Appendix 1 to Semi/Sepp 1.1

APPENDIX 1 TO SEMI/SEPP 1.1

/ { \ . ' ATTACHMENT 1 lETIER OF COMMENT HMRIN!3 QRQ~R OH.·l-~99~

KINDER4'MOROAN ( r•·•·• Clotli

Filed Electronically

July '30, 2009 · National Energy Board 444 Seventh Avenue S.W. Calgary, AB T2P OX8 .

Attention: Ms. Claudine Dutil~Berry, Board Secretary

Dear Madam:

Re: Hearing Order OH-1-2009' Keystone XL Pipeline Application Kinder Morgan Canada Inc. Filing Material

Enclosed for filing with the National Ene~gy Board ("NEB") is Kinder Morgan Canada Inc. ("Kinder Morgan")'s Letter of Comment respecting TransCanada Keystone Pipeline GP .Ltd/s Keystone XL Pipeline Application. Kinder Morgan is filing this document c electronically by placing it in the NEB's electronic filing repository, Yours truly, r ~org. ~~··C. an~~a Inc•. ~l ..J ~~~/ At:JitAt~· lD. Scott S·~~~es~- , , ; . . . V .P. Regulatory and Finance

cc, OH-1-2009 List of Parties

Kinder Morgan Canada Inc. Suite 2700, 300 - 5th Avenue SW, Calgary, AB T2P ·5J2 Phone: (800) 5~5-7219 Fax: (403) 514-6401 www.kindermorgan.com •' / Kinder Morgan can3da Inc. Letter of Comment Heanng Order OH-1-2009 ( Pagel )

/ KINDER MORGAN CANADA INC. ·LETTER OF COMMENT HEARING ORDER OH-1-2009 KEYSTONE XL PIPELINE APPLICATION

J1,1ly 30, 2009

To: The Secretary National Energy Board 444- 7th Avenue S.W. Calgary, AB T2P OX8

Background·

1. ·On February 27, 2009, TransCanada Keystone Pipeline GP Ltd. ("Keystone")

applied to the National Energy Board (the "NEB") for ce~cati.on approving: the construction of pipeline from Hardisty, AB to Monchy, SK (the ."XL Pipeline"); and a ·tolling mechanism charging contract shippers with tolls varying by term and Spot shippers with tolls baSed on a maximum of the 10 year contracted toll plus 20%.1 )

2. Kinder Morgan Canada Inc. ("Kinder Morgan") operates the Trans Mountain Pipeline System (the ''TM System") and Express/Platte Pipeline System (the "Express System"). Once the XL Pipeline is operational, both the TM and Express Systems will compete with it for Alberta based crude oil supply destined for U.S markets. • r.·

3. Kinder Morgan provides this letter of comment to:

a. Indicate it does not object to Keystone's application for the XL Pipeline; and ··'.

b. Inform the NEB of the implications the XL Pipeline proposed tolling

system may have on th~ TM and Express Systems;

1 Keystone XL Pipeline Application., pp.l0-11, lL 25-2 (the "Application").

/ ( Kinder Morgan Canada fnc. Letter of CarnmeDt Hearing Order OH-l-2009 ( Page2

Forms of Toll Calculation

4. Kinder Morgan, as the operator of the TM and Express Systems, provides these submissions to the NEB on behalf of both the TM and Express Systems.

5. The TM System was commissioned in 1953 and has been regulated by the NEB, on a cost of service basis ("COS") since 1959. Typically NEB COS regulation entails:

a. A pipeline offering the same tolls to all shippers in an open transparent manner;

b. A pipeline is provided with reasonable opportunity to recover costs, including return on and of capital, prudently incurred and forecasted; this is achieved by setting tolls based on forecasted costs divided by forecasted (_ volume;

c. A pipeline is faced with several forms of risks including:

i. Intra-period risk;

ii. Risk of disallowan~e of expenses in forecast; and

iii. What is known as a "death spiral" risk.

d. Intra-period risk occurs because tolls are set based on forecasted costs and volumes. If the cost of operating a pipeline increases or the shipped volumes decrease, the pipeline risks under-collecting its revenue requirement.

( / Kinder Morgan Canada fnc. Letter of Comment · ( Hearing Order OH-1-2009 Page3

e. Disallowance risk ocyurs when an expense is paid by a pipeline operator and then is retrospectively denied by the regulator, who deems the expense as imprudently incurred.

f. Death spiral risk occurs where increasing COS-based tolls, resulting from lower or decreasing volumes (which may be a product of reduced regional demand, decreasing supply, or competitive pipeline alternatives), leads to uncompetitive pipeline tolls. In such case,. a pipeline fails to recover its embedded and abandonment costs and, without sufficient revenue prospects, fails to meet a reasonable return.

6. The Express System was commissioned in 1997 and is a combination of three pipelines. The Canadian portion of the Expres.s System commences in Hardisty, AB and connects to the US portion of the Express System at the

Alberta/Montana border. The U~ portion of the Express System continues to· / Casper, WY, where it connects to the Platte Pipeline. The Platte Pipeline ( ) terminates in Wood River, IL. All three pipelines making up the Express System are operated by Kinder Morgan. Shippers on this system can ship from Hardisty to Wood River or any other delivery point on the Express System, subject to a joint international tariff.

7_. . yYith the approval of the NEB and the Federal Energy Regulatory Commissiqn ..

".•, •. ol ~ I ,•I, , o, l o I I; (''FERC"), the majority of shipments on the Express System are under long

term contract with fixed tolls that may escala~ by a m,axim.um of 2% per year. Both FERC ·and the NEB accepted these contracts at the time the Express System was constructed (and expanded in 2005).

8. TJ:le NEB determined that Kinder Morgan could contract-out approximately 90% of the capacity of the Express System arid must set aside the remaining

( Kinder Morgan Canada Inc. Letter of Comment'' Hearing Order OH-1-2009 Page4

10% for Spot2 COS based tolls. At this time, but subject to renewal between 2012 and 2014, approximately 231,000 bbllday of the 280,000 bblfday capacity on the Express System is contracted, leaving approximately 18% available for Spot shippers.

Tolls for the US portion of the Express System are regulated by PERC. FERC has approved similar contract structures for the US deliveries, including an international joint tariff that defines contract tolls for delivery off of the Platte portion of this system.

9. The Canadian portion of the Express Syatem is regulated as a Class II Pipeline. The NEB determined that Class II pipelines tolls would only be reviewed in the ~vent of a complaint and the Canadian portion of the Express System has held its Spot tolls consta.D.t since 1997. Both the US portion of the Express Pipeline and Platte have escalated their Spot tolls in compliance with PERC ( rules, based on the Producer Pri~e Index adjustments since 1997. Production Forecasts

10. Currently, Western Canada is a net producer of crude oil. Some of the oil is processed to serve Canadian markets, but the majority of the oil is exported. According to the Canadian Association of Petroleum Producers ("CAPP"), as of June 2009, Western Canada currently produces 2,522,000 bbllday3 of oil, uses 514,000 bbllday of oi14 and exports the remaining 2,008,000 bbllday.5 In 6 2013 ; CAPP forecasts that Western Canada will increase pr9duction to

2 By "Spot" KMC is referiing to shippers who are not contracted for long term service, and who ·nominate usage the month before usage, and pay based on cost of service based tolls approved by the regulator. 3 Crude Oil: Fotei:ast Markets and Pipeline Expansions, Canadian Association of Petroleum Producers, June 2009, appendix B.l ("Crude Oil''). 4 Ibid, Ch. 3, sum of the receipts in figure 3.2. 5 2,522,000 less 514,000 bbl/day. 6 Note that KMC is assuming the "Growth" scenario, from CAPP, in its letter of comment The math would not be materially different if "Operating & In Construction" scenario was assumed because most of the growth happens after2013. (c / Kinder Morgan Canada Inc. Letter of Comment· ( Hearing Order OH-1-2009 PageS

2,891,000 bbllday,7 consume 539,000 bbllday,8 and will export 2,352,000 bbllday.9

Pipeline Capacity

11. At this time, the current major oil export transportation systems out of Westem Canada are:

a. The Enbridge Mainline System (the "Enbridge System"), with a capacity of 1,878,000 bbllday,10 which is tolled on a Spot basis;

b. The TM System, with a capacity of 300,000 bbl/day, which is tolled on a Spot basis;

c. The Express System has capacity of 280,000 bbl/day, approximately 18%

,r-· of which is tolled on a Spot basis. ( ) 12. The sum of this export capacity is 2,458,000 bbllday. Based on the CAPP '··-·· forecasts, approxin1ately 82%11 of this volume will be used for export, with 88%12 of this export capacity charged on a Spot basis.

