits reflecting this and any other necessary corrections.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 7 of 28

1.4 Dr. Webb’s “Data Validation Effort”—Receipt and Delivery Terminalling Revenue

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 37-39 (PDF pages 39-41 of 84) (C10219-3).

(ii) MJW - Appendices A and B, December 7, 2020, at pages 6-7 and 10-11 (PDF pages 7-9 and 11-12 of 13) (C10219-4).

(iii) Enbridge, Response to CER IR 1.7.b, Attachment 2 – Part A – Model Simulation 3055 kbpd median.xlsx.

Preamble: In reference (i), Dr Webb states that he identified an error in Enbridge’s calculation of Canadian Mainline receipt and delivery terminalling revenue, which ultimately gets credited against the Canadian Mainline transmission revenue requirement. In Appendix MJW-B4 of reference (ii), Dr. Webb illustrates his calculation of terminalling revenue for the Canadian Mainline and compares his calculated revenue to Enbridge’s corresponding amounts in reference (iii), tab “TERM-TNK,” row 33. In reference (i), Dr. Webb explains that his adjustment to the Canadian Mainline terminalling revenue results in an increase to his estimate “Avg. COS Rate” of approximately US$0.07/bbl. There appear to be three inconsistencies in Dr. Webb’s calculation of receipt and delivery terminalling revenue that lead him to conclude that Enbridge has improperly calculated terminalling revenue for the Canadian Mainline.

 First, Dr. Webb calculates terminalling revenue in US dollars and compares his amount to Enbridge’s terminalling revenue in Canadian dollars, resulting in an “apples-to-oranges” comparison. In reference (iii), Enbridge calculates receipt and delivery terminalling revenue by taking the product of receipt and delivery terminalling charges and receipt and delivery volumes, respectively. Dr. Webb follows a similar approach, but incorrectly assumes that the terminalling charges are in Canadian dollars even though 1) they are labeled as being in US dollars in reference (iii), tab “Toll UTR” and 2) Enbridge clearly lays out its calculation of terminalling revenue (including currency conversion) in reference (iii), tab “TERM-TNK.” In making this erroneous assumption, Dr. Webb does not convert the revenue amounts to Canadian dollars using an FX rate as Enbridge does.

 Second, Dr. Webb applies the IJT terminalling tolls to all Canadian Mainline volumes (i.e., both IJT and CLT volumes), instead of applying the IJT terminalling tolls to only IJT volumes and separately applying the CLT terminalling tolls to CLT volumes as Enbridge does and clearly illustrates in reference (iv), tab “TERM-TNK.”

 Third, Dr. Webb uses different volumes as an input to his terminalling revenue calculations than Enbridge does. Specifically, the “Receipt Terminalling Volumes in MM Bbls @CLT” in row 17 of Appendix MJW-B4 in reference (ii) deviate from the amounts in reference (iii), tab “TERM-TNK” in the years 2033- 2041.

Suncor seeks to better understand the basis of Dr. Webb’s modeling decisions related to Canadian Mainline terminalling revenue calculations, including whether any of these decisions may represent inadvertent errors on the part of Dr. Webb.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 8 of 28

Request: Please confirm that the tolls in rows 20-23 of Appendix MJW-B4 in reference (ii) are in US dollars as they are labeled in reference (iii), tab “Toll UTR”, rows 12-19. Please also confirm that Dr. Webb’s calculation of terminalling revenue in rows 24-26 of Appendix MJW-B4 in reference (ii) is in US dollars and is thus not comparable to Enbridge’s corresponding amount in Canadian dollars. If this was an inadvertent error on Dr. Webb’s part, please so state.

Please provide Dr. Webb’s rationale for applying the IJT terminalling charges to IJT and CLT volumes instead of applying the CLT terminalling charges to CLT volumes. If this was an inadvertent error on Dr. Webb’s part, please so state.

Please identify Dr. Webb’s source for CLT receipt terminalling volumes in row 17 of Appendix MJW-B4 in reference (ii) in years 2033-2041 and explain why they differ from Enbridge’s values for these inputs in reference (iv), tab “TERM- TNK”, row 17. If this was an inadvertent error on Dr. Webb’s part, please so state.

To the extent Dr. Webb now believes his adjustment to Enbridge’s calculations of Canadian Mainline terminalling revenue incorporated one or more errors, please correct these errors as part of an updated analysis and provide updated Cost of Service results and supporting appendices / exhibits reflecting this and any other necessary corrections.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 9 of 28

1.5 Dr. Webb’s Explanation for Including a “Market Access Revenue Adjustment” in his Canadian Mainline Revenue Requirement Calculations

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 40-42 (PDF pages 42-44 of 84) (C10219-3).

(ii) Enbridge, Additional Written Evidence of Concentric Energy Advisors, Inc. (Concentric), June 12, 2020, at page 42 (PDF page 46 of 61) (C06800-3).

(iii) Exhibit No. MJW-2 Cost of Service Calculations, Workpaper 1b, at pages 144- 158 (PDF pages 145-159 of 184) (C10219-5).

Preamble: In A72 of reference (i) Dr. Webb states “it is desirable to provide incentives for pipelines to discount rates to attract new volumes because it is possible to spread the existing cost over larger volumes, resulting in a lower rate for all shippers.”

