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2014-07-10 The Role of the National Energy Board in Regulating Access to Pipelines
Hocking, Jennifer
Hocking, J. (2014). The Role of the National Energy Board in Regulating Access to Pipelines (Unpublished master's thesis). University of Calgary, Calgary, AB. doi:10.11575/PRISM/28362 http://hdl.handle.net/11023/1616 master thesis
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UNIVERSITY OF CALGARY
The Role of the National Energy Board in Regulating Access to Pipelines
by
Jennifer Hocking
A THESIS
SUBMITTED TO THE FACULTY OF GRADUATE STUDIES
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF LAWS
FACULTY OF LAW
CALGARY, ALBERTA
July, 2014
©Jennifer Hocking 2014
Abstract
This thesis examines National Energy Board (NEB) decisions, legislation and policy documents regarding access to oil and natural gas export pipelines. The NEB approach to regulation of access to pipelines has changed over time as oil and gas markets have changed.
Originally, oil pipelines were entirely common carriers. In the last fifteen years, the
NEB has approved new oil pipelines in which the majority of capacity is subject to firm contracts, provided that certain conditions are met. Currently, capacity in oil export pipelines is tight. The thesis recommends that the NEB codify its current approach to access to oil export pipelines, with some minor improvements, to provide certainty and transparency.
Natural gas pipelines are contract carriers. As there is currently adequate capacity in natural gas export pipelines, no changes to the NEB approach to access to natural gas pipelines are recommended at this time.
ii
Acknowledgements
I could not have completed this thesis without the support of many people. I thank my supervisor, Professor Nigel D. Bankes, for sharing his extensive knowledge with me.
Nigel, thank you for your exceptionally sound advice and your encouragement.
I am also grateful for scholarships from the Estate of John Petrie, QC, from the
Faculty of Graduate Studies, and the Government of Alberta.
I thank the oil and gas industry representatives that made time to be interviewed and to provide their views. These interviews were invaluable in helping me to understand the context for the National Energy Board decisions I reviewed.
I am profoundly grateful to my family for their support. I thank my husband, Jim
Beattie, my parents, Martin and Diana Hocking, my husband’s parents, Janet and John
Beattie, my sister, Philippa Hocking, and my brothers-in-law, Kurt Edwards and Doug
Beattie.
I also thank Dr. Robert L. Mansell of the Department of Economics for his detailed comments, which I received after my examination.
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Table of Contents
Abstract ...... ii
Acknowledgements ...... iii
Table of Contents ...... iv
List of Figures and Illustrations ...... x
Chapter 1: Introduction and Methodology ...... 1
1.1 Introduction ...... 1
1.2 Research Question ...... 2
1.3 Importance of Oil Exports to the Canadian Economy ...... 2
1.4 Additional Oil Export Pipeline Capacity Needed ...... 5
1.5 Capacity in Natural Gas Export Pipelines ...... 9
1.5.1 TransCanada Mainline ...... 9
1.5.2 BC Westcoast Pipeline ...... 10
1.5.3 Alliance Pipeline ...... 11
1.5.4 Conclusion regarding Na tural Gas Pipeline Capacity ...... 11
1.6 Research Methodology ...... 11
1.6.1 Literature Review ...... 12
1.6.2 Review of Decisions ...... 13
1.6.3 Industry Interviews ...... 14
1.7 Structure of Thesis ...... 14
Chapter 2: Overview: Oil and Gas in Canada ...... 18
2.1 Introduction ...... 18
iv
2.2 History of Oil Pipelines ...... 18
2.3 History of Natural Gas Pipelines ...... 19
2.4 The Creation of the National Energy Board (NEB) ...... 20
2.5 The Crude Oil and Natural Gas Supply Chains ...... 20
2.6 Oil Pipelines as Common Carriers; Natural Gas Pipelines as Contract Carriers ...... 21
2.6.1 Oil Pipelines as Common Carriers ...... 22
2.6.2 Natural Gas Pipelines as Contract Carriers ...... 25
2.7 Deregulation of Oil and Gas Prices ...... 28
2.8 Major Long-Distance Oil Pipelines Today ...... 33
2.8.1 Enbridge Pipelines ...... 36
2.8.2 Trans Mountain Pipeline ...... 38
2.8.3 Spectra Energy Express – Platte ...... 39
2.8.4 Keystone Pipeline System ...... 40
2.9 Major Long-Distance Natural Gas Pipelines Today ...... 43
2.9.1 TransCanada Mainline ...... 44
2.9.2 Proposed Energy East Project ...... 44
2.9.3 Trans Quebec and Maritimes Pipeline Inc...... 46
2.9.4 BC Pipeline ...... 46
2.9.5 Maritimes and Northeast Pipeline ...... 46
2.9.6 Alliance Pipeline ...... 47
2.10 The Development of Pipe-on-Pipe Competition for Oil Pipelines ...... 48
2.11 The Development of Pipe-on-Pipe Competition for Natural Gas Pipelines ...... 50
2.12 Conclusions ...... 52
v
Chapter 3: Economic Justification for Regulation of Oil and Natural Gas
Transmission Pipe lines as Natural Monopolies ...... 54
3.1 Introduction ...... 54
3.2 Economic Theory ...... 55
3.2.1 The Benefits of Competition ...... 55
3.2.2 Competition Ineffective in Natural Monopolies ...... 56
3.2.3 Regulation as a Substitute for Competition ...... 61
3.2.4 Oil and Natural Gas Transmission Pipelines as NaturalNatural MonopoliesMonopolies ...... 62
3.2.5 Posner’s Counter Argument: Regulation Ineffectivetive forfor NaturalNatural MonopoliesMonopolies ....64
3.2.6 Regulation to Provide Ope n Access to Transmission Pipelines ...... 65
3.2.7 Summary of Economic Theory Applicable to Regulationlation ofof OilOil andand NaturalNatural
Gas Pipelines ...... 66
3.3 The NEB and Competitive Oil and Gas Markets ...... 67
3.3.1 NEB Policy Statements: Competitive Oil and Gas Markets ...... 67
3.3.2 NEB Decis ions: Competitive Transportation Markets ...... 69
3.3.3 The National Energy Board Act (NEBA): Preventing Economic Waste ...... 71
3.3.4 The NEB: Entry of New Firms ...... 71
3.3.5 NEB: Open Access to Oil and Gas Transmission Pipelines ...... 73
3.3.6 The NEB: As Little Regulation as Possible ...... 75
3.4 Conclusions ...... 76
Chapter 4: National Energy Board Practice Regarding Allocation ofof CapacityCapacity inin OilOil
Pipelines ...... 78
4.1 Introduction ...... 78
vi
4.2 The Nature of the “Common Carrier” Obligation for NEB Regulated Oil
Pipelines ...... 78
4.3 The Importance of Firm Contracts for Oil Pipelines in the Current Competitive
Market ...... 81
4.4 NEB Criteria for Firm Capacity to be Consistent with the Common Carriage
Obligation ...... 84
4.4.1 Section 71(1) Requirements in the NEB Filing Manual ...... 86
4.4.2 NEB Decisions regarding Firm Service in Oil Pipelines ...... 87
4.4.3 Requirements for Open Seasons ...... 88
4.4.4 What Constitutes a Reasonable Percentage Reserved for Uncommitted
Volumes? ...... 90
4.4.5 Does the NEB ever decline to approve the amount of capacity reserved for
firm shippers? ...... 92
4.4.6 The Impact of Uncertainty regarding the Percentage to be Reserved for
Uncommitted Volumes ...... 97
4.5 Do Oil Pipeline Companies Today have Market Power? ...... 98
4.5.1 The Industry Perspective ...... 98
4.5.2 Two Trans Mountain Decisions – the 2011 Trans Mountain Capacity
Reallocation Decision and the 2013 Trans Mountain Expansion Decision ...... 99
4.5.3 Lower Firm Service Tolls for Committed Shippers are not Unjust
Discrimination ...... 108
4.6 Unique Cases regarding Capacity in Oil Pipelines, and the NEB Approach ...... 109
4.6.1 Chevron Priority Destination Designation Decision ...... 110
vii
4.6.2 The Trans -Northern Decision ...... 111
4.7 Conclusions ...... 113
Chapter 5: National Energy Board Practice Regarding Access to Natural Gas
Pipelines ...... 115
5.1 Introduction ...... 115
5.2 Open Access to Natural Gas Pipelines ...... 117
5.2.1 The Mac kenzie Valley Pipeline Decision ...... 119
5.2.2 Open Seasons for Natural Gas Pipelines ...... 120
5.3 Subsections 71(2) and 71(3) of the NEBA: Applications for Access to Natural
Gas Pipelines and for the Extension of Facilities ...... 121
5.3.1 Introduction ...... 121
5.3.2 National Energy Board Filing Manual ...... 122
5.3.3 Subse ction 71(2) and 71(3) Decisions ...... 123
5.4 NEB Supports Competitive Natural Gas Markets ...... 132
5.4.1 Alliance Pipeline ...... 133
5.4.2 Wild Horse Decision ...... 136
5.4.3 Mackenzie Valley Pipe line ...... 137
5.4.4 Komie North Decision ...... 139
5.4.5 TransCanada Mainline Restructuring Decision ...... 140
5.4.6 Conclusions regarding NEB Support for Competitive Markets ...... 145
5.5 Conclusions ...... 145
Chapter 6: Conclusions and Recommendations: Codifying the NEB Approach to
Allocation of Capacity in Oil Pipelines ...... 147
viii
6.1 Overview ...... 147
6.2 The Approach of the NEB: Oil Pipelines with Both Firm Capacity and
Uncommitted Volumes ...... 148
6.2.1 Economic Justification for the Approach of the NEB ...... 148
6.2.2 The Percentage to be Reserv ed for Uncommitted Volumes ...... 150
6.3 Recommendations for a NEB Memorandum of Guidance (MOG) on
Exemptions to Open Access for New Oil Pipelines ...... 152
6.3.1 Introduction ...... 152
6.3.2 MOG Recommendation ...... 153
6.3.3 Rationale for Recommend ations ...... 154
6.4 Excess Capacity in Natural Gas Pipelines ...... 159
BIBLIOGRAPHY ...... 162
Appendix A: Guidance Questions for Interviews ...... 172
ix
List of Figures and Illustrations
Figure 1-1: Western Canadian Export Pipelines and Oil Supply ...... 8
Figure 2-1: Major Liquids Pipelines ...... 35
Figure 2-2: Proposed and Existing Keystone Pipelines ...... 42
Figure 2-3: Major Natural Gas Pipelines ...... 43
x
Chapter 1: Introduction and Methodology
1.1 Introduction
This thesis reviews and evaluates the approach of the National Energy Board (NEB
or Board) in regulating access to major crude oil and natural gas pipelines. Access to capacity in crude oil pipelines is currently an issue of major significance to the Cana dian economy as a whole. Additional oil pipeline takeaway capacity from Alberta is needed
by 2015. 1 Delaying even one of the major pipeline projects currently proposed could cost the Canadian economy up to $70 million per day in foregone economic activit y. 2
The thesis also includes a discussion of the approach of the NEB in regulating access
to natural gas pipelines. Portions of the TransCanada MainlineMainline 3 and the BC Westcoast
Pipeline 4 both have excess capacity , and , as of December 1, 2015, approximate ly 92% of the capacity of the Alliance Pipeline capacity will becomebecome availableavailable toto thethe market.market. 5
Chapter 1 explains why additional oil export pipeline capacity is needed from the
Western Canadian Sedimentary Basin (WCSB), and provides an overview of issues
regarding capacity in major natural gas pipelines. In addition, the thesis research methodology and structure of the thesis are explained.