13. Currently, there are several pipeline systems seeking approval or in various stages of construction:

14. Enbridge's Alberta Clipper project will add 450,000 bbllday13 of capacity by 2010;

7 Crude Oil, supra, appendix B.l. 8 Crude Oil, supra, ch. 3, sum of the receipts in figure 3.2. 9 2,891,000 less 539,000 bbllday. · 1°Crude Oil, supra, p. 19 (sum of 692,000 and 1,186,000 bbl!day). 11 2,008,000 bbl/day as per para. 10, divided by 2,458,000 bbl!day, which is the sum of the capacity as stated in para 11. 11 2,008,000 bbllday less the 231,000 bbllday that is contracted on the Express System, then divided by 2,008,000 bbl!day. 13 Crude Oil, supra, p. 21. ( :Klnder Morgan canada Jnc. Letter of Comment Hearing Order OH-1-2009 ( Page6

15. The Keystone Pipeline System (the "Keystone Pipeline") will have a capacity of 435,000 bbllday by 201014 and will to expand to 590,000 bbllday by 2011; 15

16. The proposed XL Pipeline will add another 500,000 bbllday of export capacity by 2012.16

17. Western Canada's pending pipeline capacity combined with its current pipeline capacity will create a potential export capacity of 3,998,000 bbl/day by2013.

18. CAPP forecasts Western Canadian exports of oil in the year 2013 at 2,352,000 bbllday of oi1. 17 Therefore, after the pending projects are completed, the estimated utilization of all of Western Canada's pipeline capacity will be approximately 59% (i.e. 2,352,000 bbllday of production divided by the ( _ projected capacity of 3,998,000 bbl/day).

19. If the costs of the new pipelines are similar to those already established, and the excess capacity is· assumed proportionately across all pipelines, shippers will. pay approximately 39% higher tolls (82% usage18 divided by 59% 19 usage , minus 100%). More realistically, the new pipelines will likely be more expensiye _than_ the old pipelines on $/bbllday basis; therefore, ?n average, the tolls on all systems could increase significantly more than the estimated 39%.

20. In 2013, if all of the slated projects are on-line, no changes are made to the current tolling regime, and the NEB accepts Keystone's Application (including

14 lbid, p. 22. 15 Ibid, p. 21. 16 Application, p.l, ll. 17-24. 17 Para. 10. 18 Para. 12. 19 Para. 18. i- 1- / Kinder Morgan Canada Inc. · Letter of CollllUent · ( Hearing Order OH-1-2009 Page?

'• .... / the proposed tolling methodology based on negotiated contract tolls and long term contracts), then approximately 1,106,000 bbl/day could be contracted (the

total of 231,000 b!:>llday on the Express System; 495,000 bb~day' on the 20 21 Keystone Pipeline; and 380,000 bbllday on the XL Pipeline ) and 1,246,000 bbl/day22 will be tolled on a Spot basis.23

21. Logically, any shippers contracted on a take-or•pay basis will consider their . . contracted tolls on a sunk-cost basis. Therefore, if they have a choice of exporting their oil via the XL Pipeline, the existing Keystone Pipeline, the Express System or the Enbridge System, they may choose not to ship on the non contracted systems (Enbridge or TM System) line because they could be shipping to the same general market for higher incremental costs.

22. The result of the contracted lines, i.e., Keystone Pipeline, the Express System

and the new XL Pipeline, operating at a high capacity will likely resul~ in

lower utilization of either or both of the ~D:bridge or TM Systems (the

exclusively COS-based pipelines). We calculate that in 2013, the TM and -.._.... · Enbridge Systems collectively will be capable ~f shipping 2,628,000 bbllday,24 but there will only be 1,'246,000 bbllday25 of oil for shipping that is n~t subject to contract. This may .lead to approximately 47%26 usage of these lines. Assuming that Enbridge Alberta Clipper $/bbllday costs are similar to the costs on the existing Enbridge System, the average increase in tolls on these two systems could be 74%.27 This is a conservative estimate because the declines may manifest disprqportionately on either of these systems. It would not be

20 http://www .transcanada.comlkeystone/keystone_pipeline.html. Zl Application, p.7. · 22 2,352,000 bbVday (para. 10), less 1,106,000 bbl. 23 Express System re-contracting, scheduled to occur between 2012 and 2014, could change the contract vs. ~~~ . The total of 692,000; 1,186,000; 300,000 bbVday as per Crude Oil, supra, p. 19; and 450,000 bbVday as ter para. 14. Para.20 26 1,246,000 bb1/day divided by 2,628,000 bbl!day. 27 82% as per para. 12, divided by 47% as above. ( ' "~ .. __ Kinder Morgan Canada Inc. Letter of Comment · Hearing OrderOH-1-2009 ( PageS unreasonable to foresee that either TM or Enbridge Systems' COS tolls could double, all other things being equal.

23. In summary, the construction qf. the XL Pipeline and the Alberta Clipper projects, and the expansion of the Keystone Pipeline may result in a significant increase in COS tolls for un-contracted shippers.

Kinder Morgan's Position

24. Kinder Morgan is of the view that approval of the Trans Canada Keystone XL Pipeline Application poses challenges related to the coexistence of contracted and COS-based tolls. The Keystone Pipeline, the XL Pipeline and the Express System (assuming re-contracting iD. 2012-2014) may have more fmancial certainty, since the majority of these lines are contracted on a negotiated take or-pay basis. The Enbridge and TM Systems ship the oil remaining after the (_ shippers have used their take-or-pay capacity and are subject to cost-based tolls, or negotiated s.ettlement tolls, with prices that vary significantly. Their tolls are set based on projected costs divided by projected volume, with the majority of costs being fixed. Thus, if the current coexistence of contracted and COS-based tolls persists, the death spiral and intra-period risks could be . . far higher for _the TM and Enbridge Systems, than for· the Keystone Pipeline, the XL Pipeline and the Express System.

25. Kinder Morgan considers it likely that, in response to the proposed projects, the TM and Enbridge Systems may seek financial certainty by applying to move some or all of their respective system tolling ·practices to negotiated take or pay contracts.

26. As the NEB deliberates on the approval of the XL Pipeline application on a contract-basis, Kinder Morgan requests that the Board consider that approving the XL Application (including the tolling provisions based on negotiated rates Kinder Morgan Canada Inc. Letter of Comment· ( Hearing Order OH-1-2009 Page9

with Spot rates linked to negotiated rates) should imply that they are also ready to consider similar terms on the TM System.

27. Failing to permit the TM System to use negotiated contracts will likely cause:

a. Significant increases to TM and Bnbridge System tolls. Effectively, at a time when Keystone and TransCanada customers have locked in their tolls;

b. An increase in the financial uncertainty borne by the TM and Enbri,dge Systems, making it substantially greater risk than the uncertainty felt by TransCanada and Keystone; and

c. .The Board to provide advantages to one pipeline over another, on a policy basis. It is KJ.n,der Morgan's position that pipeline expansions should occur in a manner that is driven by.the market, riot regulatory policy. )

28. Kinder Morgan proposes that the NEB be open to all COS toll-regulated pipelines to charging negotiated contract and/or market based tolls. It is unfair to existing pipelines that new pipelines are able to charge based on contracted tolls if current COS lines are not able to do so as well. lines should be treated

equally to promote proper comp~~tion and fairness in the market. . ~:.

29. Kinder Morgan notes that:

a. J'he Alberta Utilities Commission has a long-standing practice of refraining from regulating the tolls of Alberta jurisdictional pipeline;

b. PERC has a long-standing practice of permitting market based tolls where a pipeline can demonstrate that the markets at the input and the output of the pipeline are competitive; and · Kinder Morgan Canada Inc. Letter of Comment Hearing Order OH-1-2009 PagelO

c. As demonstrated by recent pipeline projects advanced by TransCanada, Enbridge and Kinder Morgan, there is vigorous competition between pipelines to meet the expansion needs of the shippers.

Kinder Morgan appreciates the opportunity to provide the· NEB with its perspective regarding Keystone's application and the possible impact it might have on export capacity and competing pipeline tolls. Although Kinder Morgan will monitor the on going proceedings, it does not intend to participate further, and as such, declines to accept Information Requests from the other participants.