In A73 of reference (i), Dr. Webb provides an illustrative example in support of his belief that it is appropriate for Enbridge to include the “Market Access Revenue Adjustment” (MARA) in calculating a cost-based rate. In his example, when additional throughput is added to a pipeline it is in such a way that: 1) it does not have any marginal impact on the pipeline’s cost of service; and 2) the cost that the additional shipper is willing to pay is less than the cost recovery deemed by a simple cost-based formula, i.e. (Total cost of service)/(Number of barrels from original service + Number of additional barrels contracted from the addition). In Dr. Webb’s example, the additional shippers are charged a discounted rate that they are willing to pay, resulting in the existing shippers’ rate going down, but only to the extent that the pipeline is still able to recoup its remaining cost of service. As a result, Dr. Webb concludes that even the non- discounted shippers end up paying a lower rate than they would have paid in the absence of additional shippers.

In reference (ii), Concentric states: “a Market Access Discount is one of the discounts Enbridge offered Enbridge Mainline shippers to expand the set of markets accessible to Enbridge Mainline shippers, which increased delivery options for all producers in Western Canada. The CTS permitted Enbridge to offer Market Access Discounts provided that no priority access was granted, and Enbridge offered such discounts on three expansion projects: Toledo, Line 9, and Flanagan South. These Market Access Discounts represented concessions compared to full tariffed tolls but produced a net benefit for the system through the addition of incremental markets and increased volumes on the Enbridge Mainline.”

Suncor seeks to more fully understand the parameters of Dr. Webb’s illustrative example and Dr. Webb’s views as to how that example applies in context of the Enbridge Mainline. Suncor also seeks to further understand certain aspects of Dr. Webb’s modeling of MARA within his Canadian Mainline revenue requirement calculations.

Request: Is Dr. Webb of the view that the “Market Access Discounts” referred to in reference (ii) were offered on the Mainline? If yes, please provide a reference to the Enbridge Mainline tariffs that demonstrate the reduction in rates payable

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 10 of 28

by Mainline shippers that did not acquire capacity on the three expansion projects described in reference (ii).

Is Dr. Webb of the view that absent rate discounts to “price sensitive” shippers, the Mainline would not be in apportionment?

Please provide real world examples of the theoretical outcome described by Dr. Webb in reference (i) occurring with respect to oil pipeline rates.

Please provide all examples and rate tariffs therefrom where carriers have offered differentiations in pipeline rates based on a shipper’s price sensitivity.

How would a carrier determine each shipper’s price sensitivity to the cost of transportation?

Regarding information request 1.5(c.2) above, presuming that a carrier was able to determine each shipper’s price sensitivity to the cost of transportation, is it Dr. Webb’s opinion that the carrier should be allowed to set the toll for each shipper based on their price sensitivity to the cost of transportation?

If a shipper’s price sensitivity is the result of inefficient upstream or downstream investments, please discuss the appropriateness of offering a discounted transportation rate to that shipper.

Regarding Dr. Webb’s modeling mechanics (e.g., at reference (iv)), with respect to any “discount” associated with certain volumes transported on Enbridge’s Canadian Mainline: If Dr. Webb’s estimate of the remaining portion of the Canadian Mainline revenue requirement (i.e., excluding MARA) were exogenously reduced from the level that he initially estimates, what does he expect would happen to the estimate of the MARA that should be included in the Canadian Mainline revenue requirement?

If Dr. Webb’s estimate of the “discount” implied by the downstream pipeline IJT tolls relative to the estimated Mainline cost of service tolls becomes lower, would that reduce the MARA that he argues should be included in the Canadian Mainline cost of service? If not, please explain.

If Dr. Webb’s estimate of the MARA is reduced, will that in turn reduce Dr. Webb’s estimate of the overall revenue requirement associated with the Canadian Mainline?

Does this modeling mechanism constitute a feedback loop wherein exogenous (non-MARA) reductions to the Canadian Mainline revenue requirement reduce the estimated MARA, thereby reducing the revenue requirement and reducing the implied discount used to calculate MARA, and so on.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 11 of 28

1.6 Dr. Webb’s Cost of Service and “Probability” Analyses, and Market Power Assertions

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 34-58 (PDF pages 36-60 of 84) (C10219-3).

(ii) Enbridge, Response to CER IR 1.7.b, Attachment 2 - Part A - Model Simulation 3055 kbpd median.xlsx.

(iii) Written Evidence of The Brattle Group, December 7, 2020, at pages 53-54 (PDF page 55-56 of 157) (C10215-3).

(iv) Written Evidence of The Brattle Group, Exhibit 5 - Brattle Lakehead Toll and CML Residual Toll Calculations.xlsx.

(v) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, Exhibit No. MJW-2 Enbridge Cost of Service Calculations.xlsm.

(vi) Canadian Mainline Contracting Application, Enbridge Pipelines Inc., December 19, 2019, at PDF pages 47 and 56 of 86 (C03823-2).

Preamble: In reference (i), Dr. Webb performs a cost of service analysis and a “probability” analysis that estimates the likelihood that a cost-based toll will exceed the MLC toll. Dr. Webb follows Enbridge’s approach employed in reference (ii) to include a MARA and “Recovery of Foreign Exchange Hedge Losses” in the Canadian Mainline revenue requirement. Dr. Webb states in reference (i) that he “believes it is appropriate to include the MARA in calculating a cost-based rate,” but does not discuss his choice to include “Recovery of Foreign Exchange Hedge Losses” in his calculation of cost of service tolls.