1 Dinara Millington & Jo n Rozhon, “Pacific Access: Part I – Linking Oil Sands Supply to New and Existing Markets ,”,” online,online, (July(July 2012)2012) CanadianCanadian EnergyEnergy ResearchResearch InsInstitute:titute: StudyStudy No.No. 129129 – Part I at 11 online: http://www.ceri.ca . [CERI Report] 2 Michaelichael Holden,Holden, “Pipe“Pipe oror Perish:Perish: SavingSaving anan OilOil IndusIndustrytry atat Risk”,Risk”, (2013)(2013) CanadaCanada WestWest FoundationFoundation atat 22 online:
1.2 Research Question
The research question addressed in this thesis is: Under what circumstances and subject to what terms and conditions should the National Energy Board (NEB) regulate access to major oil and natural gas pipelines?
1.3 Importance of Oil Exports to the Canadian Economy
The production and export of oil and natural gas is of vital importance to the
Canadian economy. Canada has the third largest proven crude oil reserves in the world. 6
Canadian production of natural gas is the fifth largest in the world. 7 Energy, particularly oil and gas, constitutes approximately $155 billion or 9.1% of the total Canadian Gross domestic product (GDP). 8 Energy exports, particularly oil and gas, constitute $119 billion or 27.8% of Canadian domestic merchandise exports. 9 Based on these statistics, it can be seen why it is important to have adequate oil export pipeline capacity.
Until the middle of the last decade, Alberta crude oil sold in the US Midwest traded at a premium to world prices because it was closer to markets than international oil, which had to be shipped from tidewater to the middle of the continent. 10 However, since
2010, the US Midwest has been experiencing a glut of oil, due in part to increasing levels of US domestic production, and in part to an increase in the amount of Canadian oil
6 Natural Resources Canada, “Energy Markets Fact Book 2013-2014”, online: (July 2013) at 2 http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/files/pdf/2013/EnergyMarket_e.pdf. [Natural Resources Canada Fact Book] 7 Ibid . 8 Ibid at 4. 9 Ibid at 5. 10 Andrew Leach and Kirsten Smith, “Economist Andrew Leach and Kirsten Smith pop the notion of a ‘bitumen bubble’”, (February 10, 2014) Alberta Oil Magazine online:
moving into the US Midwest. 11 Alberta producers currently have limited access to other markets. As a result, Alberta oil has been trading at a discount to the North American and world prices for oil in recent years. In early 2013, at times the price for Alberta heavy crude oil was less than half of the price for international benchmark Brent oil. 12 This had a significant impact on Alberta’s finances, because the Alberta government depends on energy for approximately one third of its revenues.13 In January 2014, the price of
Western Canada Select heavy blend crude (Alberta heavy oil) was $19.50 (US) barrel less than US benchmark West Texas Intermediate light crude. 14 This is partly due to the quality discount for Alberta heavy oil, and partly due to the geographic discount, meaning the discount that results from the shortage of capacity in export pipelines for
Alberta oil. 15 In other words, the price of heavy oil generally is lower than the price of light oil, and much of Alberta oil is trading at lower prices because it cannot reach tidewater from which to access overseas markets. The price discounts result in lower tax revenues and royalties for both federal and provincial governments, and lower netbacks for oil producers than would be the case if there was sufficient oil pipeline capacity.
11 Ibid. 12 Jeffrey Jones, “Canadian crude prices see strong start to 2014,” Globe and Mail ( 14 January 2014) online: http://www.theglobeandmail.com/report-on-business/canadian-crude-prices-see-strong-start-to- 2014/article16335942/ 13 Ibid . 14 This was the price for February delivery according to Calgary-based oil broker Net Energy Inc. as reported by Jeffrey Jones, “Canadian crude prices see strong start to 2014,” Globe and Mail ( 14 January 2014) online: http://www.theglobeandmail.com/report-on-business/canadian-crude-prices-see-strong- start-to-2014/article16335942/ 15 Andrew Leach and Kirsten Smith, “Economist Andrew Leach and Kirsten Smith pop the notion of a ‘bitumen bubble’”, online: (February 10, 2014) Alberta Oil Magazine http:///www.albertaoilmagazine.com/2014/02/andrew-leach-bitumen-bubble/ 3
In 2012, the United States (US) Midwest was Canada’s largest export market. 16 In
2013, 90% of total Canadian energy exports were to the United States (US). 17 Canada cannot rely on continuing to sell the majority of its exported crude oil to the US Midwest.
Both Canadian and US oil production are growing significantly while North American crude oil consumption is not anticipated to grow. 18 Canada will therefore need to find new foreign markets for its oil. If new foreign markets cannot be accessed for Canadian crude oil, future growth in Canadian crude oil production will be limited. 19
The best strategy for Canada is to develop transportation capacity to these critical markets: Asia; the US Gulf Coast; and eastern Canada and the US eastern seaboard. 20
Asia is “a region of strong growth in energy demand to which Canada currently has very limited access.” 21 China and India are currently the “fastest growing economies in the world,” 22 and demand for oil in these two countries is growing rapidly. A report by the
Canada West Foundation underscores the importance of China, in particular, as a market.
The report states that “China alone is expected to account for half of all global growth in oil consumption through to 2035. It will need to import more than three times as much crude oil as western Canada currently produces.” 23 The US Gulf Coast is an important market for Canadian oil as it has numerous refineries that are equipped to process
16 Canadian Association of Petroleum Producers, Crude Oil: Forecast, Markets & Transportation (June 2013) online: at
Canadian heavy crude oil. 24 Refineries in eastern Canada are now seeking access to
Canadian crude oil as imported overseas crude oil becomes more expensive. 25
The majority of conventional Canadian oil is produced in the Western Canadian
Sedimentary Basin (WCSB), which is made up of Alberta, northeastern BC,
Saskatchewan, and parts of Manitoba and the Northwest Territories. 26 Oil sands are produced almost entirely in Alberta.
1.4 Additional Oil Export Pipeline Capacity Needed
Pipelines are the safest, most cost-effective, and most energy efficient way for
Canadian oil to reach markets. 27 The best option for Canadian oil to reach the US Gulf
Coast and the east coast of North America is by pipeline. New Asian markets can be accessed most cost effectively by pipeline to the west coast of BC and by tanker from there. At present, oil export pipeline capacity from the Western Canadian Sedimentary
Basin is “tight.” 28 In recent years, the Trans Mountain Pipeline 29 from Alberta to the BC coast has had to proration volumes shipped, meaning that shippers had to proportionally cut back the volumes they nominated for shipment. When crude oil cannot reach markets, it means lower corporate tax revenues for the governments of Canada and
Alberta, lower royalty revenues for the government of Alberta, and lower netbacks or profits for Canadian producers.
24 CAPP Oil Forecasts, supra note 18 at 24. 25 Supra note 2 at 2. 26 CAPP Oil Forecast, supra note 18 at 3. 27 Canada West Report, supra note 2 at 2. 28 CAPP Oil Forecasts, supra note 18 at i, iv. 29 For example, in October 2012, demand for space on the Kinder Morgan Energy LP Trans Mountain Pipeline was about 70% higher than the capacity of the pipeline: Jeremy van Loon and Rebecca Penty, “Oil Sands Producers Fighting for Pipeline Space,” Financial Post (11 October 2012) online:
It is anticipated that Canadian crude oil production will grow steadily until 2030. 30
The majority of this growth will be in production from the oil sands. 31 Additional pipeline capacity is needed by 2015 32 in order to provide take-away capacity for this forecasted increase in production. Without additional pipeline capacity, proposed oil sands projects will not proceed. The projected value to the Canadian economy of the proposed oil sands development is estimated at $1.3 trillion. 33
A study performed by the Canadian Energy Resources Institute (CERI Study) demonstrates the need for the additional pipeline capacity that could be provided by three major proposed oil export pipelines: Keystone XL Pipeline, the Trans Mountain
Expansion, and Northern Gateway. 34 The Keystone XL Pipeline from Hardisty, Alberta would provide access for Canadian crude oil to US heavy oil refineries on the Gulf Coast.
The Trans Mountain Expansion and Northern Gateway would both enable access to
Asian markets by providing pipeline capacity to Burnaby and Kitimat respectively, which are both ports on the west coast of BC. From these ports, crude oil can be loaded onto tankers and shipped to Asia. Only a small amount of the crude oil currently shipped on the existing Trans Mountain Pipeline is shipped to Asia.
As is shown in Figure 1.1,Western Canadian Export Pipelines and Oil Supply, if no additional export pipeline capacity is added for Western Canadian crude oil, all of the oil sands projects above the red line in the figure will not be constructed, because there will
30 CAPP Oil Forecast, supra note 18 at 1. 31 Ibid. 32 Supra note 1 at 11. 33 This number was calculated by Canada West Foundation in 2012 and covers economic benefits to 2035: Michael Holden, “Pipe or Perish: Saving an Oil Industry at Risk”, online: (2013) Canada West Foundation at 23
be no take-away capacity to transport their volumes to markets. 35 The projects affected would include those categorized as “approved”, “approved- on hold”, “awaiting approval”, and “announced”. 36 The four solid coloured lines in Figure 3.1 represent existing export capacity and the proposed additional capacity to be added by each of the three proposed pipelines. The blue line represents the proposed addition of the capacity of Keystone XL at 0.7 MMbpd, the purple line shows the additional capacity of the Trans
Mountain expansion at 0.55 MMbpd, and the orange line shows the proposed additional capacity of Northern Gateway at .53 MMbpd. 37
35 Ibid at 19. 36 Ibid at 19. 37 Ibid at 17. 7
Figure 1-1: Western Canadian Export Pipelines and Oil Supply 38
In addition, the Energy East Pipeline Project from Alberta to Quebec and New
Brunswick would provide 1.1 million bpd of capacity forfor crudecrude oiloil toto reachreach easterneastern
Canadian markets and access to the east coast for overseas shipments. 39 Figure 1.1 sho ws that the proposed Keystone XL, Trans Mountain Expansion, and Northern Gateway pipelines together will not provide sufficient capacity for the volume of production from oil sands projects above the orange line that are either “awaiting approval” (the lig ht
38 Ibid at 13. 39 “Energy East Pipeline application delayed until 2014: TransCanada”, The Globe and Mail (3 October 2013) online: http://www.theglobeandmail.com/report -on-busines s/industry -news/energy -and- resources/energy -east-pipeline -application-delayed -transcanada/article14676044/transcanada/article14676044/ . 8
purple area on the graph) or “announced” (the orange and green boxes on the graph).
Based on a study done by Deloitte and Touche LLP of the economic benefits of the
Energy East project, the takeaway capacity of Energy East will also be required by
2022. 40
It is important that additional oil export pipeline capacity be constructed soon. Both
Russia and the Middle East, as well as other regions, are also taking steps to secure supply links to Asia, including China. 41 If Canada cannot provide reliable crude oil supply to China soon, the opportunity will be lost.