Yours truly, ruj]JI]L .fsj:'tt Stone5s (_, Vice President Regulatory and Finance (

cc: list of Parties

( (

( APPENDIX 1 TO SEMI/SEPP 1.10 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

STEPTOE &)0 1""1 N soN tU' ATTORNEYS AT LAW (

Steven H. Brose 1330 Connecticut Avenue, NW 202.429.6250 Washington, DC 20036-1795 [email protected] Tel 202.429.3000 Fax 202.429.3902 steptoe.com

December 2, 2011

The Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First Street, N.E. Washington, D.C. 20426

Re: Application of Enterprise Products Partners L.P. and Enbridge Inc. for Authority to Charge Market-Based Rates

( Dear Secretary Bose: '--- Pursuant to Part 348 ofthe Commission's regulations, 18 C.F.R Part 348, Enterprise Products Partners L.P. ("Enterprise") and Enbridge Inc. ("Enbridge") hereby file the attached application for authority to charge market-based rates in connection with the planned reversal of the Seaway Crude Pipeline Company ("Seaway") system.

Seaway currently transports crude oil from origins on the U.S. Gulf Coast to its destination at Cushing, Oklahoma. Seaway is currently owned 50 percent by Enterprise and 50 percent by ConocoPhillips. On November 16, 2011, Enbridge announced that it has agreed to purchase ConocoPhillips' share of Seaway. Enterprise and Enbridge plan to reverse the Seaway line in order to provide transportation of crude oil from Cushing to the Gulf Coast (initially to a delivery point at Houston and later to an additional delivery point at Beaumont-Port Arthur, Texas). The new reversed line is referred to in the application as the "Reversed Seaway Pipeline." By this application, Enterprise and Enbridge seek authority to charge market-based rates for the interstate transportation of crude oil on the Reversed Seaway Pipeline at both its proposed Cushing origin and Gulf Coast destination markets.

Enterprise and Enbridge anticipate that the reversal will occur in the second quarter of2012. They therefore respectfully request that the Commission rule on this application by March 31, 2012, in order to permit the filing of initial market-based rates 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

E & 0 !-! N S 0 N tn The Honorable Kimberly D. Bose, Secretary J Federal Energy Regulatory Commission Page2

on the Reversed Seaway Pipeline. To the extent necessary, Enterprise and Enbridge seek waiver of any Commission regulations deemed inconsistent with this request.

This application includes analyses showing that the Reversed Seaway Pipeline will lack significant market power at its origin and destination markets. As demonstrated by the statistical measures that are generally utilized by the Commission in analyzing similar applications, the substantial competition that already exists in these markets, the modest market share that the Reversed Seaway Pipeline will have, and the excess capacity in these markets all confirm that Enterprise and Enbridge should be permitted to charge market-based rates on the Reversed Seaway Pipeline.

Pursuant to 18 C.F.R. § 348.2(g) and 18 C.F.R. § 343.3(a) ofthe Commission's regulations, Seaway requests that any protest to this filing be faxed to the undersigned at (202) 429-6233.

I hereby certify that on or before this date copies of this transmittal letter were distributed to each subscriber to the Seaway tariff by means of transmission agreed upon by the subscriber. Since the application does not contain any confidential material, there is no proposed protective order.

If there are any questions regarding this filing, please feel free to give me a call.

Sincerely yours,

Steven H Brose Steven H. Brose Counsel for Enterprise Products Partners L.P. and Enbridge Inc.

Enclosures

cc: All Seaway tariff subscribers

( \ 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

Enterprise Products Partners L.P. ) Docket No. OR12- and Enbridge Inc. )

APPLICATION OF ENTERPRISE PRODUCTS PARTNERS L.P. AND ENBRIDGE INC. FOR AUTHORIZATION TO CHARGE MARKET-BASED RATES

Steven H. Brose Steven Reed Daniel J. Poynor Steptoe & Johnson LLP 1330 Connecticut Avenue, N.W. Washington, D.C. 20036-1795 (202) 429-6250

Counsel for Enterprise Products Partners December 2, 20 11 L.P. and Enbridge Inc. 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT ...... 2 EXECUTIVE. SUMMARY ...... 3 STATEMENT OF MATERIAL FACTS AND POSITION ...... 5 I. The Relevant Markets Consist of the Transportation of Crude Oil From the Cushing Origin Market and the Transportation of Crude Oil to the Gulf Coast Destination Market...... 5 A. Relevant Product Market ...... 5 B. Relevant Geographic Markets ...... 6 1. Origin Market...... 7 2. Destination Market...... 7 II. There Are Numerous Competitive Alternatives to the Reversed Seaway Pipeline in Both Its Origin and Destination Markets ...... 8 A. Cushing Origin Market ...... 8 B. Gulf Coast Destination Market ...... 9 III. The Statistical Competitive Analyses Performed by Dr. Schink Confirm that the Reversed Seaway Pipeline Will Not Possess Significant Market Power in the Proposed Origin Market or the Proposed Destination Market...... 9 A. Threshold Criteria ...... 10 B. Market Power Statistics Demonstrate that the Reversed Seaway Pipeline Will Lack Market Power in The Proposed Origin and Destination Markets ...... 11 1. Cushing Origin Market ...... 12 2. Gulf Coast Destination Market ...... 13 IV. Potential Competition and Other Factors ...... 13 A. Potential Competition in the Applicable Markets ...... 14 B. Other Factors ...... 14 V. Market-Based Initial Rates for the New Reversed Service ...... 15 CONCLUSION ...... 16

(, 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( APPLICATION OF ENTERPRISE PRODUCTS PARTNERS, L.P. AND ENBRIDGE INC. FOR AUTHORIZATION TO CHARGE MARKET-BASED RATES

Pursuant to Part 348 ofthe Commission's Regulations, 18 C.F.R. § 385.1, et seq. (2010),

Enterprise Products Partners L.P. ("Enterprise") and Enbridge Inc. ("Enbridge") hereby apply for

authorization to charge market-based rates in connection with a proposed reversal of the current

Seaway Crude Pipeline Company ("Seaway") system. The proposed reversed pipeline is

referred to in this application as the "Reversed Seaway Pipeline." Enterprise and Enbridge seek

authority to charge market based rates for the interstate transportation of crude oil on the

Reversed Seaway Pipeline at its Cushing, Oklahoma origin an~ its proposed destinations on the

U.S. Gulf Coast.

In accordance with 18 C.F.R. § 348.1 ofthe Commission's regulations, this application is

accompanied by the attached Statements A through I. Statement A describes the relevant

( geographic markets. Statement B identifies the relevant product market. Statement C describes '- the facilities of the Reversed Seaway Pipeline and the services that will be offered in the relevant

markets. Statement D identifies and describes sources of competition that the Reversed Seaway

Pipeline will face in those markets. Statement E describes potential sources of competition in

those markets. Statement F contains maps of the Reversed Seaway Pipeline's facilities and maps

showing patterns of crude oil production and use as well as locations of competitors. Statement

G sets forth the market power statistics in the relevant markets, including calculations of the

Herfindahl-Hirschman Index ("HHI"), market shares, and excess capacity. Statement H

describes other factors that bear on the Reversed Seaway Pipeline's lack of market power.

Finally, Statement I consists of the Prepared Direct Testimony of Dr. George R. Schink, a

( ~ 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

Managing Director ofNavigant Economics,1 and of Mark A. Hurley, the Senior Vice President (_

of Crude Oil and Offshore Pipelines for Enterprise, whose responsibilities include management

of Seaway.

PRELUMINARYSTATEMENT

The Reversed Seaway Pipeline will be a common carrier crude oil pipeline that is subject

to the regulatory jurisdiction of the Commission. As explained in the Prepared Direct Testimony

of Mark A. Hurley, the current Seaway pipeline (which is owned 50 percent by Enterprise and 50

percent by ConocoPhillips) provides south-to-north transportation of crude oil from origins on

the U.S. Gulf Coast to its destination at Cushing. Enbridge recently announced that it has agreed

to purchase ConocoPhillips' share of Seaway. After the purchase, Enterprise and Enbridge plan

to reverse the flow of crude oil on the system in order to provide north-to-south service from

Cushing to an initial delivery point at Houston, Texas, and following construction of additional

pipeline facilities to an additional delivery point in the Beaumont/Port Arthur, Texas area. It is

currently anticipated that the Reversed Seaway Pipeline will begin operating in north-to-south

service by the second quarter of2012, with an initial capacity of approximately 150,000 barrels

per day depending upon the specific mix of crude oil transported. Following pump additions and

modifications anticipated to be completed by early 2013, the capacity of the Reversed Seaway

Pipeline is expected to be approximately 375,000 barrels per day, again depending upon the

specific mix of crude oil transported. See Statement I (Hurley) at 2-3.