Dr. Webb uses his “probability” analysis to justify his conclusion that MLC tolls are reasonable and do not represent an abuse of market power. In reference (i), Dr. Webb states “the fact that in the majority of simulations the cost-based rate exceeds the MLC rate provides an obvious explanation of the reasons shippers want to sign up for the MLC; they expect it will result in lower rates compared to the alternatives. This fact provides further evidence that Enbridge is not exercising market power, meaning that the MLC tolls are within the zone of reasonableness.”

Various parties in this proceeding, including Suncor and its experts (see reference (iii)), have argued: 1) that it is inappropriate for Enbridge to include a MARA in its revenue requirement as Enbridge has not demonstrated or quantified the benefits to Canadian Mainline shippers of offering Market Access Discounts; and 2) that it is inappropriate for Enbridge to pass on the costs incurred from FX hedging to shippers because “[t]he realized impact of financial decisions made by Enbridge for its own account should not justifiably be imposed upon shippers in a going-forward cost of service calculation.”

In reference (i), Dr. Webb calculates a cost-based IJT toll by taking the sum of a cost- based Lakehead toll and a cost-based Canadian Mainline toll. Enbridge performs a similar calculation in reference (ii). Various parties in this proceeding, including Suncor and its experts (see reference (iii)), have argued that the toll levels associated with the U.S. Lakehead system component of Enbridge’s IJT tolls should be determined pursuant to FERC’s indexing regime and the Facilities Surcharge Mechanism (FSM)

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 12 of 28

methodology agreed to by shippers and approved by FERC. Accordingly, a relevant cost-based IJT toll level to use as a benchmark in this proceeding would be calculated by taking the sum of a cost-based Canadian Mainline toll and the Lakehead local toll that would prevail under FERC’s regulatory standards.

Suncor seeks to better understand how Dr. Webb carried out his “probability” analysis. Additionally, Suncor seeks to understand how the results of Dr. Webb’s “probability” analysis would change if certain core assumptions underlying Dr. Webb’s cost of service analysis were changed.

Request: Please confirm that there is no “random number generator” used in Dr. Webb’s “probability” analysis as he describes in reference (i). If this cannot be confirmed, please explain how a random number generator is used in Dr. Webb’s analysis.

Please confirm that Dr. Webb’s analysis is “deterministic” in the sense that it produces the same result each time the model is run.

Please confirm that Dr. Webb’s “probability” analysis assumes that each of the 3,125 “probability cases” estimated are equally likely to occur. If this cannot be confirmed, please explain why it is appropriate to estimate the probability that the MLC toll is greater than the cost of service toll by taking a simple ratio of the number of “probability cases” in which the MLC toll is greater than the cost of service toll to the total number of “probability cases.”

Please provide updated versions Dr. Webb’s Exhibit No. MJW-2 Enbridge Cost of Service Calculations.xlsx and Exhibit No. MJW-8 Enbridge COS Rates – Probability Analysis.xlsm after: 1) removing the MARA and FX hedge losses from the Canadian Mainline revenue requirement; and 2) incorporating the projected Lakehead local tolls that would prevail under FERC’s regulatory standards, as Brattle calculates in reference (iv).

To the extent Dr. Webb’s finds it appropriate to update his cost of service inputs to correct any unintentional errors or inconsistencies that may have been identified in relation to information requests 1.2, 1.3 and 1.4 above, please also incorporate such corrections in the updated analysis requested here.

31504138.3 Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Page 13 of 28

1.7 Negotiation of Enbridge’s MLC Proposal and Ability to Exercise Market Power

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 15-16 and 62 (PDF pages 17-18 and 64 of 84) (C10219-3).

Preamble: In A30 of reference (i), Dr. Webb states that negotiated rates will not be influenced by market power if (i) negotiation occurs prior to the commitment of capital, (ii) a regulator “scrutinizes the process,” or (iii) a regulator compares the rates to a “reasonable benchmark.”

In A106 of reference (i), Dr. Webb states that if the CER found that changing market conditions merited additional negotiations, the CER could supervise those “additional negotiations” where Enbridge could withdraw from the process and seek alternative tolls such as cost-based tolls, or the CER could reject the result if there was evidence that Enbridge was exercising market power, leading to an alternative toll methodology.

Request: With regard to Dr. Webb’s statements regarding “negotiation occur[ing] prior to the commitment of capital” at A30 of reference (i), can Dr. Webb confirm that Enbridge’s MLC tolls and associated contracts are not being proposed in conjunction with a new expansion of capacity and associated capital investment?

If not confirmed, please identify the expansion capacity that Dr. Webb believes is being proposed in conjunction with Enbridge’s MLC proposal.

If confirmed, why does Dr. Webb believe the situation of “a negotiation occur[ing] prior to the commitment of capital” described in A30 of his evidence is relevant?

With regard to Dr. Webb’s statements about “negotiation occur[ing] prior to the commitment of capital” at A30 of reference (i), can Dr. Webb confirm that various shipper entities currently using the Enbridge Mainline have made capital investments upstream or downstream of Enbridge’s system and that these investments were made before Enbridge proposed MLC?