1.5 Capacity in Natural Gas Export Pipelines
1.5.1 TransCanada Mainline
When the TransCanada Mainline commenced operations in 1958, the Mainline was the only way for producers to reach markets in eastern Canada. In the year 2000, the
Alliance and Vector pipelines commenced operations and competed directly with
TransCanada in both supply and destination markets. After 2000, TransCanada has lost long-haul volumes to Alliance and Vector. Since 2005, TransCanada has also lost long- haul volumes due to the significant increase in production of gas in the US. Key markets formerly served by the TransCanada Mainline, including Ontario, the US Midwest, and the US Northeast, are now increasingly relying on natural gas produced in the US, especially from the Marcellus shale gas basin in the US northeast. 42
40 TransCanada: Deloitte and Touche LLP: Energy East- The economic benefits of TransCanada’s Canadian Mainline conversion project (September 2013) online:
Today there is excess capacity in portions of the TransCanada mainline; the average capacity utilization of the Prairies Segment and Northern Ontario Line Segment has been below 50% in the past three years. 43 Production of natural gas in the Western Canadian
Sedimentary Basin (WCSB) has decreased, resulting in further reductions to volumes shipped from Alberta and Saskatchewan east to Ontario and Quebec and to US markets on the TransCanada mainline. 44
TransCanada has commenced a number of business diversification initiatives in response to the decreased throughput on the mainline. For example, it is converting portions of its export pipelines to oil service, such as the Keystone Pipeline Project to the
US, and the proposed Energy East Pipeline to the east coast of Canada. TransCanada is also pursuing opportunities to construct pipelines to the west coast of BC to serve proposed liquefied natural gas (LNG) facilities. 45 From these facilities, LNG could be shipped to Asian markets. 46
1.5.2 BC Westcoast Pipeline
BC Westcoast Pipeline, formerly known as the Westcoast Energy Pipeline 47 runs from Fort Nelson in northern BC and from Gordondale at the BC/Alberta border to the
43 This is true for 2011, 2012, and the first nine months of 2013 for these portions of the TransCanada mainline: the Prairies segment, which extends from the Alberta/Saskatchewan border to Manitoba, and the Northern Ontario Line (NOL) segment which connects with the Prairies segment. Ibid at 29-31. 44 Ibid at 8. 45 See e.g. TransCanada, “TransCanada Selected by Shell and Partners to Develop Multi-Billion Dollar Natural Gas Pipeline to Canada's West Coast” ( 5 June 2012), online: http://www.transcanada.com/news- releases-article.html?id=1597396 The development of pipelines related to proposed LNG projects is beyond the scope of this thesis. 46 Government of British Columbia, online:
BC/Washington border at Sumas, Washington. 48 Over the past few years, average capacity utilization in BC Westcoast has been less than 60%. 49
1.5.3 Alliance Pipeline
The Alliance Pipeline runs from northwestern Alberta and northeastern BC to
Chicago. Currently, 99% of Alliance Pipeline’s capacity is allocated through long term contracts. 50 Most of the shippers that signed 15 year contracts commencing in 2000 have declined to renew their contracts. Thus, as of December 1, 2015, approximately
92% of the Alliance pipeline capacity will become available to the market. 51 On May 22,
2014, Alliance filed a tolls and tariffs application with the NEB with proposals for more flexible, market-based tolls to address this issue.52
1.5.4 Conclusion regarding Natural Gas Pipeline Capacity
Based on the foregoing, it is clear that there is no shortage of capacity in major natural gas export pipelines at this time. Capacity in natural gas pipelines is discussed further in chapters 2 and 5.
1.6 Research Methodology
The thesis adopts a doctrinal methodology and interviews of industry representatives to respond to the research question. It reviews and analyzes NEB
48 Spectra Energy: BC Pipeline Division (March 2013)online:
decisions, recommendations to Cabinet, 53 statutory provisions, and policies regarding access to oil and natural gas pipelines, and makes recommendations for NEB practice based on this review and analysis.
Two literature reviews were performed: 54 The first literature review examined the history and structure of oil and gas markets and export pipeline systems in Canada in order to better understand the legal and policy framework of the NEB regarding the allocation of capacity in pipelines. The second literature review examined key texts regarding the economic justification for regulation of export pipelines as natural monopolies, in order to establish criteria for evaluating the approach of the NEB and the recommendations.
1.6.1 Literature Review
The literature review included a review of reports by the NEB and by independent research agencies, including the Canada West Foundation and the Canadian Energy
Research Institute on matters related to the research question, including Canadian pipeline transportation systems, oil and natural gas markets, and pipe-on-pipe competition. Policy statements from the NEB website were also reviewed. Library staff and others at the NEB were consulted to ensure that the most relevant reports, and the most recent versions of key reports, were reviewed. The literature review also included
53 In 2012 the National Energy Board Act , RSC 1985, c N-7 ( NEBA ) was amended. Under section 52 of the NEBA , the NEB now makes a recommendation to the federal Minister of Natural Resources as to whether a proposed pipeline should be issued a certificate of public convenience and necessity. 54 See David N Boote and Penny Beile, “Scholars Before Researchers: On the Centrality of the Dissertation Literature Review in Research Preparation” (2005) 34(6) Educational Researcher 3. Boote and Beile explain the importance of comprehensive literature reviews and of determining what is relevant to a particular investigation. See also Joseph A Maxwell, “Literature Reviews of, and for, Educational Research”: A Commentary on Boote and Beile’s “Scholars Before Researchers, “ 35 Educational Researcher 28; David N Boote & Penny Beile, “On ‘Literature Reviews of, and for, Educational Research’: A Response to the Critique by Joseph Maxwell” (2006) 35 Educational Researcher 32. 12
research reports by industry organizations including the Canadian Association of
Petroleum Producers (CAPP) and the Canadian Energy Pipeline Association (CEPA) on matters including oil production forecasts, markets, and transportation. Information about pipelines on the Natural Resources Canada website was reviewed. Relevant journal articles were reviewed.
The online databases used included: Quicklaw, Westlaw, Science Direct, Hein
Online, LLMC Digital, Halsbury’s Laws of Canada, and the NEB Regulatory Documents database. Search terms used included: common carrier, pipeline, open access, proration, capacity rights, priority allocation, firm capacity, third party access. Search terms and search techniques with reference librarians at the University of Calgary Law Library to ensure that the subjects researched were thoroughly covered.
Key North American texts on the economics of regulation and one key European text on competition in energy markets were reviewed, as well as articles on both of these subjects.
1.6.2 Review of Decisions
NEB decisions related to allocation of capacity in oil and natural gas pipelines were reviewed. Relevant cases were identified using the Canadian Energy Law Service,
Westlaw, Quicklaw, and CanLII, as well as by finding decisions cited in footnotes of relevant decisions. The author attended lectures by prominent oil and gas law practitioners in Calgary on recent developments in oil and gas law. Also, staff at the
NEB and industry representatives were consulted to ensure that all relevant NEB decisions were considered.
13
1.6.3 Industry Interviews
After having received approval from the Conjoint Faculties Research Ethics Board
(CFREB), the author interviewed 55 senior representatives in the oil and gas industry regarding issues related to the allocation of capacity in pipelines in Canada. Questions asked included those provided in Appendix A to this thesis. Interviews often led to broader discussions of issues in oil and gas markets and capacity in pipelines.
Interviewees included senior representatives of major oil shippers, major oil and gas pipeline companies, oil and gas regulators, chief executives of industry associations, and other oil and gas industry representatives. All parties interviewed were generous with their time, and most provided frank and practical insights into the workings of oil and gas transportation. The majority of parties interviewed indicated that they did not wish to see the name of their organization or their own names appear in the thesis. Their desire for confidentiality was partly based on the fact that the issue of allocation of capacity in pipelines is currently the subject of ongoing or upcoming negotiations or regulatory hearing processes, and no party wished to jeopardize its position or its relationship with the other participants in these processes.
1.7 Structure of Thesis
This thesis has the following parts.
Chapter 2 provides context for the analysis of NEB decisions regarding capacity in pipelines. It provides a brief overview of major oil and gas export pipelines and the development of oil and gas markets in Canada. It compares oil pipelines as common
55 For a discussion of interviewing methodology, see Chapter 8: Interviewing I: Unstructured and Semistructured, in H Russell Bernard, Research Methods in Anthropology:Qualitative and Quantitiative Approaches , 5 th ed (Altamira, 2011) 156. 14
carriers to natural gas pipelines as contract carriers. It also provides current examples of pipe-on-pipe competition for oil pipelines and natural gas pipelines.
Chapter 3 presents the economic justification for regulation of oil and natural gas transmission pipelines as natural monopolies. This theory is introduced by a discussion of the benefits of competition and the problems that can arise in industries that are natural monopolies, where competition is not feasible. 56 Natural monopolies are regulated as a substitute for competition. Ensuring open access to pipelines is an important aspect of regulation for competition in oil and natural gas production and supply markets. This chapter explains that the NEB supports “well-functioning competitive markets” 57 and posits that the approach of the NEB in regulating the allocation of capacity in both oil and natural gas pipelines is consistent with the economic theory of justification of regulation of natural monopolies. The NEB requires pipeline companies to provide open access to all parties on a non-discriminatory basis. 58 Where there is a well-functioning competitive market, the NEB will not interfere with freely negotiated contracts between shippers and pipeline companies. However, the NEB will adjudicate disputes, if necessary in the public interest, in cases where the market is not “functioning properly.” 59
Chapter 4 presents a review of key NEB decisions regarding the NEB approach to access to capacity in oil pipelines. NEB decisions have consistently held that contractual
56 Alfred E Kahn, The Economics of Regulation, Principles and Institutions , (Cambridge, Massachusetts: MIT Press, 1988) vol I at xv. 57 Gaétan Caron, “National Energy Board Update” (Speech delivered at the Canadian Energy Summit, 8 November 2013), online:< http://www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndprsnttn/2103/nbpdt/nbpdt- eng.html>. [Gaétan Caron Speech] 58 National Energy Board, “Who we are and our governance – Our Responsibilities-The Construction and Operation of Pipelines and Power Lines – Traffic, Tolls and Tariffs online: < http://www.neb-one.gc.ca/clf-nsi/rthnb/whwrndrgvrnnc/rrspnsblt-eng.html#s2>. 59 See e.g. Gaétan Caron Speech, supra note 57. 15
arrangements in which the majority of the capacity is allocated to firm shippers through long term contracts are consistent with the common carrier status of oil pipelines provided that two conditions are met. First, the pipeline company must have held a fair and transparent open season. Second, a reasonable percentage of the capacity of the pipeline must be reserved for spot shipments. 60
Chapter 5 presents a review of key NEB decisions regarding the NEB approach to access to capacity in natural gas pipelines and compares it to the NEB approach with respect to oil pipelines. Since 1987, the NEB has required natural gas pipeline companies to provide non-discriminatory open access to all shippers meeting the eligibility requirements of the pipeline company, provided that the pipeline has available capacity. 61
If a pipeline company denies access to a shipper, the shipper can apply to the NEB for an order requiring the pipeline company to transport the product. 62
Chapter 6 presents recommendations for a NEB Memorandum of Guidance (MOG) allowing capacity on oil pipelines to be committed to firm contracts provided that certain conditions are met. In most cases, 10% of the capacity of the pipeline would have to be reserved for uncommitted volumes. In addition, the pipeline company would have to hold a fair and transparent open season, and the proposed pipeline or pipeline expansion
60 See e.g. TransCanada Keystone Pipeline GP Ltd (September 2007), OH-1-2007, online: NEB http://www.neb-one.gc.ca [the 2007 Keystone Base Decision ]; Enbridge Southern Lights LP (February 1, 2008), OH-3-2007, online: NEB
16
would have to enhance competition in crude oil markets. These recommendations are largely based on current NEB practice, with some improvements.
