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Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Enbridge Pipelines Inc. (Enbridge) Canadia

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Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Enbridge Pipelines Inc. (Enbridge) Canadia Information Request No. 1 Suncor Energy Inc. to Cenovus Energy Inc. February 1, 2021 Enbridge Pipelines Inc. (Enbridge) 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$) incorporate Canadian Mainline movements to deliver internationally or to Eastern Canada, the IJT tolls under the CTS are, in essence, paying more for the same commodity and distance travelled on the Canadian Mainline as compared to the CLT [Canadian Local Toll] movements on the Canadian Mainline.” Reference (iv) illustrates this deterioration as reflected in the evolution of CTS tolls for the Edmonton to Gretna light crude CLT movement. Relying on the information provided by Enbridge in reference (iii), The Brattle Group (Brattle) explains in reference (ii) that “[b]ecause of currency exchange rate fluctuations occurring over the term of the CTS—notably a devaluation in Canadian vs. U.S. currency—the effective Hardisty-to-border toll level embedded in the CTS IJT US$/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$-denominated shipping cost on the Canadian Mainline over the course of the CTS in terms of the Hardisty-to-border Canadian Mainline residual portion of the CTS IJT Hardisty-to-Chicago heavy crude benchmark toll that is the primary toll of focus in Enbridge’s Mainline Contracting Application. As the table demonstrates, while the US$-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 Petroleum 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.
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