With regard to Dr. Webb’s statements at A30 of reference (i), please provide Dr. Webb’s opinion regarding what specific steps the CER should take to “scrutinize the process” of negotiations to ensure that negotiated tolls will not be influenced by market power?

If “additional negotiations” were to occur as described in in A106 of Reference (i), please provide and explain Dr. Webb’s opinion on the following scenarios:

If in the course of “additional negotiations” the CER determined that Enbridge’s proposed MLC tolls exceeded a reasonable cost-based toll level, should the CER reject Enbridge’s MLC proposal and tolls?

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Would the ability to “withdraw from the process and seek alternative tolls such as cost-based tolls” be reciprocal, such that shippers would have the same ability to do so as Enbridge?

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1.8 Benefits of Negotiated Rates Relative to Cost-Based Rates

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 9-10, 19 and 63-64 (PDF pages 11-12, 21, and 65-66 of 84) (C10219-3).

(ii) NEB Reasons for Decision RH-1-99, In the Matter of TransCanada PipeLines Limited Interruptible Transportation and Short Term Firm Transportation Tariff Amendments, (April 2000) at page viii (PDF page 11 of 44) (LINK).

Preamble: In reference (i) at A18, Dr. Webb states that “cost-based regulation solves the natural monopoly problem by allowing the natural monopoly to charge just enough to cover its prudently incurred costs plus a reasonable rate of return. As a result, the monopoly cannot raise prices and earn inefficient monopoly profits.”

In reference (i) at A36, Dr. Webb states that relative to cost-based regulation, a benefit of contracting and TSAs is that capacity is allocated to shippers according to how they value the capacity and that “a well-functioning market will allocate goods and resources to participants who can derive the greatest benefit from these goods or resources.”

In reference (i) at A108, Dr. Webb recommends that if Enbridge’s MLC as proposed is rejected, CER should initiate a “broader open season process” wherein shippers would offer “better or worse terms” to incentivize “all parties [to] bid their true value” for the capacity, with the “auction” to clear based on the net present value rank of the bids.

In reference (ii), the NEB defined market power as “the ability of a company to influence the market price of a good or service.”

Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements referenced above.

Request: Is it Dr. Webb’s opinion that a toll that permits a pipeline to recover its prudently incurred costs and earn a reasonable rate of return is consistent with a toll level that would prevail in a workably competitive transportation market? Please provide references to regulatory or academic articles that support Dr. Webb’s position.

Is it Dr. Webb’s opinion that any toll that is equal to shippers’ willingness to pay, or value of a transportation service, is consistent with a toll level that would prevail in a workably competitive transportation market? Please provide references to regulatory or academic articles that support Dr. Webb’s position.

Is it Dr. Webb’s opinion that a toll could be equal to shippers’ willingness to pay, or value of a transportation service, but could also exceed a toll level that would prevail in a workably competitive transportation market? Please provide references to regulatory or academic articles that support Dr. Webb’s position.

Is it Dr. Webb’s opinion that if Enbridge could implement a toll level that would allow Enbridge to recover its prudently incurred costs plus a return on its capital investment that exceeded a reasonable rate of return, that the toll level would be consistent with a level that would be expected to occur in a workably

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competitive market? Please provide references to regulatory or academic articles that support Dr. Webb’s position.

Is it Dr. Webb’s opinion that a profit-maximizing toll level implemented by a monopolist would be equal to, or less than, the customers’ willingness to pay for the monopolist’s service? Please provide references to regulatory or academic articles that support Dr. Webb’s position.

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1.9 The Historical Role of Cost in Setting Tolls on the Enbridge Mainline.

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at pages 13-14 (PDF pages 15-16 of 84) (C10219-3).

(ii) Enbridge Mainline Contracting Application, PDF pages 15-16 of 86 (C03823- 2).

(iii) Enbridge, Response to CER IR 2.21b, at PDF pages 91-92 of 171 (C07648-2).

(iv) Enbridge, Request, and Response to, CER IR 5.16c, at PDF pages 59-60 of 104 (C09909-2).

(v) Application Under Part IV of the NEB Act for Approval of Incentive Toll Principles of Settlement for the Year 2011 and for Approval of Interim 2011 Tolls and Tariffs for the Enbridge Mainline System (2011 ITS Application), Article 3, at pages 4-6 (PDF pages 5-7 of 17) (A1X9T9)

(vi) Southern Access Enbridge Pipelines Surcharge Terms (Appendix A of the Mainline Expansion Toll Mechanism dated January 31, 2008), at pages 3-6 (PDF pages 4-7 of 13 (A1D2S4).

(vii) Clipper Canada Settlement, June 28, 2007, at pages 3-8 (PDF pages 4-9 of 28) (A0Z4F7).

(viii) Line 4 Extension Settlement, June 28, 2007, at pages 1-7 (PDF pages 3-9 of 27) (A0Z4G5).

(ix) EELP Facilities Surcharge Offer of Settlement, FERC Docket No. OR04- 2-000, May 20, 2004 (FSM Offer of Settlement), at page 4 (PDF page 5 of 32) (FERC e-Library LINK).

(x) EELP Supplement to Facilities Surcharge Settlement, FERC Docket No. OR17- 3, December 14, 2016 (2016 FSM Supplement), at page 2 (PDF page 2 of 9) (FERC e-Library LINK).