As Mr. Hurley explains, Enterprise and Enbridge are requesting the authority to charge

market-based rates on the Reversed Seaway Pipeline at the proposed Cushing origin and the

proposed U.S. Gulf Coast destination (including both the Houston and Beaumont/Port Arthur

1 Dr. Schink also prepared, or directly supervised the preparation of, Statements A through H of the present application. See Statement I (Schink) at 3. ( \

2 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( delivery points). Market-based ratemaking authority will permit greater flexibility in setting

rates than would otherwise be available under the Commission's indexing and cost-of-service

ratemaking regulations. See Statement I (Hurley) at 5-6. Operating under the Commission's

indexing procedures and cost-of-service alternatives would constrain the Reversed Seaway

Pipeline's ability to respond appropriately to the market forces in those locations. This

ratemaking flexibility is consistent with the Commission's objectives in authorizing market

based rates. See Order No. 572, Market-Based Ratemakingfor Oil Pipelines, Reg. Preambles

1991-1996, F.E.R.C. Stats. & Regs.~ 31,007, at 31,180 (1994) (explaining that market-based

rates would be appropriate "in circumstances where the oil pipeline needs the flexibility to

compete provided by market..,based rates, rather than other approaches").

EXECUTfVES~Y

Statistical analysis demonstrates that there are very low levels of market concentration in

both the applicable origin and destination markets. As shown below, if the destination market is

defined appropriately to include the entire Gulf Coast refining area, the HHI is an extremely low

26. If the destination market is defined more narrowly to include the Houston to Lake Charles

area, the HHI is a similarly low 169. The statistical results also show significant competition in

the Cushing origin market, where the effective capacity-based HHI is only 1,126 and the

adjusted capacity-based HHI is an even lower 909. In addition, in both its origin and destination

markets, the Reversed Seaway Pipeline will have a low market share and there is significant

excess capacity. In fact, in all cases, the excess capacity held by competitors is more than

sufficient to transport all of the crude oil that could be transported by the Reversed Seaway

Pipeline. As summarized in the tables below, the Reversed Seaway Pipeline therefore will lack

market power and Enterprise and Enbridge should be granted authority to charge market-based

( rates at both the Reversed Seaway Pipeline origin and destination markets. \.,

3 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

Table 1 Summary of Capacity-Based Analysis Results for the Reversed Seaway Pipeline's Destination Market on the Gulf Coast

Excess Reversed Capacity Seaway Excess Held by Market Capacity others Definition of the Destination Market HHI Share Ratio Ratio

Gulf Coast Area 26 4.6% 1.23 4.41

Houston to Lake Charles Area 169 6.5% 1.53 5.78

Sources: Tables G.1 and G.2.

Table 2 Summary of Capacity-Based Analysis Results for the Cushing Origin Market

Market Size Definition Local Crude Oil Production and Local Crude Oil Crude Oil Market Statistic Production Only Deliveries Effective Capacity HHI 1,126 1,126 Reversed Seaway Pipeline's 18.0% 18.0% Effective Capacity Market Share Excess Capacity Ratio 3.84 1.31 Excess Capacity Held by Others Ratio 4.45 1.34

Adjusted Capacity HHI 909 1,003 Reversed Seaway Pipeline's 9.1% 11.1% Adjusted Capacity Market Share

Sources: Tables G.14 and G.15.

4 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( STATEMENT OF MATERIAL FACTS AND POSITION

I. The Relevant Markets Consist of the Transportation of Crude Oil From the Cushing Origin Market and the Transportation of Crude Oil to the Gulf Coast Destination Market.

In determining whether the Reversed Seaway Pipeline will have the ability to exercise

significant market power, it is first necessary to define the relevant geographic and product

markets. The general approach used to define the markets served by pipelines seeking market-

based rates is that used by the U.S. Department of Justice and Federal Trade Commission

("DOJ/FTC") in their Horizontal Merger Guidelines issued August 19, 2010 (hereinafter "2010

Merger Guidelines")? That approach consists of three steps: (1) identifying the products or

services being sold (i.e., the product market); (2) identifying the geographic size of the market

being served (i.e., the geographic market); and (3) identifying the specific companies available as

competitive alternatives within these markets. See Statement A at 5-6. Dr. Schink's analysis and

conclusions with respect to those three issues are set forth below.

A. Relevant Product Market

As explained in Statement B, the relevant product market is properly defined as the

transportation of"crude oil." As explained in the testimony of Mr. Hurley, the Reversed Seaway

Pipeline will transport light sweet crude oil (i.e., West Texas Intermediate or "WTI") and heavy

sour crude (i.e., Western Canadian Select or "WCS"); however, the pipeline will be able to

transport any type of crude oil. Statement I (Hurley) at 4. Moreover, as explained by Dr.

Schink, most modem refineries can use all types of crude oil. The relevant product market

2 The 2010 Merger Guidelines replaced those last issued on April2, 1992 (and revised April 8, 1997); however, the more recent approach towards market definition is consistent with the approach described in prior guidelines. ( "-----· 5 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

therefore should be defined as all crude oil, rather than any particular type of crude oil. See

Statement Bat 1.

B. Relevant Geographic Markets

Consistent with Commission precedent, this application defines the relevant geographic

markets as the area encompassing the alternatives at the origin of the movement (i.e., the origin

market) as well as the area encompassing the alternatives at the end of the movement (i.e., the

destination market). This approach is referred to as an "origin-destination market approach."3

The Commission has consistently rejected the narrower "corridor market" approach in

proceedings involving market-based rate applications by oil pipelines. See Statement A at 13.4

For example, as explained by Dr. Schink, the intervenors in Williams proposed a corridor market

approach based on their argument that they had no choice but to ship product via existing

corridors between Williams' origin and destination markets. The Commission rejected this

approach, explaining that shippers are concerned about the delivered product and its price -not

whether it travels between specific locations: "Limiting geographic markets to specific

origin/destination points would fail to recognize this [concern] and ... would eliminate from

3 See, e.g., Buckeye Pipe Line Company, L.P., 53 FERC ~ 61,473 (1990) ("Buckeye"); Williams Pipe Line Co., 68 FERC ~ 61,136, at 61,657 (1994) ("Williams"), order on reh'g, 71 FERC ~ 62,131 (1995); Kaneb Pipe Line Operating P'Ship, L.P., 83 FERC ~ 61,183 (1998) ("Kaneb"); Longhorn Partners Pipeline, L.P., 83 FERC ~ 61,345 (1998) ("Longhorn"), order on reh'g, 85 FERC ~ 61,206 (1998); Explorer Pipeline Co., 87 FERC ~ 61,374 (1999) ("Explorer"); TE Products Pipeline Co., 92 FERC ~ 61,121 (2000) ("TEPPCO"); Colonial Pipeline Co., 92 FERC ~ 61,144 (2000) ("Colonial"); Wolverine Pipe Line Co., 92 FERC ~ 61,277 (2000); Chevron Pipe Line Co., 95 FERC ~ 61,111 (200 1); Marathon Ashland Pipe Line, 96 FERC ~ 61,263 (200 1); West Shore Pipe Line Co., 100 FERC ~ 61,001 (2002); Sunoco Pipeline L.P., 114 FERC ~ 61,036 (2006); Mobil Pipe Line Co., 121 FERC ~ 61,268 (2007) ("Mobif'); Magellan Pipeline Company, L.P., 128 FERC ~ 61,278 (2009) ("Magellan").

4 Under the corridor market approach, only pipeline or waterborne movements that link the same destination and origin markets as the pipeline requesting market-based authority are considered as competitive options. See Statement A at 13.

6 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( consideration competitive suppliers who bring product to the markets without utilizing the

specific corridors." Williams, 68 FERC ~ 61,136, at 61,660-61; Statement A at 13.