No changes to the NEB approach to regulation of capacity in natural gas pipelines are recommended at this time.
17
Chapter 2: Overview: Oil and Gas in Canada
2.1 Introduction
Significant quantities of oil and natural gas were discovered in Alberta in the late
1940s and 1950s 1 commencing with the spectacular Leduc oil strike in 1946.1946. 2 With the discovery of oil and natural gas, it became necessary to develop long -di stance oil and natural gas pipelines to transport oil and natural gas to markets outside Alberta. 3 In
Canada, major oil pipeline systems and natural gas pipeline systems 4 were generally developed as a result of financing by private, investor -owned compani es.
This chapter provides context for the rest of the thesis. It provides the history of the development of oil and gas export pipelines in Canada, and compares and contrasts the aspects of oil and natural gas production that resulted in oil pipelines b eing classified as common carriers and natural gas pipelines as contract carriers. It discusses the deregulation of oil and natural gas markets. It describes the major long -distance oil and natural gas pipeline systems in Canada today, and the current sta tus of pipe -on-pipe competition.
2.2 History of Oil Pipelines
The first Canadian long -distance oil pipelines were constructed in the 1950s. 5
Interprovincial Pipe Line (now Enbridge) commenced operations in 1950, transporting
1 Peter McKenzie -Brown, Gordon Jaremko & David Finch, The Great Oil Age: The Petroleum Industry in Canada (Calgary: Detselig Enterprises, 1993) at 47 [ McKenzie -Brown et al ]. 2 Ibid at 46. 3 Earle Gray , The Great Canadian Oil Patch: The Petroleum Era from Birth to Peak , 2 nd ed, (Edmonton: June Warren Publishing Ltd , 2005) at 247 -48 . [Earle Gray] 4 Michelle Michot Foss, “Energy Policy in Natural Gas Industry” in Encyclopedia of Energ y, Vol 4 (Elsevier: 2004) 222 [Michot Foss]. 5 Canadian Energy Pipeline Association: History of Pipelines , online: http://www.cepa.com/about - pipelines/history -of-pipelines . [CEPA – Hi story of Pipelines] 18
oil east from Edmonton to the Great Lakes. 6 The Interprovincial Pipe Line was later extended to Sarnia, to Toronto, and to Montreal, as well as to the American Midwest and to upstate New York. 7
The Trans Mountain Pipeline System (now owned by Kinder Morgan) 8 commenced operations in 1953,9 transporting crude oil and refined products west to markets in British
Columbia and, later, crude oil to the US Pacific Northwest. 10 At the time these pipelines were built, the cost of moving crude oil by railway from Edmonton to Sarnia was prohibitively expensive. 11
2.3 History of Natural Gas Pipelines
The first Canadian long-distance natural gas pipelines were also constructed in the
1950s. In 1957, Westcoast Transmission Company Ltd (now Spectra Energy Inc) began transporting natural gas from northeastern British Columbia to the BC/US border, 12 where it connected with US pipelines serving the Pacific Northwest. 13 In 1958,
TransCanada Pipelines Ltd began transporting natural gas from Alberta to Ontario. 14
More than twenty years later, in 1981, Foothills Pipe Lines Ltd began transporting natural gas from central Alberta through the southeast corner of BC to the US border. 15
6 McKenzie-Brown et al, supra note 1 at 50. 7 Ibid . 8 CEPA - History of Pipelines , supra note 5. 9 McKenzie-Brown et al, supra note 1 at 50. 10 Earle Gray, supra note 3 at 262. 11 At the time when the Interprovincial Pipe Line was constructed, the cost of moving crude oil by railway from Edmonton to Sarnia, Canada’s largest refining centre, was $3.24 per barrel. The price of US crude oil laid down in Sarnia was $3.55 per barrel; supra note 3 at 249. 12 CEPA - History of Pipelines, supra note 5. 13 Earle Gray, supra note 10 at 282 14 TransCanada, The TransCanada Journey, online: http://www.transcanada.com/we-are- here/Introduction_Prologue.pdf. 15 CEPA – History of Pipelines, supra note 5.. 19
2.4 The Creation of the National Energy Board (NEB)
The NEB was established in 1959. 16 It regulates long-distance interprovincial pipelines, oil exports, and natural gas imports and exports from Canada. 17 While
Canada’s natural gas and oil transportation systems are owned and operated by private
(investor-owned) companies, the NEB regulates them to control for any monopoly power. 18 This theme will be explored further in chapter 3. The powers and duties of the
NEB are defined by the National Energy Board Act (NEBA).
2.5 The Crude Oil and Natural Gas Supply Chains
It may be helpful to provide an overview here of the upstream, midstream, and downstream components of the crude oil and natural gas supply chains for context. For both oil and gas, upstream operations consist of exploration for, and production of, oil and gas resources. 19 Midstream operations for crude oil consist of transportation, by pipeline, ocean tanker, or rail, to refineries. For natural gas, midstream operations include small, low-pressure gathering pipeline systems, processing plants, and the shipping of gas through a large high-pressure pipeline known as a transmission or transportation pipeline.
Downstream operations constitute the delivery and “supply” or sale of gas to customers. 20 For oil, distribution pipelines may deliver refined petroleum products to
16 National Energy Board: What is the National Energy Board? Online:< http://www.neb-one.gc.ca/clf- nsi/rthnb/whwrndrgvrnnc/rhstry-eng.html>. 17 National Energy Board: Who we are and our governance online:
large users like major manufacturing plants; delivery to residential users and local distribution centres such as gas stations may be by rail or by truck. 21 For natural gas, gas must be delivered to end users by pipeline. 22 Usually a local distribution company (LDC) delivers gas to customers, but large users may contract directly with the midstream transmission company for deliveries. 23
While the upstream and supply phases of the chains are competitive or potentially competitive, the transmission phases for both oil and gas are natural monopolies; 24 distribution for natural gas is also a natural monopoly. 25
2.6 Oil Pipelines as Common Carriers; Natural Gas Pipelines as Contract Carriers
NEB-regulated oil pipelines are generally described as “common carriers.”
Traditionally, this meant that they were required to ship all oil offered to them for transmission, without contract and by monthly nominations. 26 The requirement to ship all oil offered is codified in section 71(1) of the NEBA, although the words “common carrier” do not appear in the NEBA. On a common carrier pipeline, if capacity is not available to meet all requests, capacity is apportioned, which means that reductions in volumes shipped are prorated among shippers. By contrast, as will be explained below,
NEB- regulated natural gas pipelines are generally described as “contract carriers.” A
21 Petropolitics , supra note 19 at 12. 22 Ibid. 23 Ibid. 24 Michot Foss, supra note 4, Petropolitics, supra note 19 at 11. 25 Michot Foss, supra note 4. 26 The NEB has the following definition of “common carrier” in an online dictionary of definitions entitled “Pipeline Tolls and Tariffs: A Compendium of Terms:” online:
contract carrier is defined by economists Robert L. Mansell and Jeffrey R. Church
(Mansell and Church) as a pipeline that “provide[s] transmission service for gas owned by others according to a private contract between the pipeline company and the shipper.” 27 A party that has been unable to successfully negotiate access to a natural gas pipeline may apply to the NEB for an order pursuant to subsection 71(2) of the NEBA requiring the pipeline company to transport gas.
An application pursuant to subsection 71(2) may be accompanied by an application pursuant to subsection 71(3) for an order requiring the pipeline company to provide the facilities needed for the pipeline company to receive, transport, and deliver the gas, such as interconnection facilities. It is also possible for an oil shipper to apply for an order pursuant to subsection 71(3). However, the NEB has rarely granted orders pursuant to subsection 71(3).
There is a dearth of materials explaining why originally, in 1959, when the first
NEBA was enacted, oil pipelines were designated common carriers and natural gas pipelines were designated contract carriers. The different treatment of oil pipelines as common carriers and natural gas pipelines as contract carriers may be explained in part by the characteristics of oil and natural gas as substances, and by the structures of the oil and natural gas markets in the 1950s.
2.6.1 Oil Pipelines as Common Carriers
Crude oil is not generally usable in the form in which it is produced from a well in the oil patch. Crude oil must be transported to a refinery where it is refined into
27 Robert L Mansell & Jeffrey R Church, Traditional and Incentive Regulation: Applications to Natural Gas Pipelines in Canada , (Calgary: Van Horne Institute for International Transportation and Regulatory Affairs, 1995) at 20 [Mansell and Church]. 22
consumer products such as petroleum, naphtha, gasoline, diesel fuel, asphalt base, heating oil, kerosene and liquefied petroleum gas. 28 There are many different grades of crude oil, 29 ranging from light oil to heavy oil and bitumen. Light oil is the most valuable, as it is the most easily converted into consumer products. Bitumen, a dense, highly viscous crude oil, is produced from the oil sands. Because bitumen is so viscous, it must be diluted with condensate in order to be transported in pipelines.
As noted above, crude oil is generally refined before it is sold to end users. Oil refineries are often located next to tidewater, so that they can process crude oil received from either overseas tankers or a transmission pipeline. Oil refineries are also located near large markets for refined products, such as the refineries in Ontario, Quebec, and the
US Midwest. Because there are so many different grades of crude oil, it is necessary for oil to be transported in separate batches for each customer or shipper. 30 Different batches cannot be commingled by the pipeline company because mixing a high grade oil from one customer with a lower grade of oil from another customer would lower the value of the higher grade of oil. In addition, refineries are typically designed to accept only specific grades of oil.
Crude oil is a liquid at ambient temperature. As a result, it is relatively easy and inexpensive to build storage facilities (sometimes known as “tank farms” or “oil terminals”) for crude oil at both the upstream and downstream ends of transmission pipelines. These storage facilities can be used to “smooth out” the use of capacity in the pipeline and deliveries to customers. If the producer cannot access pipeline capacity in a
28 Thomas O Miesner and William L Leffler, Oil and Gas Pipelines in Nontechnical Language (Tulsa: PennWell, 2006) at 7. 29 Ibid. 30 Ibid at 4. 23
given month, the producer will likely be able to store excess oil in storage tanks. If the pipeline company receives fewer deliveries in a given month, it can ship oil from upstream storage facilities. Also, if consumer demand exceeds pipeline capacity in a given month, oil from downstream storage facilities can be accessed.
Crude oil in North America has generally been purchased and sold on a short-term basis, typically month-to-month, in “spot markets”.31 Individual oil end-users do not need to have long-term contracts on transmission pipelines in order to have security of supply because there are alternative means of transportation for oil. 32 Oil can be delivered by ocean tankers and barges from around the world, by other oil pipelines, by petroleum product pipelines, by rail, or by truck.
Similarly, Canadian oil pipeline companies traditionally allocated capacity on a short-term or month-to-month basis. Every month, shippers would nominate the volume of crude oil they wished to ship on a given pipeline. As shippers were buying and selling crude oil in spot markets on a monthly basis, this arrangement worked well for them.
Oil pipeline companies have often been vertically integrated. In other words, oil pipelines have often been constructed and owned by oil producers that also refine their own oil; 33 clearly vertically integrated pipeline companies have no need for long term transportation contracts.