Preamble: In A26 of reference (i), Dr. Webb states: “In the 1990s and early 2000s, the rates on both the Canadian portion of the Mainline as well as the U.S. portion of the Mainline, often known as Lakehead Pipeline, were set largely based on a complex series of formulae developed through settlements with the Canadian Association of Petroleum Producers. In 2011, the shippers and Enbridge agreed to a simplified methodology known as the Competitive Toll Settlement (“CTS”). Thus, rates on the Enbridge Mainline have not been set on the basis of cost of service in decades.” In footnote 12 to A26, Dr. Webb adds: “I would note that the FERC has never prescribed cost-based rates for Lakehead.”

In reference (ii), while explaining the terms of the CTS, Enbridge states: “With agreement of its shippers, Enbridge is permitted to recover the costs of such expansions through surcharges added to the tolls. The CTS also permits Enbridge to

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recover the costs of certain regulatory changes and recognizes the recovery of certain abandonment costs.”

In reference (iii), Enbridge says that “...while the proposed tolls are not strictly cost- based, they reflect a number of elements consistent with cost-causation and are market responsive, adhere to the principle of no acquired rights, promote economic efficiency, have no unjust discrimination, and are just and reasonable.”

In reference (iv), CER asks: “When cost-based tolls or market-based tolls are agreed to by negotiation, would Enbridge characterize these as negotiated cost-based tolls and negotiated market-based tolls, respectively?” In response, Enbridge states: “Yes, Enbridge agrees that they could be characterized as negotiated cost-based tolls and negotiated market-based tolls. Or they could be characterized just as negotiated tolls.”

Reference (v) states: “The 2011 ITS [Incentive Toll Settlement] provides that three categories of costs will be included in the 2011 Base Toll revenue requirement: Negotiated Elements, Forecast elements and Prior Year Adjustments.” It goes on to say: “Negotiated Elements include various values for operating costs, capital structure, interest rate and return on equity.” Further, “Forecast Elements include the following items which will be charged on a flow-through basis: Power Costs, Operating Cost Elements…”

Reference (vi) states: “The MET [Mainline Expansion Toll] mechanism will be used to recover the costs of facilities for which a commercial agreement has been reached that provides for, among other items, risk sharing mechanisms, capital structure or financial parameters which differ from the parameters embedded in the 2005 ITS.” Reference (vi) further states: “The MET will provide a mechanism for Enbridge to recover the costs of expansions not dealt with through the current 2005 ITS tolling regime and will result in tolls that are transparent and not unjustly discriminatory.” In regard to the Southern Access Expansion Program, reference (vi) states: “Enbridge intends to recover the costs of the Canadian portion of the SA Expansion Program through the MET mechanism commencing on April 1, 2008.” It further provides details for the revenue requirements to be recovered for the Southern Access project: “In accordance with the SA Settlement, the Southern Access revenue requirement will have two components: a capital revenue requirement (“CRR”) and a noncapital revenue requirement (“NCRR”)…The CRR will include Capital Costs, Allowance for Funds Used During Construction, and Allowance for Working Capital…The NCRR will include general operating, maintenance and administrative expenses, power costs, other operating expense recoverables, pipeline integrity capital costs and maintenance capital costs as set out in the SA Settlement.” In addition, Enbridge agreed to recover its costs for Alberta Clipper and Line 4 Extension projects as part of its 2007 agreements with CAPP by using a cost-based revenue requirement calculation (see references (vii) and (viii))—similar to the cost-based calculation for the Canadian portion of Southern Access project defined above.

Based upon reference (v), the ITS tolls incorporated the MET settlements and were thus informed by certain cost-based elements. In addition, reference (ii) identified certain elements within the proposed Canadian Mainline contracting framework that were also informed by cost-based methodologies. Reference (iii) reinforces that point, i.e., there was at least cost-causation in setting some elements of the tolls. Reference (iv) confirms Enbridge’s acknowledgement that what may simply be referred to as

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“negotiated tolls” may perhaps be negotiated to an extent, but that their derivation is underpinned by cost-based methodologies.

As regards Lakehead System tolls, in its 2004 FSM offer of settlement with the FERC (see reference (ix)), Enbridge clearly stated: “The Facilities Surcharge is intended to be a transparent, cost-of-service-based tariff mechanism that will be trued-up each year to actual costs and throughput and that will therefore not be subject to adjustment either upwards or downwards under indexing.” Enbridge reinforces that point in its 2016 supplement to its FSM Settlement, where it states (see reference (x)): “The Facilities Surcharge allows Enbridge Energy to recover the costs associated with particular shipper-requested projects through an incremental surcharge layered on top of the existing base rates.”

In light of the above, Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements regarding the role of cost in the historical determination Enbridge’s Canadian Mainline tolls and Lakehead rates.

Request: Is it Dr. Webb’s opinion that no component of Mainline tolls were informed by any cost-based inputs or cost of service concepts or ratemaking methodologies for the past two decades?

With respect to Dr. Webb’s characterization of the basis of Enbridge’s Mainline tolls in the 1990s and early 2000s as “a complex series of formulae developed through settlements with [CAPP],” please answer the following:

Does Dr. Webb acknowledge that various of the “settlements with CAPP” that determined components of the Canadian Mainline revenue requirement prior to CTS were structured to reflect the recovery of costs, including a return on rate base, as the basis for determining the revenue requirement for specific expansion projects and components of the Canadian Mainline system?