The origin-destination market approach is appropriate for evaluating the competition that

the Reversed Seaway Pipeline will face, because it will compete with alternative sources at both

its origin and destination points. In a crude oil pipeline's origin market, competitive options

typically include (1) refineries in the origin market that use the local production, (2) pipelines

able to transport crude oil out of the origin market, (3) water carriers such as barges and tankers

that transport crude oil out of the origin market, and (4) other methods of export from the origin

market such as truck and rail transportation. In a crude oil pipeline's destination market,

competitive options typically include (1) local crude oil production, (2) deliveries into the market

by other inbound crude oil pipelines, (3) deliveries into the market by barges or tankers, and (4) ( truck and rail deliveries into the destination market. In the case of the Reversed Seaway '--- Pipeline, there are numerous competitive alternatives at both the proposed origin and destination

markets; thus, any attempt by the Reversed Seaway Pipeline to set rates above competitive levels

would result in shippers substituting the competing options described above.

1. Origin Market

As Dr. Schink testifies, the Reversed Seaway Pipeline's Cushing origin market is

appropriately defined geographically to include the production areas in Oklahoma, Kansas and

Northwest Texas that are linked by pipeline to Cushing. A map showing the Cushing origin

market is included with Dr. Schink's testimony at Statement I.

2. Destination Market

Dr. Schink further explains that the Reversed Seaway Pipeline's destination market is

appropriately defined geographically as the entire Gulf Coast refining area. See Statement A at

( 16. The Gulf Coast refining area from Corpus Christi, Texas to Mobile, Alabama is linked by ""--- 7 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

waterborne crude oil movements, making it effectively one market for the receipt of crude oil. (~(

Dr. Schink explains that, even if the Commission were to define the destination market more

narrowly, the smallest appropriate definition of the destination market would be the Houston to

Lake Charles Area. Maps showing both the Gulf Coast and alternative Houston-to-Lake Charles

definitions of the destination market are included with Dr. Schink's testimony at Statement 1.5

II. The Reversed Seaway Pipeline Will Face Numerous Competitive Alternatives in Both Its Origin and Destination Markets.

As described further below, the Reversed Seaway Pipeline will face significant

competition at both its proposed origin and destination markets. This competition is discussed in

detail in Statement D of the application.

A. Cushing Origin Market

The Reversed Seaway Pipeline will face several competitors at its Cushing origin market.

As Dr. Schink explains, there are 3 crude oil pipelines (not counting the Reversed Seaway

Pipeline) that transport crude oil out of the origin market. There are also 9 refineries owned by 7

different companies that process the crude oil produced in the area. Moreover, as Dr. Schink

explains, a substantial amount of the crude oil at Cushing is transported into the area from

production located outside the origin market. The producers outside the Cushing area have

various alternatives for moving crude oil from their production areas to locations other than

Cushing. See Statement G at 32-34. Thus, while the Cushing origin market is highly

competitive even when only the competitors located within the market are considered, it is even

more competitive when the external competitive alternatives are taken into account.

5 Both definitions of the geographic market include the initial delivery point at Houston and the planned extension to Beaumont/Port Arthur. (

8 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( B. Gulf Coast Destination Market

The Reversed Seaway Pipeline will face numerous competitors at its destination market.

For either of the alternative geographic definitions of the destination market, local crude oil

production plus waterborne crude oil deliveries exceed the total quantity of crude oil processed

by the refineries located in the market. That fact alone ensures that the destination market is

highly competitive. There are also several inbound crude oil pipelines in addition to the

Reversed Seaway Pipeline ( 4 additional pipelines in the Gulf Coast definition of the destination

market and 6 in the Houston to Lake Charles definition). See Statement Gat 30-31.6 Given the

large quantity of local crude oil production and waterborne deliveries to this destination ·market,

the market would be highly competitive even if there were no competing pipelines. Inde_ed, the

Commission has previously found the narrower Houston to Lake Charles area to be a

competitive destination market for the delivery of crude oil. Mobil Pipe Line Company, 121

PERC ~ 61,268, at P 16 (2007).

Ill. The Statistical Competitive Analyses Performed by Dr. Schink Confirm that the Reversed Seaway Pipeline Will Not Possess Significant Market Power in its Proposed Origin Market or its Proposed Destination Market.

The statistical competitive analyses performed by Dr. Schink establish that sufficient

competition exists in the applicable origin and destination markets such that the Reversed

Seaway Pipeline would be unable to exercise market power. Dr. Schink's analyses include: (1)

capacity-based HHis, which measure market concentration; 7 (2) the capacity-based market

shares for the applicant pipeline and its competitors; (3) the excess capacity ratio, which

6 Two of the pipelines that import crude oil in to the smaller geographic market begin and end in the larger Gulf Coast market.

7 The HHI equals the sum of the squared market shares of all competitors in the market, ( thus taking into account both the number and relative size of competitors. See Statement G at 1. "-- 9 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

measures the total capacity available in the market relative to usage; and (4) the excess capacity (_

held by others ratio, which measures the excess capacity held by the applicant pipeline's

competitors relative to the applicant's own throughput. 8 See Statements E, G and H.

A. Threshold Criteria

As set forth by the U.S. Department of Justice in its Oil Pipeline Deregulation Study, the

recommended threshold for permitting an oil pipeline to be totally deregulated is an HHI of

2,500. Thus, if the 2,500 threshold is sufficient to permit total deregulation, there is no reason to

deny market-based rates where HHis are below 2,500. See Statement Gat 7.

The Commission has declined to set a threshold level for HHis. Even at HHis at or

above 2,500, the FERC has found markets sufficiently competitive to allow market-based rates if

market shares are not excessive. !d. at 10-11. For example, in Williams, the Commission found

two markets with capacity-based HHis of2,500 and delivery-based market shares between 50

and 60 percent to be sufficiently competitive to grant market-based rate authority. 71 FERC ~

61,291, at 62,141-43. The Commission accepted the Presiding Judge's view that if a given

pipeline's "market share [were] 70 percent [or higher], [this] would be 'fairly persuasive' of

market power, a market share of 50 to 70 percent would 'warrant concern' that might be offset

by other factors, and a market share below 50 percent would be 'less troublesome."' !d. at

61,671.

As explained in Statement G, in establishing market concentration thresholds to assess

market power, the ability of firms to act in concert must also be considered. Successful

cooperative behavior is not easy to accomplish since such behavior (in lieu of competition) is

illegal. Statement Gat 3. However, a number of factors that are characteristic of the oil pipeline

8 Since the Reversed Seaway Pipeline is not yet operating, its volumes are set equal to 90 percent of its anticipated capacity. (

10 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( industry- including high fixed costs (which create a strong incentive to cut prices to gain market

share) and confidential exchange agreements, which foster competition - make such behavior

unlikely. !d.

Thus, if either the market concentration or market share statistics are below the applicable

thresholds, a market should be considered sufficiently competitive to warrant the authorization of

market-based rates. Excess capacity measures can also be useful to gauge the potential for an

applicant pipeline to exercise market power in a given market.9 As explained below, based on

measures of market concentration, the Reversed Seaway Pipeline's market share, and the excess

capacity in the relevant markets, it is clear that the Reversed Seaway Pipeline will not be able to

exercise market power in its proposed origin and destination markets.

B. Market Power Statistics Demonstrate that the Reversed Seaway Pipeline Will Lack Market Power in its Origin and Destination Markets. ( Dr. Schink's testimony describes how he calculated the various market power statistics. '- Each of these analyses establishes that the Reversed Seaway Pipeline's origin and destination

markets are highly competitive.

9 An excess capacity ratio of 1.2 or higher indicates substantial excess capacity (i.e., that the excess capacity available to supply a market equals 20% of total consumption in the market). Indeed, in many cases, an excess capacity ratio of 1.1 would be sufficient. With respect to the excess capacity held by others ratio, a ratio that is 1.0 or higher implies that there is sufficient unused capacity held by others to allow shippers on the applicant pipeline to divert all of their deliveries to these alternatives. Even if the excess capacity held by others ratio were substantially less than 1.0 (e.g., 0.2), there could still be sufficient excess capacity to ensure that the applicant pipeline could not profitably raise its rates above competitive levels. See Statement Gat 14-16. ( ~- 11 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

1. Cushing Origin Market ( / For the Cushing origin market, Dr. Schink calculated an effective capacity-based HHI of

1,126 and an adjusted capacity-based HHI of909.10 He also calculated an effective capacity-

based market share of 18% and an adjusted capacity-based market share of9.1 %. Dr. Schink

further calculated an excess capacity ratio of3.84 and an excess capacity held by others ratio of

4.45. See Statement Gat 44.

When crude oil deliveries from remote production areas to the origin market are added to

local crude oil production in the relevant counties of Oklahoma, Kansas and Northwest Texas,

Dr. Schink's calculation of the effective capacity-based HHI and market share remained roughly

the same. The adjusted capacity-based HHI and market share increased slightly to 1,003 and

11.1 %, respectively. Dr. Schink also calculated an excess capacity ratio of 1.31 and an excess

capacity held by others ratio of 1.34. See Statement G at 44.