31 An NEB publication contains this definition of “spot market”: “Market where people buy and sell actual commodities or financial instruments for instant delivery. The spot market contrasts with the futures market, in which contracts are completed at a specified time in the future.” National Energy Board, “Canadian Electricity Trends and Issues: An Energy Market Assessment” (Calgary, May 2001) at 64 online:
In summary, historically it made sense to treat crude oil pipelines as common carriers because there was no need for end-users to have long term contracts on the pipelines.
Long term contracts would not have fit well with the spot market for oil or with the fact that batches of crude oil cannot typically be commingled. Further, end users of oil products typically have numerous supply and transportation alternatives available to them, as well as easy access to storage, meaning that they were not historically motivated to seek long term contracts with oil pipelines.
Indeed, until 1997, all long-distance oil pipelines in Canada were truly common carriers; they did not have long term firm contracts with shippers. In 1997, the Express
Pipeline became the first long-distance Canadian oil pipeline to have long-term firm contracts for capacity. Today, Enbridge Mainline remains 100% common carrier, but other major pipeline systems such as Keystone, Trans Mountain, and Express/Platte, have firm long term contracts for a portion of their capacity.
2.6.2 Natural Gas Pipelines as Contract Carriers
As noted above, NEB- regulated natural gas pipelines are generally described as
“contract carriers.”
It was more financially risky to build the first natural gas pipelines than the early oil pipelines. Prior to the construction of natural gas pipelines, there was no market for natural gas, because there are no efficient alternatives for transporting natural gas over land other than by pipeline. In order to obtain financing from investment firms, natural gas pipeline companies needed to demonstrate that they had signed long term contracts
25
with both gas shippers and purchasers for the capacity of the pipeline. 34 Prior to deregulation in 1986, natural gas pipelines were typically merchant carriers – they purchased the gas they transported from producers. Natural gas is typically processed at the wellhead, because, unlike with crude oil, it is not safe to transport natural gas through high-pressure, long-distance pipelines before the contaminants have been removed. After being transported through long-distance transmission lines, the pipeline company typically sold it to local distribution companies (LDCs - the local gas companies). 35 The
LDCs delivered the natural gas through local distribution lines to residential, commercial, and industrial customers. 36
Capacity on natural gas pipelines was allocated almost entirely through long term contracts that were typically for fifteen or twenty years. LDCs paid both the demand charge 37 and the commodity charge 38 to the pipeline company. The TransCanada mainline was the only pipeline from western to eastern Canada. TransCanada purchased the majority of the gas shipped east from producers at regulated prices, and sold it to the
LDCs and other customers in eastern Canada.
34 At the same time, shippers and purchasers would be reluctant to sign long term contracts for a project that might not proceed. In the late 1950s TransCanada struggled with this “chicken and egg” problem trying to get funding to build the mainline. Ultimately almost half of the funding to construct the TransCanada mainline was provided by government. TransCanada later repaid this. Earle Gray, supra note 3. 35 Mansell and Church, supra note 27 at 20. 36 Thomas O Miesner and William L Leffler, Oil and Gas Pipelines in Nontechnical Language (Tulsa: PennWell, 2006) at 6. 37 The demand charge is “a capacity reservation charge through which the fixed costs of providing [pipeline] capacity are recovered.” National Energy Board, Natural Gas Market Assessment: 10 Years after Deregulation (Calgary: 1996) at 57, online: http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/ntrlgs/gs10yrsftrdrgltn1996-eng.pdf. 38 The commodity charge represents the variable costs of transporting gas volumes actually transported. Ibid at 57. 26
As the LDCs sought stable prices and reliable supply for their customers, they were motivated to enter into long-term contracts with pipeline companies. There were no cost effective alternatives to shipping natural gas over land other than by pipeline, and originally there was only one natural gas pipeline to eastern Canada. Natural gas cannot be efficiently transported by rail or by truck. Further, conversion of natural gas to liquefied natural gas (LNG) for shipment on ocean tankers is very expensive. A major use of natural gas is residential heating. Given the historical absence of alternative sources of natural gas, the impacts on consumers of a failure of gas supply to reach them was high.
Once natural gas has been processed, it is “fungible” meaning that processed natural gas from different sources is essentially interchangeable. Unlike crude oil, there are generally no different grades of processed natural gas. As a result, it is typically not necessary to “batch” natural gas shipped on pipelines, and pipeline companies can generally commingle natural gas received from different shippers. This means that it is easier to manage multiple long term contracts with shippers.
Natural gas is in gaseous form at ambient temperature, so it is generally stored under pressure. Natural gas can be stored underground in depleted reservoirs or caverns either near production or near demand. 39 However, natural gas storage is expensive, and natural gas storage facilities may not always be available at desired locations. This means that it is not as easy to use gas storage for load balancing or smoothing out of deliveries. These limitations may create an incentive for both producers and consumers to seek long term contracts with pipeline companies. Producers will wish to avoid having to shut in
39 Michot Foss, supra note 4 at 219. 27
production when the pipeline does not have capacity, and consumers will wish to ensure security of supply.
In summary, prior to deregulation in 1986, it made sense for natural gas pipelines to be contract carriers for several reasons. First, historically natural gas pipeline companies needed long term contracts from shippers and purchasers in order to obtain financing to construct long-distance pipelines. Second, LDCs were motivated to sign long term firm contracts with natural gas pipeline companies to ensure security of supply for heating for residential customers because of the lack of alternative methods of delivery of natural gas and because of limited gas storage facilities. Third, it was easy for pipeline companies to manage multiple long term contracts given that natural gas is fungible.
As will be explained in the next section, with deregulation in 1986, a competitive market was established in the sale of natural gas as a commodity to end users 40 and pipeline services were unbundled. Open or competitive access to natural gas transmission pipelines was established in order to facilitate the competitive commodity market.
2.7 Deregulation of Oil and Gas Prices
From 1974-1985, crude oil and natural gas prices were regulated by government. 41
Part of this regulation included oil export controls and export taxes, which lowered the incentive for business investment in oil and natural gas production. 42
40 Ibid at 221-222 41 Natural Resources Canada website, online http://www.nrcan.gc.ca/energy/sources/petroleum-crude- prices/1511 42 Ibid . 28
In the 1980s, the prices of both oil and natural gas were deregulated. There were three advantages to deregulation and to the creation of more competitive markets in natural gas. First, deregulation increased efficiency and provided an incentive for innovation. 43 Second, it solved a problem in pricing: at the time of deregulation, the world price of both oil and natural gas had dropped below the floor set for the domestic price of oil and natural gas. Third, deregulation served to attract more investment in the oil and natural gas sectors.
The deregulation of oil and gas prices occurred as a result of two agreements signed by the governments of Canada, Alberta, British Columbia and Saskatchewan in 1985: the
Western Accord of March 28, 1985 on Energy Pricing and Taxation (Western Accord) and the Agreement on Natural Gas Markets and Prices on October 31, 1985 (Halloween
Agreement). 44 These agreements took effect on November 1, 1986, the year after they were signed. 45 In the Western Accord, the parties “agreed that a more flexible and market-oriented pricing regime was required for the domestic pricing of natural gas.” 46
The Halloween Agreement created the conditions for a competitive commodity market in natural gas. 47 According to Michot Foss, the Western Accord “eliminated control of the natural gas supply by Canada’s monopoly interprovincial pipeline, TransCanada.” 48
It was recognized that the transmission and distribution of natural gas ought to remain regulated due to the fact that they have characteristics of natural monopolies.
43 Michot Foss, supra note 4 at 223. 44 Keith F Miller, “Energy Regulation and the Role of the Market” (1999) 37 Alta L Rev 419 45 Alexander J Black, “Canadian Natural Gas Deregulation: Contractual Impediments and Discriminatory Consequences” (1989) 44 Journal of Energy and Natural Resources Law 42 at 50. 46 Cyanamid Canada Pipeline Inc. (December 1986), GH-3-86 at 3, online: NEB http://www.neb- one.gc.ca [Cyanamid Decision ] . 47 Ibid . 48 Michot Foss at 228. 29
However, it was important to achieve open access to natural gas transmission lines in order to have a successful natural gas commodity market.
It took several years to implement the Halloween Agreement through the amendment of federal and provincial statutes and the changing of contractual practices. 49 Ultimately pipeline merchant and transportation services were unbundled; TransCanada was no longer permitted to purchase the gas they transported, but they were required to provide open access to natural gas marketers, LDCs, producers, and other direct purchasers wishing to ship natural gas on the system. 50 Hundreds of buyers and sellers entered the market. 51 The gas transported was owned by producers, purchasers or gas marketers. 52
Industrial, commercial and residential consumers (as well as local distribution companies or LDCs) were now able to purchase gas directly from producers, aggregators, marketing companies and brokers. 53 Buyers and sellers of natural gas could freely negotiate pricing of gas as a commodity. This suited producers as they no longer had to deal with the marketing arm of TransCanada as a middle man. The deregulation of natural gas commodity markets also resulted in a “general move to shorter term contracts and the development of sizable spot markets for natural gas.” 54
49 CD Howe Institute Commentary, “Canada and the US: A Seamless Energy Border?” online: (April 2003) The Border Papers 178 at 4
After deregulation, natural gas production boomed in Western Canada. From 1996 to
1998, there was insufficient capacity in pipelines from the Western Canada Sedimentary
Basin (WCSB), resulting in an oversupply situation in Western Canada. 55 As a result, natural gas prices in Canada dropped and remained low compared to other markets, such as the US Midwest, “until pipeline expansion projects were announced.” 56 The most significant natural gas export pipeline project to be announced in the late 1990s was the
Alliance Pipeline from Alberta to Chicago.
Increasingly, the trend in Canada, the United States, and the European Union has been to separate charges for transportation and for the product itself (the “commodity”) and to provide open or competitive access to natural gas pipeline systems for all suppliers and users of natural gas. 57 The establishment of open access to natural gas pipelines supports the development of a competitive market in the sale of natural gas as a commodity to end users by ensuring that pipeline companies cannot block competitors from accessing destination markets.
As will be explored further in chapters 4 and 5, the NEB requires that both oil and natural gas pipeline companies must provide open and non-discriminatory access to shippers.
In the mid 1990s, natural gas pipeline capacity was constrained. Pipeline companies required shippers to sign long term firm contracts for capacity. In this time frame, both
TransCanada and Foothills constructed pipeline expansions, and two new pipelines were
55 National Energy Board, Short Term Natural Gas Deliverability from the Western Canada Sedimentary Basin 1998-2001 (Calgary: 1999) 56 Ibid. 57 Michot Foss, supra note 4 at 221-222. 31
built: the Maritimes and Northeast Pipeline and the Alliance Pipeline. The result was a significant increase in natural gas pipeline capacity.
Since 2007, there have been dramatic changes in oil and gas markets. 58 Due to technological advances in the production of oil and gas, it is now possible to economically produce large volumes of oil and gas from tight and shale formations in
Canada and the United States, 59 and oil sands production has increased. The NEB notes that “[e]nergy markets have been responding to these changes.” 60 Rapid growth in
WCSB oil sands and US tight oil production has resulted in a surplus of oil in the middle of North America since 2011. 61 As a result, oil export pipeline capacity is tight; 62 both
Enbridge and Trans Mountain have had to significantly apportion volumes. 63 The proposed oil export pipelines are “evidence of the market responding to the recent constraints in oil pipeline capacity.” 64
As a result of constrained oil pipeline capacity, the amount of oil shipped by rail has grown in recent years. From January to November 2013, an average of 123, 000 bpd of crude oil was exported to the US by rail, primarily to the US East Coast and Gulf Coast. 65
This is only a fraction of the total amount of crude oil shipped out of the WCSB daily.