If Dr. Webb disputes that recovery of prudently incurred cost was a relevant principle and methodology for determining Enbridge’s pre-CTS Canadian Mainline tolls, please provide and explain Dr. Webb’s understanding of the terms of the Southern Access, Alberta Clipper and Line 4 Expansion settlement agreements that underpin the MET component of Enbridge’s pre-CTS Canadian Mainline revenue requirement and tolls?

With respect to Dr. Webb’s assertion that “FERC has never prescribed cost- based rates for Lakehead,” please answer the following:

Does Dr. Webb acknowledge that the Facilities Surcharge Settlement and corresponding FSM mechanism used to determine one component of Lakehead system rates are fundamentally cost of service based?

If Dr. Webb disputes that FSM tolls are determined pursuant to cost of service principles and methodologies, please provide and explain Dr. Webb’s understanding of the structure and function of Facilities Surcharge Settlement and the various amendments to that agreement

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that have been put in place for recovery of expansion projects on or other specific components of the Lakehead system.

Is it Dr. Webb’s opinion that even when tolls are informed by cost-causation principles and/or explicitly derived using cost-based methodologies, such tolls should not be characterized as having been “set on the basis of cost of service”? Please explain your answer.

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1.10 Incentives under Indexed Cost-Based Ratemaking Regimes

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 20, page 11 (PDF page 13 of 84) (C10219-3).

(ii) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 28, page 14 (PDF page 16 of 84) (C10219-3).

Preamble: At reference (i), Dr. Webb asserts that “the existence of some degree of competition make[s] cost-based ratemaking more problematic” because “[i]f customers of the regulated entity have alternatives, the possibility that the regulated entity will not recover its costs, and thus will not earn a reasonable profit, increases.” He goes on to state that cost-based regulation “necessarily limits the upside” of investment—“the possibility of earning high profits”—which “typically “balance[s]” the possibility of not recovering costs.

At reference (ii), Dr. Webb states his view as to the merits of “indexing” as a rate-setting methodology, stating that indexing “provides an incentive for the pipeline to manage its costs,” since when “the initial rate is set at some reasonable level and then adjusted each year by a measure of inflation […] a pipeline that effectively manages its costs will retain this savings.” [sic] Dr. Webb states that the FERC employs an indexing methodology and notes that both the CTS and Enbridge’s MLC proposal have indexing components.

Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements referenced above.

Request: Please explain Dr. Webb’s view as to why the probability of cost non-recovery increases when there is some degree of competition, as he states at reference (i).

If a regulated pipeline entity were unable to fully recover its costs due to “the existence of some degree of competition,” would that be because its customers had shifted volumes to the entity’s competitors, such that its realized revenues would be less than those expected at the level of throughput used to set the tolls? If not, please explain how Dr. Webb envisions the potential for cost non-recovery would arise.

In Dr. Webb’s experience, do some cost-based ratemaking regimes incorporate re-basing of tolls to cost-reflective levels, or even (e.g., annual) true-up mechanisms?

In Dr. Webb’s opinion, do such mechanisms serve to limit downside risk of under-recovery of costs, as well as limiting upside potential for very high profits?

Does Dr. Webb agree that the goal of cost-based ratemaking is to set tolls at a level that provides the regulated entity the opportunity to recover its costs, including a fair rate of return on invested capital?

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If no, please explain the basis of Dr. Webb’s disagreement.

In a cost-based ratemaking regime for a regulated transportation entity, is the appropriate level of tolls one that that will provide revenue equal to the expected level of costs when the tolls are assessed on volumes matching the expected level of volume?

If no, please explain the basis of Dr. Webb’s disagreement.

Under an appropriately implemented cost-based ratemaking regime, which of the following should be the case: (i) the risk of cost over-recovery or under- recovery will be symmetric, (ii) there is a greater probability that actual revenues will exceed the cost-based revenue requirement, or (iii) there is a greater probability that actual revenues will fall short of the cost-based revenue requirement? Please explain your answer.

With respect to Dr. Webb’s discussion of how indexing mechanisms provide an incentive for a regulated entity to control costs, does Dr. Webb agree that such an incentive exists whenever rates are implemented such that “cost reductions or increases” do not “simply pass through to shippers in the form of higher or lower rates,” such as when rates are fixed over an extended period?

As regards Dr. Webb’s discussion of indexing mechanisms at reference (ii), what is Dr. Webb’s view as to the “reasonable level” at which an initial rate should be set pursuant to subsequent adjustments for inflation?

Should the “reasonable level” of initial rates be the level at which the regulated entity would be expected to recover its current costs, including a reasonable return on invested capital?

(i) If not, please explain why the initial rates should be set higher or lower than a cost-based level.

In Dr. Webb’s opinion, what is the role of periodic re-basing of tolls to a cost- based level in a well-functioning indexing or other incentive-based ratemaking regime?

In Dr. Webb’s opinion, in a well-functioning indexing or other incentive-based ratemaking regime, if a regulated entity successfully reduces its costs in response to an incentive to do so (resulting from the ability to retain the cost savings as profit above the profit level consistent with a fair rate of return on invested capital), should the regulated entity continue to retain that cost- savings as profit in perpetuity? Or is it appropriate for the rates to be periodically re-based to a cost-based level to allow the customers of the regulated entity to share in the benefits of the incentive-driven cost efficiencies? Please explain your answer.