In addition, Dr. Schink analyzed the origin market based on potential changes to the

competitive landscape expected to occur by the end of 2013 and also through 2015. Under these

various alternative assumptions, the effective capacity-based HHI's range from 878 to 1,264, the

Reversed Seaway Pipeline's market share ranges from 13.5% to 15.2%, and the effective

capacity-based excess capacity ratios range from 1.55 to 1.75, all of which measures indicate that

the origin market will remain competitive under expected future market conditions. See

Statement G at 48.

In short, Dr. Schink' s analysis demonstrates that the Cushing origin market is and will

remain highly competitive. These results confirm that the Reversed Seaway Pipeline could not

profitably raise its rates above competitive levels in the Cushing origin market.

10 Dr. Schink discusses the difference between effective capacity-based HHI and adjusted capacity-based HHI in Statement I. See Statement I at 21 & n. 19. (

12 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( 2. Gulf Coast Destination Market

For the Gulf Coast destination market, Dr. Schink's analysis shows an HHI of26, a

market share of 4.6%, an excess capacity ratio of 1.23 and an excess capacity held by others ratio

of 4.41. To the extent the destination market is more narrowly defined to include only the

Houston to Lake Charles area, Dr. Schink calculates an HHI of 169, a market share of 6.5%, an

excess capacity ratio of 1.53 and an excess capacity held by others ratio of 5. 78. See Statement

Gat 36.

Dr. Schink also conducted alternative capacity-based analyses using net local crude oil

production and waterborne deliveries. The results of these analyses are consistent with Dr.

Schink's primary analyses and confirm that the Reversed Seaway Pipeline's destination market

is highly competitive. Id at 36-38 and Tables G.5 through G.7. Dr. Schink further analyzed

expected changes in the competitive landscape through the end of2013, and confirmed that these

changes will have very little effect on the results. Id at 38-39. In sum, Dr. Schink's analyses

confirm that even under the narrowest reasonable geographic defmition, the destination market is

extremely competitive and the Reversed Seaway Pipeline could not profitably increase rates to

Gulf Coast destinations above competitive levels. !d. at 41.

IV. Potential Competition and Other Factors

Although the applicable origin and destination markets are already extremely competitive

given the existing transportation alternatives, the Reversed Seaway Pipeline will also face

potential competition in the Cushing origin market and the Gulf Coast destination market. See

Statement Eat 2-5. These and other factors discussed below further ensure that the Reversed

Seaway Pipeline will not be able to raise its rates above competitive levels in the subject

markets.

("'--

13 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

A. Potential Competition in the Applicable Markets

The Commission has found potential competition or "potential entry" to be a significant

factor to be considered in a market power evaluation. See Buckeye, 53 FERC ~ 61,473, at

62,667. Statement E describes the numerous potential competitive alternatives to the Reversed

Seaway Pipeline at both its origin and destination markets. In addition, as Dr. Schink explains,

the increasing crude oil production in areas outside of the Cushing origin market is spurring

growth of various competitive alternatives such as barge and rail transportation and increased

refinery capacity. See Statement Gat 45-46.

B. Other Factors

In addition to existing competition and the potential for new competition in the Reversed

Seaway Pipeline's proposed origin and destination markets, there are several other factors that

support the application for authority to charge market-based rates. First, as Dr. Schink explains,

when the U.S. Department of Justice evaluated the competitiveness ofU.S. crude oil pipelines, it

concluded that alllower-48 crude oil pipelines could be safely deregulated, which strongly

supports the conclusion that such pipelines could safely be allowed to charge market-based rates.

Second, the Reversed Seaway Pipeline will be a new entrant into its proposed origin and

destination markets, which by definition will make those markets more competitive. Third, there

is significant excess capacity in both the origin and destination markets. 11 Fourth, crude oil

exchanges and other forms of crude oil trading allow potential shippers to use all of the Reversed

Seaway Pipeline's competitors at the proposed origin and destination markets. Fifth, all of the

11 As explained in Statement E, an excess capacity ratio of 1.2 or higher indicates substantial excess capacity. An excess capacity held by others ratio that is 1.0 or higher implies that there is sufficient unused capacity held by others to allow shippers on the applicant pipeline to divert all of their deliveries to these alternatives. Here, the excess capacity ratio exceeds 1.2 in all cases, and the excess capacity held by others ratio exceeds 1.0 in all cases. See Statement E. (

14 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( potential shippers are sophisticated oil industry participants with knowledge of and access to all

of the various competitive alternatives. See Statement H. Each of these factors further

demonstrates that the Reversed Seaway Pipeline will not have market power in the origin and

destination markets.

V. Market-Based Initial Rates for the New Reversed Service

As noted above, the new service on the Reversed Seaway Pipeline from Cushing to the

Gulf Coast is expected to begin April 1, 2012. Consistent with Commission precedent,

Enterprise and Enbridge respectfully request that upon approval of this application the

Commission waive the provisions of 18 C.F .R. § 342.2, and permit the Reversed Seaway

Pipeline to charge initial market-based rates when the new service takes effect. See Longhorn

Partners, L.P., 83 FERC ~ 61,345 (1998); Wolverine Pipe Line Co., 90 FERC ~ 61,001 (2000). ( Enterprise and Enbridge also respectfully request that the Commission rule on this application by "----· no later than March 31, 2012, in order to permit initial market-based rates to be filed when the

new service takes effect on the Reversed Seaway Pipeline.

( "----- 15 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

CONCLUSION

For the reasons set forth above, Enterprise and Enbridge respectfully request that the

Commission grant this application for authorization to charge market-based rates on the

Reversed Seaway Pipeline at its Cushing origin market and its Gulf Coast destination market,

including the delivery points at Houston and Beaumont/Port Arthur. Enterprise and Enbridge

respectfully request that the Commission rule on this application by no later than March 31,

2012, and that the Commission waive the provisions of 18 C.F.R. § 342.2, in order to permit the

Reversed Seaway Pipeline to charge initial market-based rates when the reversal takes effect.

Respectfully submitted,

Steven H Brose Steven H. Brose Steven Reed Daniel J. Poynor Steptoe & Johnson LLP 1330 Connecticut Avenue, N.W. Washington, D.C. 20036-1795 (202) 429-6250

Counsel for Enterprise Products Partners L.P. and Enbridge Inc.

December 2, 2011

(

16 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

(

STATEMENT A

THE GEOGRAPHIC MARKETS SERVED BY THE REVERSED SEAWAY PIPELINE

( '\__ __ .. 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

TABLE OF CONTENTS FOR STATEMENT A

Section

I. Description of the Reversed Seaway Pipeline ...... 1

II. Enterpise's and Enbridge's Market-Based Rate Request...... 5

Ill. Overview of the Formal Market Definition Process ...... 5

IV. The Recommended Origin-Destination Market Approach to Geographic Market Definition ...... 8

A. Definition and Acceptance of the Origin-Destination Market Approach ...... 8 B. The Alter.native Corridor Market Approach ...... 13

V. Counties are the Component Building Blocks for the Reversed Seaway Pipeline's Origin and Destination Market Areas ...... 13

VI. Destination Market Definition for the Reversed Seaway Pipeline ...... 15

A. Description of the Reversed Seaway Pipeline's Gulf Coast Destination Market ...... 15 B. Approach Used to Define Destination Markets for Crude Oil Pipelines ...... 17 C. Description of the Reversed Seaway Pipeline's Destination Market ...... 18 1. The Gulf Coast Definition of the Destination Market...... 19 2. The Houston to Lake Charles Definition of the Destination Market ...... 21

VII. Origin Market Definition for the Reversed Seaway Pipeline ...... 23

A. Approach Used to Define Origin Markets for Crude Oil Pipelines ...... 23 B. Description of the Reversed Seaway Pipeline's Cushing Origin Market ...... 24 C. The Options Available to Shippers at Cushing Whose Crude Oil Was Produced in Remote Areas ...... 27 1. The Rocky Mountain Area ...... 28 2. The Western Canada Area ...... 29 3. The New Mexico-Texas Permian Basin Area ...... 30

A-i APPENDIX 1 TO SEMJJSEPP 1.1

/ / "·· ·'· ., ATTACHMENT 7 lffiER OF COMMENT !i~P,RIN~ QRQI;R 0~-1-~Q9~

( KINDER~MO:RGAN,...... ~tl~ll" lillC.