There are some short term advantages to transporting crude oil by rail. Rail is a more
58 National Energy Board, “Canadian Pipeline Transportation System: Energy Market Assessment” (April 2014), at 1, online: http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/trnsprttn/2014trnsprttnssssmnt/2014trnsprttnssssmnt-eng.html [NEB 2014 Transportation Report] 59 Ibid. 60 Ibid . 61 Ibid at 5. 62 Ibid . 63 Ibid. . 64 Ibid at 7. 65 Ibid at 5. 32
flexible option than pipelines and can quickly adapt to changing markets. 66 In addition, transportation of crude oil by rail has, to date, not drawn the significant public opposition to crude oil transportation experienced by proposed pipelines in Canada and the US.
However, shipping crude oil by rail is considerably more expensive than by pipelines and less energy efficient. The cost of shipping by rail is roughly double or triple the cost of shipping by pipeline, 67 which means lower netbacks for producers and lower tax revenues for government. Thus, in the long run, pipelines are a better option. 68
By contrast, there is currently excess capacity in portions of the TransCanada
Mainline, a natural gas pipeline. Eastern Canadian and eastern US markets that had traditionally been served by TransCanada are now increasingly accessing newly available eastern US gas. 69 In addition, the TransCanada Mainline now competes with the Alliance pipeline for both supply and markets. 70
2.8 Major Long-Distance Oil Pipelines Today
Today, there are four major oil pipeline systems that transport oil production out of the Western Canadian Sedimentary Basin (WCSB): Trans Mountain, Express (now
Spectra Energy Express-Platte), the Keystone Pipeline System, and the Enbridge
Mainline. In three of these four major pipeline systems, the majority of capacity is now subject to firm long term contracts with shippers, known in the industry as Transportation
Service Agreements (TSAs). 80% of the existing Trans Mountain pipeline is subject to
66 Michael Holden, “Pipe or Perish: Saving an Oil Industry at Risk”, online: (2013) Canada West Foundation at 18, 19 and 20
TSAs, with this percentage remaining constant in the proposed expansion. 85% of the
Express pipeline is subject to long term firm contracts. Up to 88% of the capacity of
Keystone XL is subject to long term firm contracts, and up to 94% of Base Keystone is subject to long term firm contracts. Enbridge proposes to have 95% of the Northern
Gateway Pipeline subject to firm contracts. By contrast, the Enbridge Mainline remains entirely a common carrier pipeline, with no long term contracts.
Major liquids pipelines (primarily oil) are shown in Figure 2-1 below.
34
Figure 2-1: Major Liquids Pipelines 71
71 Canadian Energy Pipeline Association, online: http://www.cepa.com/map/index-en.html. 35
2.8.1 Enbridge Pipelines
2.8.1.1 Enbridge Mainline
Enbridge is Canada’s largest transporter of crude oil, delivering on average more than 2.2 million barrels per day of crude oil and liquids. 72 The Enbridge Canadian mainline (formerly the Interprovincial Pipeline) commences in Edmonton, Alberta, and is made up of six pipelines exiting Western Canada that transport natural gas liquids, synthetic crude oil, refined petroleum products, light crude oil, condensate, and heavy crude oil. 73 The six lines interconnect with other Enbridge pipelines, to serve destinations in central Canada, including Montreal, Quebec, and destinations in the US including the
Cushing Hub and Toledo. The Enbridge Mainline Pipeline System includes the Clipper
Pipeline which runs from Hardisty, Alberta to Gretna, Manitoba, and south to Superior,
Wisconsin in the US. 74
After extensive negotiations with shippers, Enbridge entered into a Competitive
Tolling Settlement Agreement (CTS) for ten years with shippers. The tolls are set pursuant to the agreement; the Enbridge mainline is no longer based on a cost of service toll methodology. Under the terms of the CTS, Enbridge stands to earn a greater return on equity if they accept more risk with respect to volumes, capital or other stated factors on a particular project. 75
72 Enbridge Liquids Pipelines: online: http://www.enbridge.com/DeliveringEnergy/OurPipelines.aspx. 73 NEB 2014 Transportation Assessment, supra note 58 at 14. 74 Enbridge: Alberta Clipper (Line 67) Capacity Expansion: online: http://www.enbridge.com/MainlineEnhancementProgram/Canada/Alberta-Clipper-Capacity- Expansion.aspx. 75 Enbridge Pipelines Inc. Mainline Competitive Toll Settlement Representative Shipper Group Agreement (March 20, 2012), paragraph 16.7, online: http://www.enbridge.com/~/media/www/Site%20Documents/Delivering%20Energy/Shippers/2012%2003 %2020%20RSG%20Agreement%20MASTER.pdf. 36
2.8.1.2 Enbridge Line 9 Reversal
In November 2012, Enbridge filed an application with the NEB to reverse (or re- reverse) the direction of flow in the section of Line 9 known as Line 9B stretching from
North Westover, Ontario to Montreal, Quebec and to expand the capacity of the entire
Line 9 to approximately 300,000 barrels per day. 76 Enbridge has already obtained NEB approval to reverse the pipeline’s flow for the section running between Sarnia and North
Westover, known as Line 9A. 77 The Line 9 reversal will allow Enbridge to ship crude oil from western Canada to Montreal refineries. 78 Line 9 originally flowed from west to east, but in 1998 it was reversed to flow from east to west to receive oil from overseas. It now makes sense to re-reverse the flow of the line given the forecast for substantial growth in western Canadian light crude oil supply. 79 The Line 9 reversal will allow western Canadian producers greater access to the Ontario market and will provide lower- priced Canadian crude oil to Imperial Oil’s Nanticoke refinery near Port Dover, Ontario so that Imperial does not have to rely on higher-priced offshore crude oil. 80
2.8.1.3 Proposed Enbridge Northern Gateway Pipeline
The proposed Northern Gateway pipeline (Northern Gateway) would be capable of transporting an average of 525,000 barrels per day of crude oil from Bruderheim in
76 NEB 2014 Transportation Report, supra note 58 at 15. 77 NEB Letter Decision, Enbridge Pipelines Inc. Line 9 Reversal Phase I Project OH-005-2011 ( July 27, 2012), online: NEB https://docs.neb-one.gc.ca/ll- eng/llisapi.dll/fetch/2000/90464/90552/92263/706191/706437/834328/834582/A2V3K2_- _Letter_Decision_OH-005-2011.pdf?nodeid=834303&vernum=-2. 78 Canada West Report, supra note 66 at 17. 79 Views of Enbridge, NEB Letter Decision, Enbridge Pipelines Inc. Line 9 Reversal Phase I Project OH- 005-2011 (July 27, 2012) at 3 online: NEB https://docs.neb-one.gc.ca/ll- eng/llisapi.dll/fetch/2000/90464/90552/92263/706191/706437/834328/834582/A2V3K2_- _Letter_Decision_OH-005-2011.pdf?nodeid=834303&vernum=-2 80 Position of Imperial Oil, NEB Letter Decision, Enbridge Pipelines Inc. Line 9 Reversal Phase I Project OH-005-2011 ( July 27, 2012) at 4 online: NEB https://docs.neb-one.gc.ca/ll- eng/llisapi.dll/fetch/2000/90464/90552/92263/706191/706437/834328/834582/A2V3K2_- _Letter_Decision_OH-005-2011.pdf?nodeid=834303&vernum=-2 37
northern Alberta to the northwest coast of British Columbia at Kitimat. 81 From Kitimat, the oil could be transported to overseas markets, particularly Asia, by tanker. Northern
Gateway would transport bitumen diluted with condensate to allow it to flow freely in the pipeline, as well as other oil products. The project includes a parallel condensate pipeline which would transport the used condensate back to Alberta for re-use.
2.8.2 Trans Mountain Pipeline
The existing Kinder Morgan Trans Mountain pipeline transports crude oil and refined products from Edmonton, Alberta to Burnaby, BC. 82 It is currently the only crude oil pipeline from Alberta directly to the west coast, 83 and it provides access to Asian markets, as well as to other markets in the US and overseas through the Westridge marine terminal at Burnaby, BC. 84 In addition, Trans Mountain delivers oil products to marketing terminals and refineries in central BC, and the Greater Vancouver area. It also connects to a US affiliate at Sumas, on the BC/Washington State border, for delivery to refineries in the Puget Sound area in Washington State. 80% of the capacity of the
Trans Mountain pipeline is allocated through long term firm contracts.
Kinder Morgan proposes to expand the Trans Mountain pipeline. The proposed expansion, if approved by the NEB, would create a twinned pipeline that would increase
81 Report of the Joint Review Panel for the Enbridge Northern Gateway Project (December 2013) Calgary vol II at 3,5. On June 17, 2014, the Governor in Council approved the Northern Gateway Project, subject to the 209 conditions set out by the Joint Review Panel. See National Energy Board, Decision Statement Issued under Section 54 of the Canadian Environmental Assessment Act , 2012 and Paragraph 104(40(b) of the Jobs, Growth and Long-term Prosperity Act to Northern Gateway Pipelines Inc. on behalf of Northern Gateway Pipelines Limited Partnership for the Enbridge Northern Gateway Project (17 June 2014) , online: http://gatewaypanel.review-examen.gc.ca/clf-nsi/hm-eng.html. 82 Kinder Morgan – Canada, Trans Mountain Pipeline System, online: < http://www.kindermorgan.com/business/canada/transmountain.cfm>. 83 Canada West Report, supra note 66 at 17. 84 Trans Mountain Pipeline ULC (May 2013), RH-001-2012 at 18, online: NEB http://www.neb-one.gc.ca [Trans Mountain Expansion Decision]. 38
the nominal capacity of the existing pipeline by almost three times, from 300,000 barrels per day to 890,000 barrels per day. 85
The proposed Keystone XL pipeline will compete with the Trans Mountain pipeline for supply from the Western Canadian Sedimentary Basin (WCSB). The proposed Northern Gateway Pipeline would compete more directly with Trans Mountain, offering a second route for transportation to the west coast of Canada and access to Asian markets.
2.8.3 Spectra Energy Express – Platte
The Express Pipeline system commenced operation in 1997. The Express Pipeline system was the first major oil pipeline in Canada to have long-term firm contracts with its shippers for a majority of its capacity. 86 The Express Pipeline has a capacity of approximately 280,000 bpd.
The Express Pipeline and the Platte pipeline are now owned by Spectra. 87 The
Express Pipeline delivers Western Canadian crude oil from Hardisty, Alberta to Casper,
Wyoming, where it interconnects with the Platte Pipeline. The Platte Pipeline transports the crude oil to refineries in the Rocky Mountain and Midwest regions of the United
States. 88
85 Trans Mountain Pipeline: Proposed Expansion, online:< http://www.transmountain.com/proposed- expansion> 86 National Energy Board, Canadian Pipeline Transportation System: Transportation Assessment (Calgary: July 2009) at 12. 87 Spectra Energy: Crude Oil Transportation, online
The Express Pipeline and the Enbridge mainline both commence at Hardisty,
Alberta, and they compete for crude oil supply from the WCSB, 89 although they serve different markets.