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1.11 Conversion from Common Carriage to Contract Carriage for Existing Capacity

Reference: (i) Colonial Pipeline Company, FERC Order on Petition for Declaratory Order, 146 FERC ¶ 61,206 (2014) (FERC eLibrary LINK).

(ii) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 14, page 7 (PDF page 9 of 84) (C10219-3).

Preamble: Reference (i) is a 2014 FERC decision involving Colonial Pipeline Company (Colonial). In that context, Colonial had petitioned the FERC for approval to convert a substantial portion of the existing transportation capacity on its common carrier petroleum products pipeline to contract carriage, based on the results of an Open Season conducted prior to its petition (Reference (i) at paras 1, 5). The FERC denied Colonial’s position, noting that “[u]nlike the proposal by Colonial to establish contract rates for existing capacity, the Commission’s body of precedent has approved contract rates with respect to new pipelines, expansion projects, or at the very least, reversals or reconfigurations of existing pipelines in order to serve new markets or respond to changing market conditions” (Reference (i) at para 35). The FERC found that Colonial’s attempt to institute committed shipper contracts on existing capacity would be “inconsistent with [FERC’s] policy of entertaining such [contract carriage] proposals essentially in support of new infrastructure to support changing market needs” (Reference (i) at paras 38-39). The FERC further found that to approve Colonial’s proposed committed terms would be unduly discriminatory with respect to Colonial’s existing shippers (reference (i) at para 37, emphasis added):

The Commission finds that Colonial’s request to create two classes of shippers, committed and uncommitted, out of one class of shippers who are currently receiving the same service on existing capacity, is unduly discriminatory in these circumstances. In other cases, contract shippers make financial commitments to support the long-term viability of a new project. Such commitment is unnecessary here for a long-standing pipeline such as Colonial that has been in allocation for at least two years. The subject TSA proposal simply would ensure Colonial a legally unassailable revenue stream whether or not committed shippers make any shipments and without any commitment that new capacity will be added to a constrained system; at the same time it would degrade the service of existing shippers that would not (or could not) prudently sign the TSA as against their interests.

At reference (ii), Dr. Webb argues that the Colonial decision (reference (i)) does not constitute a “per se prohibition [by FERC] against proposals such as MLC,” and that the Colonial decision does not stand for the proposition “that it is never appropriate to a allow a pipeline that has historically allocated space on a traditional common carriage basis to change its procedures to allocate some of that space on a traditional common carriage basis.” He further argues that such a “blanket prohibition” would “ignore[] basic principles of regulatory economics.” Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements on this matter.

Request: Please provide any examples that Dr. Webb is aware of where the CER or its predecessor, the FERC or any other regulator has permitted a pipeline to convert common carriage service, on existing capacity that has been consistently oversubscribed (and, thus, under allocation or prorationing), to

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contract service without the pipeline offering the possibility of expansion capacity in response to contractual bids (e.g., in an open season)?

If Dr. Webb is aware of any such examples, please identify and summarize the circumstances wherein Dr. Webb believes such a conversion proposal has received regulatory approval.

If Dr. Webb is aware of any such examples, please provide citations and supporting documentation.

Considering the fact that the Enbridge Mainline—like the Colonial pipeline at the time of its Petition for Declaratory Order (rejected by the FERC in reference (i))—has consistently been oversubscribed and under allocation in the recent past, please provide Dr. Webb’s responses to the following questions.

Does the consistent oversubscription of Canadian Mainline capacity under the current service offering indicate that Enbridge would be able to increase its prevailing tolls by some amount without losing volumes?

To the extent that the CER determines that toll levels consistent with current CTS tolls (or expected “CTS exit tolls”) are substantially in excess of competitive toll levels, does the consistent oversubscription of Canadian Mainline capacity indicate that Enbridge has been able to sustain Canadian Mainline tolls above competitive levels without suffering loss of volumes or revenues?

Does the consistent oversubscription of Canadian Mainline capacity indicate that “shippers value the capacity” and would value increased capacity if Enbridge offered it via expansion, similar to the FERC’s determination (at reference (i), para 36) regarding Colonial’s contract carriage conversion proposal?

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1.12 Economic Regulation of Natural Monopolies

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/As 15-17, pages 8-9 (PDF pages 10-11 of 84) (C10219-3).

(ii) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 18, pages 9-10 (PDF pages 11-12 of 84) (C10219- 3).

(iii) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 43, pages 22-23 (PDF pages 24-25 of 84) (C10219- 3).

Preamble: At reference (i), Dr. Webb describes the characteristics of natural monopolies that provide the impetus for economic regulation of their prices and terms of service:

A natural monopoly occurs in an industry where there are high fixed costs and other barriers to entry that give the largest supplier in the market an advantage over potential competitors. A natural monopoly occurs frequently in industries with large economies of scale, such as in the oil pipeline industry, which involves billions of dollars of initial capital investment that must be recovered over a long period of time. These large initial investments are sunk costs, or costs that have already been incurred and cannot be recovered, and act as barriers to entry that prevent or deter new competitors from entering the market.

[…]

Due to the high barriers to entry and/or large economies of scale, a firm that is a natural monopoly may be the only (or one of few) supplier of a product or service in a market. Thus, market forces do not act to maintain prices at a competitive level and customers may be forced to pay prices that exceed the economically efficient level. In addition, the monopolist may reduce output relative to what would prevail in a competitive market. Furthermore, the high fixed costs may reduce the incentive to enter a market with characteristics of a natural monopoly.