Filed Electronically

July '30, 2009 · National Energy Board 444 Seventh Avenue S.W. Calgary, AB T2P OX8 .

Attention: Ms. Claudine Dutil~Berry, Board Secretary

Dear Madam:

Re: Hearing Order OH-1-2009' Keystone XL Pipeline Application Kinder Morgan Canada Inc. Filing Material

Enclosed for filing with the National Bne:.;gy Board ("NEB") is Kinder Morgan Canada Inc. ("Kinder Morgan")'s Letter: of Comment respecting TransCanada Keystone Pipeline GP .Ltd/s Keystone XL Pipeline Application·. Kinder Morgan is filing this document c electronically by placing it in the NEB's electronic filing repository, Yours truly, r ~or~~~·· Can~:a Inc•. 9J .I~~~/ AtJirrAt~· ott Stoness · lV.P. Regulatory and Finance ...... • •• '.t ~ cc, OH-1-2009 List of Parties

Kinder Morgan Canada Inc. Suite 2700, 300- 5th Avenue SW, Calgary, AB T2P ·sJ2 Phone: (800) 5~5-7219 Fax: (403) 514-6401 www.kindermo'rgan.com / Kinder Morgan Caruida Inc. Letter of Comment Hearilig Order OH-1-2009 ( Pagel ) / KINDER MORGAN CANADA INC. ·LETTER OF COMMENT HEARING ORDER OH-1-2009 KEYSTONE XL PIPELINE APPLICATION

J1,1ly 30,2009

To: The Secretary National Energy Board 444 -7th Avenue S.W. Calgary, AB T2P OX8

Background·

1. On February 27, 2009, TransCanada Keystone Pipeline GP Ltd. ("Keystone")

applied to the National Energy Board (the "NEB") for ce~cation approving: the construction of pipeline from Hardisty, AB to Monchy, SK (the ."XL Pipeline"); and a ·tolling mechanism charging contract shippers with tolls varying by term and Spot shippers with tolls ba.Sed on a maximum of the 10 year contracted toll plus 20%.1 )

3. Kinder Morgan provides this letter of comment to:

a. Indicate it does not object to Keystorie' s application for the XL Pipeline; and ··'.

b. Inform the NEB of the implications the XL Pipeline proposed tolling

system may have on th~ TM and Express Systems;

1 Keystone XL Pipeline Application., pp.l 0-ll,lL 25-2 (the "Application").

( Kinder Morgan Canada Inc. Letter of Comment Hearing Order OH-1-2009 ( Page2

Forms of Toll Calculation

4. Kinder Morgan, as the operator of the TM and Express Systems, provides these submissions to the NEB on behalf of both the TM and Express Systems.

5. The TM System was commissioned in 1953 and has been regulated by the

~B, on a cost of service basis ("COS") since 1959. Typically NEB COS regulation entails:

a. A pipeline offering the same tolls to all shippers in an open transparent manner;

c. A pipeline is faced with several forms of risks including:

i. Intra-period risk;

ii. Risk of disallowan~e of expenses in forecast; and

iii. What is known as a "death spiral" risk.

( / Kinder Morgan Canada fnc. Letter of Col!Unent · ( Hearing Order OH-1-2009 Page3

e. Disallowance risk oc~urs when an expense is paid by a pipeline operator and then is retrospectively denied by the regulator, who deems the expense as imprudently incurred.

Alberta/Montana border. The U~ portion of the Express System continues to· Casper, WY, where it connects to the Platte Pipeline. The Platte Pipeline ) terminates in Wood River, IL. All three pipelines making up the Express ... _.. System are operated by Kinder Morgan. Shippers on this system can ship from Hardisty to Wood River or any other delivery point on the Express System, subject to a joint international tariff.

7.. . yYith the approval of the NEB and the Federal Energy Regulatory Commissiqn ...... t. '··'· . '·'' ',:. (''PERC"), the majority of shipments on the Express System are under long term contract with fixed tolls that may escalate by a :m,aximum of 2% per year. Both PERC ·and the NEB accepted these contracts at the time the Express System was constructed (and expanded in 2005).

8. TJ:le NEB determined that Kinder Morgan could contract-out approximately 90% of the capacity of the Express System and must set aside the remaining Kinder Morgan Canada Inc. Letter of Comment"· Hearing Order OH-1-2009 Page4

Tolls for the US portion of the Express System are regulated by FERC. FERC has approved similar contract structures for the US deliveries, including an international joint tariff that defines contract tolls for delivery off of the Platte portion of this system.

9. The Canadian portion of the Express System is regulated as a Class II Pipeline. The NEB determined that Class II pipelines tolls would only be reviewed in the ~vent of a complaint and the Canadian portion of the Express System bas held its Spot tolls consta.D.t since 1997. Both the US portion of the Express Pipeline and Platte have escalated their Spot tolls in compliance with FERC ( rules, based on the Producer Pri~e Index adjustments since 1997. Production Forecasts

10. Currently, Western Canada is a net producer of crude oil. Some of the oil is processed to serve Canadian markets, but the majority of the oil is exported. According to the Canadian Association of Petroleum Producers ("CAPP"), as of June 2009, Western Canada currently produces 2,522,000 bbl/day3 of oil, uses 514,000 bbl/day of oil4 and exports the remaining 2,008,000 bbllday.5 In 6 2013 ; CAPP forecasts that Western Canada will increase pr9duction to

2 By "Spot" KMC is refercing to shippers who are not contracted for long term service, and who ·nominate usage the month before usage, and pay based on cost of service based tolls approved by the regulator. 3 Crude Oil: Fate cast Markets and Pipeline Expansions, Canadian Association of Petroleum Producers, June 2009, appendix B.l ("Crude Oil''). 4 Ibid, Ch. 3, sum of the receipts in figure 3.2. s 2,522,000 less 514,000 bbl/day. 6 Note that Klv1C is assuming the "Growth" scenario, from CAPP, in its letter of comment. The math would not be materially different if "Operating & In Construction" scenario was assumed because most of the growth happens after 2013.

' /

(. \ ' Kinder Morgan Canada Inc. Letter of Comment· ( Heating Order OH-1-2009 PageS

2,891,000 bbl/day,7 consume 539,000 bbl/day,8 and will export 2,352,000 bbl/day.9

Pipeline Capacity

11. At this time, the current major oil export transportation systems out of Westem Canada are:

a. The Enbridge Mainline System (the "Enbridge System"), with a capacity of 1,878,000 bbl/day,10 which is tolled on a Spot basis;

b. The TM System, with a capacity of 300,000 bbl/day, which is tolled on a Spot basis;

c. The Express System has capacity of 280,000 bbl/day, approximately 18% of which is tolled on a Spot basis. c~: 12. The sum of this export capacity is 2,458,000 bbiiday. Based on the CAPP forecasts, approxin:iately 82%11 of this volume will be used for export, with 88%12 of this export capacity charged on a Spot basis.

13. Currently, there are several pipeline systems seeking approval or in various stages of construction:

14. Enbridge's Alberta Clipper project will add 450,000 bbiiday13 of capacity by 2010;

7 Crude Oil, supra, appendix B.l. 8 Crude Oil, supra, ch. 3, sum of the receipts in figure 3.2. 9 2,891,000 less 539,000 bbl/day. · 1°Crude Oil, supra, p. 19 (sum of 692,000 and 1,186,000 bbl/day). 11 2,008,000 bbl/day as per para. 10, divided by 2,458,000 bbl/day, which is the sum of the capacity as stated in para. 11. 11 2,008,000 bbl/day less the 231,000 bbl/day that is contracted on the Express System, then divided by 2,008,000 bbllday. 13 Crude Oil, supra, p. 21. Kinder Morgan canada Inc. Letter of Comment Hearing Order OH-1-2009 ( ( Page6

15. The Keystone Pipeline System (the "Keystone Pipeline") will have a capacity of 435,000 bbl/day by 201014 and will to expand to 590,000 bbllday by 2011;15

16. The proposed XL Pipeline will add another 500,000 bbl/day of export capacity by 2012.16

17. Western Canada's pending pipeline capacity combined with its current pipeline capacity will create a potential export capacity of 3,998,000 bbllday by 2013.