2.8.4 Keystone Pipeline System
The Keystone Pipeline system can be described as four pipelines, which are shown in Figure 2-2 below. Base Keystone is already operational, and it runs from
Hardisty, Alberta, to Steele City in Nebraska, and to Wood River and Patoka in Illinois, as shown by the red line in Figure 2-2. More than half of Keystone Base involved the conversion of existing under-utilized natural gas pipeline in Saskatchewan and Manitoba.
The Cushing Extension is already operational, and it runs from Steele City to the Cushing
Hub in Oklahoma, and is shown by the green line from Steele City to Cushing in Figure
2-2. The Gulf Coast Project, from Cushing to Nederland and Houston, Texas (on the
Gulf Coast) commenced operations in January 2014. 90 With the completion of the link to the Gulf Coast, this is the first time that supply from the WCSB has been directly connected to the US Gulf Coast, which, according to Keystone, is a “large, highly desirable, and virtually untapped market.” 91 The Keystone XL Pipeline would extend from Hardisty, Alberta to Steele City, Nebraska, and is shown as the dotted diagonal line
(or “hypotenuse”) in Figure 2-2. The National Energy Board has approved the Canadian
89 Express Pipeline Ltd . Facilities and Toll Methodology , (June 1996) OH-1-95, online: NEB http://www.neb-one.gc.ca [Express Pipeline Decision ] 90 According to an industry representative, the Gulf Coast Project was originally named as part of the Keystone XL Project but this was later renamed after the difficulties in getting the entire Keystone XL project approved in the US became apparent. 91 Keystone Pipeline GP (March 1, 2010), OH-1-2009 at 30, online: NEB http://www.neb-one.gc.ca [ 2010 Keystone XL Decision]. 40
portion of Keystone XL.92 The portion of the Keystone XL Pipeline from the Canadian border to Steele City, Nebraska has not yet been approved by the US state department. It is controversial and highly politicized. Environmental groups have expressed concerns about the potential negative impacts of the Keystone XL Pipeline and the fact that it will transport oil from the Alberta oil sands.
92 Ibid. 41
Figure 2-2: Proposed and Existing Keystone Pipelines 93
93 TransCanada Keystone XL Pipeline, online: http://keystone-xl.com/keystone-xl-pipeline-overall-route- map/. 42
2.9 Major Long-Distance Natural Gas Pipelines Today
Major natural gas pipelines are shown in Figure 2-3 below.
Figure 2-3: Major Natural Gas Pipelines 94
94 Canadian Energy Pipeline Association, online: http://www.cepa.com/map/index-en.html. 43
2.9.1 TransCanada Mainline
TransCanada owns and operates the Mainline, which is a natural gas transmission system that runs from Empress, Alberta (near the Saskatchewan border) across
Saskatchewan, Manitoba, and Ontario and east to the Quebec/Vermont border, where it connects with other natural gas pipelines in Canada and the US. 95 The entire
TransCanada network moves 15 billion cubic feet (bcf) of natural gas per day. 96
The TransCanada pipeline system now includes the former Foothills pipeline system and the former Alberta Nova Gas Transmission Limited (NGTL) system. 97 The former Alberta/BC Foothills pipeline moves natural gas south from Caroline, Alberta through southeastern BC to the US border where it connects with a US pipeline system to deliver gas to US customers in the Pacific Northwest, California and Nevada. 98 The former Foothills Saskatchewan pipeline moves natural gas in a southeasterly direction to the Saskatchewan/US border where it connects with a US pipeline to deliver gas to US
Midwest markets. 99 The former NGTL system is entirely within the province of Alberta, and was formerly regulated by the provincial regulator.
2.9.2 Proposed Energy East Project
TransCanada filed a project description for the Energy East Pipeline with the
NEB in March 2014, 100 and will file an application for the project later in 2014. The
95 TransCanada: Canadian Mainline, online:
Energy East Pipeline will carry 1.1 million barrels of crude oil per day from Hardisty,
Alberta and Saskatchewan to existing refineries in Montreal, near Quebec City, and Saint
John, New Brunswick. 101 Marine facilities will be built in Quebec City and Saint John,
NB to allow marine tankers to be loaded with crude for shipment to export markets. 102
The project includes the conversion of portions of the existing underutilized TransCanada mainline from natural gas service to oil service and the construction of new facilities.
Currently the refineries in eastern Canada receive oil shipped from overseas, which is expensive. 103 This project, if approved, will provide Canadian refineries with a reliable source of domestic crude oil. It is anticipated to be in service in 2018. 104 TransCanada has estimated that tolls on Energy East will be competitive with west coast access pipelines, presumably because TransCanada would convert some existing gas facilities to oil service. The pipeline will provide an alternative transportation option for WCSB crude oil producers to access eastern Canadian, US and other international markets. 105 It should also lessen the price discount on Alberta oil.
Canadian Environmental Assessment Act, 2012 is required: TransCanada: Energy East Pipeline: online (2014)
2.9.3 Trans Quebec and Maritimes Pipeline Inc.
The Trans Quebec and Maritimes Pipeline (TQM) connects the Montreal to Quebec City corridor, and connects to a US pipeline at the Quebec/New Hampshire border. 106 TQM is
50% owned by TransCanada and 50% by Gaz Metro. 107
2.9.4 BC Pipeline
BC Pipeline, formerly known as the Westcoast Energy Pipeline 108 runs from Fort Nelson in northern BC and from Gordondale at the BC/Alberta border to the BC/Washington border at Sumas, Washington. It primarily exports natural gas from northern BC to the
US. The capacity of BC Pipeline is 2.4 bcf/d. At Gordondale, BC Pipeline interconnects with the NGTL system, allowing it to compete with TransCanada for Alberta gas supply, although it serves different markets. BC Pipeline is now owned by Spectra Energy
Transmission. 109
2.9.5 Maritimes and Northeast Pipeline
Spectra Energy now has a 77.53% ownership interest in the Maritimes and
Northeast Pipeline. 110 The remainder of the pipeline is owned 12.92% by Emera, Inc. and 9.55% by ExxonMobil Corporation. 111 This pipeline is located in the Northeast
106 TransCanada, online
United States and Atlantic Canada, and the capacity of the Canadian portion of the pipeline is 555,000 MMBtu/d. 112
2.9.6 Alliance Pipeline
The Alliance Pipeline is the most recent major natural gas pipeline to be constructed in
Canada. The Alliance Pipeline was conceived in the late 1990s by an Alberta gas producer and an energy marketing company. 113 Alberta gas producers were frustrated by the lack of pipeline capacity to move natural gas to higher-priced US markets. 114 Gas in
Alberta commanded a lower price due to excess supply domestically. Gas producers had significantly cut their costs in order to continue to earn a profit, but pipeline companies did not appear to be cutting their own costs. As a result, Alberta producers developed the
Alliance Pipeline which exported Alberta natural gas to Chicago and US markets.
The Alliance Pipeline commenced operations in 2000.115 Its capacity is approximately 1.6 billion cubic feet per day. 116 It is a high-pressure “bullet line”; it does not deliver gas to any destinations in Canada. Alliance transports liquids rich natural gas 117 from the WCSB and the Williston Basin. Liquids rich natural gas is easier to compress, creating a “dense gas” that is more valuable than regular gas; this means that producers receive higher netbacks for their product. 118 Alliance runs from a point in
112 Ibid. 113 Bill White, supra note 52. 114 Ibid . 115 Alliance Pipeline: Who We Are, online: http://www.alliancepipeline.com/Pages/default.aspx. 116 Alliance Pipeline: About Us, online:
northwestern Alberta near Gordondale and from northeastern BC to Chicago. In Chicago it provides gas to the Aux Sable Plant which strips the liquids out of the gas to make it merchantable for downstream transportation and markets. 119 The Aux Sable Plant is owned by Verasen.
The Alliance Pipeline is owned 50% by Enbridge Income Fund Holdings Inc. and
50% by Veresen Inc. 120
The Alliance Pipeline competes directly with the TransCanada mainline for supply. Currently, 99% of Alliance Pipeline’s capacity is utilized, 121 while portions of the TransCanada mainline are at below 50% utilization. 122
2.10 The Development of Pipe-on-Pipe Competition for Oil Pipelines
In the 1950s, when Interprovincial Pipeline and Trans Mountain Pipeline System commenced operations, neither pipeline had any significant competition in their respective destination markets. At that time, Interprovincial Pipeline was the only long distance oil pipeline transporting oil from Alberta to eastern North America, and Trans
Mountain was the only oil pipeline to transport oil from Alberta to the west coast of
Canada.
As oil and natural gas export markets have grown, more export pipeline capacity has been constructed, and as a result, pipe-on-pipe competition has developed for both oil and
119 Alliance Pipeline Application (22 May 2014) at para 13 online: NEB
natural gas pipelines. The transportation of oil by rail has also grown as an alternative to pipeline transportation.
Proponents of most new oil export pipelines in the past twenty years have applied for and received NEB approval for firm contracts for the majority of the capacity of the pipeline, and for competitive tolls as opposed to cost of service tolling. 123 The proponents have successfully argued that the firm contracts were necessary to underpin the financing of the project given the volume risk that they would otherwise face, and the lower tolls for firm shippers were necessary to entice shippers who had other transportation options.
Today, four major pipelines compete for crude oil supply from the WCSB, although they serve different destination markets: Express Pipeline, Keystone Base, the Enbridge mainline, and Trans Mountain. Based on forecasted WCSB crude oil production, there will be sufficient crude oil volumes for all of these pipelines, as well as the proposed
Keystone XL, Trans Mountain Expansion, Northern Gateway, and Energy East pipeline projects, until at least 2021. 124
Currently, Trans Mountain is the only long distance crude oil pipeline to transport crude oil to the west coast of BC. Northern Gateway, if constructed, will compete directly with Trans Mountain for access to Asian markets. Asian demand for crude oil is forecast
123 See e.g. Express Pipeline Decision, supra note 89; Enbridge Bakken Pipeline Company Inc., (December 2011) OH-1-2011, online: NEB: http://www.neb-one.gc.ca [Enbridge Bakken Decision ]; TransCanada Keystone Pipeline GP Ltd (September 2007), OH-1-2007, online: NEB http://www.neb-one.gc.ca [2007 Keystone Base Decision ], 2010 Keystone XL Decision , supra note 91. These pipelines will be discussed in more detail in chapter 4. 124 See Dinara Millington & Jon Rozhon, “Pacific Access: Part I – Linking Oil Sands Supply to New and Existing Markets,” (July 2012) Canadian Energy Research Institute: Study No. 129 – Part I at 13 online;
to be far larger than the capacity of both an expanded Trans Mountain and Northern
Gateway together, provided that Canada can secure access to Asian markets, particularly
China, before these trading partners look elsewhere for a secure supply of crude oil. 125
Trans Mountain also serves destinations in BC and in Washington State.
Energy East, if approved, would compete in part with the Enbridge mainline, assuming the Enbridge Line 9 reversal is approved. Both Energy East and Enbridge Line
9 would serve Montreal refineries. 126 However, both Enbridge and Energy East also have other destination markets.
If actual oil sands production falls short of forecasted production in the coming years, so that there is excess takeaway pipeline capacity from the WCSB, Northern Gateway and Enbridge mainline may be the pipelines to suffer volume risk, as these two pipelines do not currently have firm contracts with shippers. Express, Keystone Base, Trans
Mountain and Keystone XL all have firm contracts for the majority of the capacity of the pipelines, and Energy East also intends to apply for approval of firm contracts for a portion of the capacity of the pipeline. If shippers do not use capacity for which they have a firm contract, they will pay a substantial penalty to the pipeline company.