At reference (ii), Dr. Webb asserts that cost-based regulation is most appropriate for regulating de jure franchise monopolies such as local distribution networks, and that cost-based ratemaking may be “problematic when a firm lacks [legal] protection from competition.”

At reference (iii), Dr. Webb again states that “cost-based ratemaking is most applicable … in the context of a true monopoly” and opines that “if a pipeline has some degree of competition, but still has sufficient market power to justify regulation, regulatory methodologies that avoid some of the inefficiency of applying cost of service become more desirable.”

Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements referenced above.

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Request: In Dr. Webb’s opinion, do the characteristics of a natural monopoly that he describes in reference (i) apply in the context of Enbridge’s Canadian Mainline oil transportation service?

Please explain why or why not.

If yes, does Dr. Webb agree that it is appropriate for the CER to regulate Enbridge’s Canadian Mainline tolls and terms of service to prevent the “problems [that] can arise in a market with natural monopolies” as he describes them at reference (i)?

With respect to the assertion at reference (ii) that cost-based regulation is most appropriate for regulating service providers that hold a legally-protected franchise monopoly, is Dr. Webb aware of any examples of cost-based regulation being applied to industries and entities where such de jure franchise protections do not exist?

If so, please identify and summarize the instances where Dr. Webb is aware of cost-based regulation being applied to natural monopolies without franchise protection.

Does Dr. Webb consider that, historically, the regulation of pipelines by the CER (and its predecessor, the NEB) employed cost- based methodologies as the primary method for regulating rates and terms of service? Why or why not?

Does Dr. Webb consider the regulation of U.S. interstate natural gas pipelines by the FERC to employ cost-based methodologies, at least as one method for regulating rates and terms of service? Why or why not?

Does Dr. Webb consider the regulation of U.S. interstate oil and liquids pipelines by the FERC to employ cost-based methodologies, at least as one method for regulating rates and terms of service? Why or why not?

Does Dr. Webb consider the regulation of intraprovincial / intrastate pipeline operations by some Canadian provincial or U.S. state regulators (such as the Alberta Utilities Commission or the California Public Utilities Commission) to employ cost-based methodologies, at least as one method for regulating rates and terms of service? Why or why not?

With respect to the “regulatory methodologies that avoid some of the inefficiency of applying cost of service” that he asserts (at reference (iii)) become desirable for regulating natural monopolies without de jure monopolies, please provide Dr. Webb’s responses to the following questions:

Are there methodological alternatives to “cost of service” ratemaking of the type referenced by Dr. Webb that nevertheless incorporate cost- based elements or operate with reference to some analysis of the regulated entity’s costs?

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(i) If so, please provide examples and explain the role of cost in each such methodological alternative to “cost of service.”

(ii) If not, please explain why Dr. Webb believes that any incorporation or reference to cost is incompatible with such methodological alternatives.

Would Dr. Webb consider negotiated multi-year fixed tolls to represent a viable regulatory methodology to “avoid some of the inefficiency of applying cost of service” if those tolls were initially set with reference to the regulated entity’s costs and periodically re-based on a pre- determined cycle (e.g., every 3 to 5 years)? Why or why not?

Would Dr. Webb consider an index-based ratemaking regime to represent a viable regulatory methodology to “avoid some of the inefficiency of applying cost of service” if the tolls were initially set and periodically re-based (e.g., on a 3-to-5-year cycle) with reference to the regulated entity’s costs? Why or why not?

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1.13 Market Power of Negotiating Parties

Reference: (i) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/As 45-46, pages 23-25 (PDF pages 25-27 of 84) (C10219-3).

(ii) Direct Evidence of Michael J. Webb, PhD, Regulatory Economics Group, LLC, December 7, 2020, at Q/A 96, at pages 58-59 (PDF pages 60-61 of 84) (C10219-3).

Preamble: At reference (i), Dr. Webb states that because there are many Western Canada Sedimentary Basin (WCSB) crude oil producers and most of them are relatively small in proportion to the market for supply from that basin, Canadian Mainline shippers do not have market power or the ability to exercise same in the context of negotiations with Enbridge regarding Canadian Mainline tolls and terms of service.

At reference (ii), Dr. Webb states that for purposes of his “probability analysis,” during future period scenarios wherein “demand for Enbridge’s service exceeds capacity […], it is reasonable to presume that shippers would not be able to access other pipelines in the market because demand for export capacity is high meaning other pipelines are also full,” such that uncommitted shippers would be forced to transport oil out of the WCSB by rail.

Suncor seeks to better understand the basis for and implications of Dr. Webb’s statements referenced above.

Request: As it relates to Dr. Webb’s statements at reference (i), what is the relevance of Canadian Mainline shippers’ ability to exercise market power with respect to the question of whether Enbridge is proposing to implement Canadian Mainline and IJT tolls above a competitive level?

With regard to Dr. Webb’s modeling assumptions described in reference (ii), does the fact that shippers must use “expensive rail options” when demand for Canadian Mainline transportation service exceeds the available capacity indicate that there are an insufficient number of competitively priced pipeline alternatives available for shippers to shift volumes to in response to a toll increase above a competitive level by Enbridge?

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