18. CAPP forecasts Western Canadian exports of oil in the year 2013 at 2,352,000 bbl/day of oi1. 17 Therefore, after the pending projects are completed, the estimated utilization of all of Western Canada's pipeline capacity will be approximately 59% (i.e. 2,352,000 bbllday of production divided by the ( _ projected capacity of 3,998,000 bbllday).

more expensiye .than . the old pipelines on $/bbl/day basis; therefore, .on average, the tolls on all systems could increase significantly more than the estimated 39%.

20. In 2013, if all of the sl!ited projects are on-line, no changes are made to the current tolling regime, and the NEB accepts Keystone's Application (including

14 Ibid, p. 22. 15 Ibid, p. 21. 16 Application,p.l,ll.17-24. 17 Para. 10. 18 Para. 12. 19 Para. 18. ! i-

Kinder Morgan Canada Inc. · Letter of Comment · ( Hearin~ Order OH-1-2009 " Page7

·- _, .. / the proposed tolling methodology based on negotiated contract tolls and long term contracts), then approximately 1,106,000 bbllday could be contracted (the

total of 231,000 b~l/day on the Express System; 495,000 bb~day on the 20 21 Keystone Pipeline; and 380,000 bbl/day on the XL Pipeline ) and 1,246,000 bbl/day22 will be tolled on a Spot basis.23

21. Logically, any shippers contracted on a take-or"pay basis will consider their contracted tolls on a sunk-cost basis. Therefore, if they have a choice of exporting their oil via the XL Pipeline, the existing Keystone Pipeline, the Express System or the Enbridge System, they may choose not to ship on the non contracted systems (Enbridge or TM System) line because they could be shipping to the same general market for higher incremental costs.

22. The result of the contracted lines, i.e., Keystone Pipeline, the Express System

and the new XL Pipeline, operating at a high capacity will likely resul~ in

lower utilization of either or both of the ~D;bridge or TM Systems (the exclusively COS-based pipelines). We calculate that in 2013, the TM and Enbridge Systems collectively will be capable ~f shipping 2,628,000 bbl/day,24 but there will only be 1,246,000 bbl/day25 of oil for shipping that is n~t subject to contract. This may _lead to approximately 47%26 usage of these lines. Assuming that Enbridge Alberta Clipper $/bbl/day costs are similar to the costs on the existing Enbridge System, the average increase in tollS on these two systems could be 74%.27 This is a conservative estimate because the declines may manifest disprqportionately on either of these systems. It would not be

20 http://www. transcanada.comfkeystonelkeystone_pipeline.html. 21 Application, p.7. · . zz 2,352,000 bbllday (para. IO),less 1,106,000 bbl. 23 Express System re-contracting, scheduled to occur between 2012 and 2014, could change the contract vs. ~~~ . The total of 692,000; 1,186,000; 300,000 bbl/day as per Crude Oil, supra, p. 19; and 450,000 bbl!day as fser para. 14. Para.20 26 1,246,000 bbl/day divided by 2,628,000 bbl/day. 27 82% as per para. 12, divided by 47% as above. ( Kinder Morgan Canada. Inc. Letter of Comment · Hearing OrderOH-1-2009 ( PageS unreasonable to foresee that either TM or Enbridge Systems' COS tolls could double, all other things being equal.

23. In summary, the construction qf .the XL Pipeline and the Alberta Clipper projects, and the expansion of the Keystone Pipeline may result in a significant increase in COS tolls for un-contracted shippers.

Kinder Morgan's Position

24. Kinder Morgan is of the view that approval of the Trans Canada Keystone XL Pipeline Application poses challenges related to the coexistence of contracted and COS-based tolls. The Keystone Pipeline, the XL Pipeline and the Express System (assuming re-contracting i.D. 2012-2014) may have more fmancial certainty, since the majority of these lines are contracted on a negotiated take or-pay basis. The Enbridge and TM Systems ship the oil remaining after the (_ shippers have used their take-or-pay capacity and are subject to cost-based tolls, or negotiated s.ettlement tolls, with prices that vary significantly. Their tolls are set based on projected costs divided by projected volume, with the majority of costs being fixed. Thus, if the current coexistence of contracted and COS-based tolls persists, the death spiral and intra-period risks could be . . far higher for the TM and Enbridge Systems, than for· the Keystone Pipeline, the XL Pipeline and the Express System.

I \ ( Kinder Morgan Canada Tnc. Letter of Comment· ( Hearing Order OH-1-2009 Page9

with Spot rates linked to negotiated rates) should imply that they are also ready to consider similar terms on the TM Systein.

27. Failing to permit the TM System to use negotiated contracts will likely cause:

a. Significant increases to TM and Enbridge System tolls. Effectively, at a time when Keystone and TransCanada customers have locked in their tolls;

b. An increase in the financi3! uncertainty borne by the TM and Enbridge Systems, making it substantially greater risk than the uncertainty felt by TransCanada and Keystone; and

c. .The Board to provide advantages to one pipeline over another, on a policy basis. It is Kin.der Morgan's position that pipeline expansions should occur in a manner that is driven by.the market, riot regulatory policy. ( )

equally to promote proper compl?~tion and fairness in the market. .\!

29. Kinder Morgan notes that:

a. :rhe Alberta Utilities Commission has a long-standing practice of refraining from regulating the tolls of Alberta jurisdictional pipeline;

b. FERC has a long-standing practice of permitting market based tolls where a pipeline can demonstrate that the markets at the input and the output of the pipeline are competitive; and . Kinder Morgan Canada me. Letter of Com:menr · Hearing Order OH-1-2009 PagelO

c. As demonstrated by recent pipeline projects advanced by TransCanada, Enbridge and Kinder Morgan, there is vigorous competition between pipelines to meet the expansion needs of the shippers.

Kinder Morgan appreciates the opportunity to provide the NEB with its perspective regarding Keystone's application and the possible impact it might have on export capacity and competing pipeline tolls. Although Kinder Morgan will monitor the on going proceedings, it does not intend to participate further, and as such, declines to accept Information Requests from the other participants.

Yours truly, J}:jJL (__ Vice President Regulatory and Fin:ance

cc: List of Parties (

c/·

/. · .. ( APPENDIX 1 TO SEMIJSEPP 1.10

( 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

ST E.P T 0 E &) 0 l"wl N S 0 N tu• ( ATTORNEYS AT Li\,\V

Steven H. Brose 1330 Connecticut Avenue, NW 202.429.6250 Washington, DC 20036-1795 [email protected] Tel 202.429.3000 Fax 202.429.3902 steptoe.com

December 2, 2011

The Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First Street, N.E. Washington, D.C. 20426

Re: Application of Enterprise Products Partners L.P. and Enbridge Inc. for Authority to Charge Market-Based Rates

Dear Secretary Bose:

Pursuant to Part 348 of the Commission's regulations, 18 C.F.R Part 348, Enterprise Products Partners L.P. ("Enterprise") and Enbridge Inc. ("Enbridge") hereby file the attached application for authority to charge market-based rates in connection with the planned reversal of the Seaway Crude Pipeline Company ("Seaway") system.

Enterprise and Enbridge anticipate that the reversal will occur in the second quarter of 2012. They therefore respectfully request that the Commission rule on this application by March 31, 2012, in order to permit the filing of initial market-based rates ( '------· 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

EPTOE&JOHNS Ntu The Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission Page2

on the Reversed Seaway Pipeline. To the extent necessary, Enterprise and Enbridge seek waiver of any Commission regulations deemed inconsistent with this request.

Pursuant to 18 C.P.R.§ 348.2(g) and 18 C.P.R.§ 343.3(a) ofthe Commission's regulations, Seaway requests that any protest to this filing be faxed to the undersigned at (202) 429-6233.

If there are any questions regarding this filing, please feel free to give me a call. ( ' Sincerely yours,

Steven H Brose Steven H. Brose Counsel for Enterprise Products Partners L.P. and Enbridge Inc.

Enclosures

cc: All Seaway tariff subscribers

( 20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM

( UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

Enterprise Products Partners L.P. ) Docket No. OR12- and Enbridge Inc. )

APPLICATION OF ENTERPRISE PRODUCTS PARTNERS L.P. AND ENBRIDGE INC. FOR AUTHORIZATION TO CHARGE MARKET-BASED RATES

Steven H. Brose Steven Reed Daniel J. Poynor Steptoe & Johnson LLP 1330 Connecticut Avenue, N.W. Washington, D.C. 20036-1795 (202) 429-6250

Counsel for Enterprise Products Partners December 2, 2011 L.P. and Enbridge Inc.

( \______20111202-5190 FERC PDF (Unofficial) 12/2/2011 4:46:13 PM