2.11 The Development of Pipe-on-Pipe Competition for Natural Gas Pipelines
In the 1950s, neither Westcoast Transmission Company Ltd nor TransCanada
PipeLines Ltd had any significant competition in their respective destination markets.
Westcoast transported natural gas south through BC and to the US Pacific Northwest.
The TransCanada Mainline did not face significant supply or destination competition
125 See Canada West Report, supra note 66 at 2. 126 TransCanada: Energy East Pipeline Project, online: http://www.transcanada.com/energy-east- pipeline.html; Canada West Report, supra note 66 at 17. 50
until the year 2000, when the Alliance and Vector Pipelines commenced operations. The
Alliance Pipeline interconnects with the Vector Pipeline at Joliet, Illinois, and markets served by the Vector Pipeline include Ontario. 127 Thus the Alliance and Vector Pipelines together compete directly with TransCanada for Ontario markets. Today, both the
TransCanada Mainline and Alliance Pipeline face competition for gas supply based on demand for natural gas in Alberta markets, other ex-Western Canada Sedimentary Basin pipelines and new sources of natural gas in the US Rockies region and the eastern US. 128
Currently, 99% of Alliance Pipeline’s capacity is utilized, 129 while portions of the
TransCanada mainline are at below 50% utilization. 130 As of December 2015, when the original 15 year contracts on Alliance expire, 92% of the capacity of the Alliance
Pipeline will be available for the market. 131 On May 22, 2014, Alliance filed a tolling application with the NEB designed to address the risk of underutilization. 132
In the 2013 TransCanada Mainline Restructuring Decision , the NEB recognized the challenges of increasing competition for gas supply faced by the TransCanada mainline. 133 In the decision, the NEB made changes to the TransCanada tolling
127 Vector Pipeline, online < http://www.vector-pipeline.com/Vector/>. 128 See Alliance Pipeline Application (22 May 2014) online: NEB
structure to make it more competitive. The challenges of competition for both the
TransCanada Mainline and Alliance Pipeline are discussed further in chapter 5.
The Foothills BC Pipeline is now owned by TransCanada. It competes with US pipelines supplying the California market. 134 As a result, the average pipeline capacity utilization on the Foothills BC pipeline was 66% or lower over the past three years. 135 In
2011, throughput decreased slightly on the Foothills BC pipeline primarily because of the commencement of operations of a pipeline in the US, the Ruby Pipeline, which connected natural gas production in the US Rocky Mountains with markets in
California. 136
In the past five years, throughput on the Foothills Saskatchewan pipeline system declined due to increased supply competition from pipelines in the US Midwest and the
US Rocky Mountains. 137
2.12 Conclusions
This chapter has provided a brief overview of oil and gas export pipelines in Canada.
It argues that oil pipelines were originally regulated as common carriers because this was consistent with the short term nature of the oil spot market, among other reasons. It also argues that natural gas pipelines were originally regulated as contract carriers because of the lack of alternatives available to customers; customers sought the assurance provided by long term contracts.
134 NEB 2014 Transportation Report, s upra note 58 at 26. 135 Average pipeline capacity utilization was 59% in 2011, 62% in 2012, and 66% in the first nine months of 2013. National Energy Board Transportation Report 2014, supra note 58 at 26 136 Ibid at 26. 137 Ibid at 27. 52
Today, there is pipe-on-pipe competition in some transportation markets in Canada for both oil and natural gas. Many oil pipelines now have firm contracts for the majority of their capacity, and the NEB requires open access to both oil and natural gas pipelines.
NEB decisions regarding capacity in oil and natural gas pipelines will be discussed in detail in chapters 4 and 5 respectively.
53
Chapter 3: Economic Justification for Regulation of Oil and Natural Gas Transmission Pipelines as Natural Monopolies
3.1 Introduction
Western societies generally consider that competitive market economies produce the most efficient outcomes from an economic perspective. 1 Economic theory states that competition will not be feasible in industries that areare naturalnatural monopolies.monopolies. InIn naturalnatural monopolies, regulation is the best option to produce efficient results. Regulation should be used as a substitute for competition, with the goal being, as stated by Alfred Kahn, “to produce the same results as would be produced by effective competition, if it were feasible.” 2 Crude oil 3 and natural gas 4 transmission pipelines can be co nsidered to be natural monopolies , at least when the first oil or natural gas pipeline is built inin aa givengiven market.
Chapter 3 explores these key themes. Based on the economic analysis presented, it provides a list of four principles for the regulation of oil and natural gas pipelines. The approach of the NEB is then reviewed with respect to these principles. It presents NEB policy statements and decisions illustrative of these principles.
1 Alfred E Kahn, The Economics of Regulation, Principles and Institutionstions , (Cambridge, Massachusetts: MIT Press, 1988) vol I at at 17. [Alfred Kahn] 2 Ibid . 3 Alan J MacFadyn and G Campbell Watkins, Petropolitics: Petroleum Markets and Regulations, Albertalberta as an Illustrative History (Calgary: University of Calgary Presss, 2014) at 31. [MacFadyn, “Petropolitics”] In Trans Mountain Pipeline ULC Toll Methodology for Expanded Trans Mountain Pipeline System (May 2013), RH -001-2012, online: NEB http://www.neb -one.gc.ca [Trans Mountain Expansion Decision ], the NEB stated at page 18: “crude oil pi pelines like Trans Mountain tend to be natural monopolies and, as a result, highly concentrated markets are to be expected.” 4 S H Wellisz, “Regulation of natural gas pipeline companies: An economic analysis” (1963) 71(1) Journal of Political Economy, 30 at 36; Nikol J Schultz, “Light -Handed Regulation” (1999) 37 Alta L Rev 387 at para 27. 54
3.2 Economic Theory
3.2.1 The Benefits of Competition
In Western society, most economists consider that a competitive market economy is the structure that is the most likely to provide economically efficient outcomes. 5 In a market economy, “the critical economic decisions are made by individuals, each separately pursuing his own interest.” 6 At the same time, the “competitive market guides and controls the self-seeking activities of each individual.” 7 The competitive market is what Adam Smith called the “invisible hand” 8 that acts to “maximize the wealth of the nation.” 9 Alfred Kahn (Kahn) described the benefits of competition thus:
Competition will weed out the inefficient and concentrate production in the efficient; it will determine, by the objective test of market survival, who should be permitted to produce; it will force the producers to be progressive and to offer customers the services they want and for which they are willing to pay; it will assure the allocation of labor and other inputs into the lines of production in which they will make the maximum contribution to total output. 10
In a similar vein, Peter Cameron (Cameron) states that competition is generally seen as having the following four advantages:
Allocative efficiency : the part that competition plays in allocating resources in the direction preferred by consumers. This has the benefit of reducing the risk that goods or services produced will not be wanted, or not wanted at the price at which they are offered.
Innovation : the constant process of dynamic adjustment to continual changes in consumer preferences as an incentive for producers to invest in research and development and to innovate, leading to the survival and
5 See e.g. Alfred Kahn, supra note 1 at 17. 6 Ibid vol I at 1. 7 Ibid. 8 An Inquiry into the Nature and Causes of The Wealth of Nations , Edwin Cannan, ed., 4 th ed. (London: Methuen & Co. Ltd., 1925), cited in Kahn vol I at 1. 9 Alfred Kahn, supra note 1, vol I at 1. 10 Ibid , vol I at 18. 55
growth of those companies which make the necessary changes in good time, whilst those that fail to do so inevitably fall behind.
Cost reduction : the continual pressure on all producers and sellers in the market to keep down costs, and therefore prices, for fear of losing custom to other sellers who find ways to attract business either by general price cuts or by special discounts to favoured buyers.
Progress: the likelihood that a country whose economy is committed to the competitive process will enjoy greater advances in productive efficiency and in utilization of its resources of raw material and human capital. 11
3.2.2 Competition Ineffective in Natural Monopolies
According to Alfred Kahn, certain industries are natural monopolies because either the technology of the industry or the character of the service provided is such that “the customer can be served at least cost or greatest net benefit only by a single firm or by a limited number” of firms. 12 Kahn states:
A “natural monopoly” is an industry in which the economies of scale — that is, the tendency for average costs to decrease the larger the producing firm – are continuous up to the point that one company supplies the entire demand. 13
In these industries, costs will be lower if goods or services are supplied by only one firm. 14 As a result, competition will only result in higher social costs and is undesirable. 15
11 Peter D Cameron, Competition in Energy Markets: Law and Regulation in the European Union , 2 nd ed, (Oxford: Oxford University Press 2007) at 5-6. 12 Alfred Kahn, supra note 1, vol II at 2. In a similar vein, Richard Posner defines a natural monopoly as: “a market whose entire demand can be met at lowest cost by a single firm. This implies that before a firm can begin to do business it must sink large sums in a plant that is large enough or can readily be expanded to serve the entire market. Once the heavy initial fixed or overhead expenses are incurred, the cost of serving a particular customer is relatively slight.” Richard Posner, supra note 12 at 570. 13 Alfred Kahn, supra note 1 vol I at 123-4. 14 Alfred Kahn, supra note 1, vol I at 11. 15 James C Bonbright, Albert L Danielsen, and David R Kamerschen, Principles of Public Utility Rates, 2 nd ed. (Arlington, Public Utilities Reports, Inc 1988 at 8. 56
Stephen Breyer offers traditional telephone service as an example of a natural monopoly. 16 He states:
Rather than have three connecting phone companies laying separate cables where one would do, it may be more efficient to grant one firm a monopoly subject to governmental regulation of its prices and profits. 17
Breyer provides the justifications for regulation of natural monopolies set out below.
3.2.2.1 Allocative Efficiency
In a competitive environment, firms will keep producing more units until the point where “price equals incremental cost – the cost of producing an additional unit of their product.” 18 Allocative efficiency means that “all resources are used in a manner that maximizes the welfare of the world’s individuals as measured by their preferences revealed in the marketplace.” 19 Breyer describes allocative efficiency under perfect competition as follows:
Under perfect competition, the price of each and every good reflects its incremental cost; buyers cannot be misled into choosing goods that they desire less but that cost society more to produce; resources are allocated so as to maximize social welfare. 20
By contrast, an unregulated monopolist may limit production so that he can raise prices. Although demand will decline with higher prices, the monopolist will willingly forgo sales as he can compensate for the loss in revenue by the higher price on each unit sold. The result is “waste.” 21 The monopolized product may be priced at a price that is in
16 Stephen Breyer, Regulation and its Reform , (Cambridge, Massachusetts: Harvard University Press, 1982) at 15 [Stephen Breyer]. 17 Ibid at 15. 18 Ibid at 15. 19 Ibid at 25. 20 Ibid at 16. 21 Ibid at 16. 57
excess of the true social costs of production of the good. 22 Consumers will compare the price of the monopolized product with a cheaper competitively produced product and buy more of the competitive product even though first of all, they would have preferred the monopoly product and secondly, “it costs society less in terms of real resources to produce more of the monopoly product and less of the competitive product.” 23 The result is inefficient from an economic perspective; society will allocate insufficient resources to the monopolized sector. 24
A regulator will try to move prices towards allocative efficiency by
try[ing] to set the price of a monopoly product near incremental cost in order to induce the natural monopolist to expand its output to a socially preferred level – where buyers do not inefficiently substitute consumption of socially more costly goods for consumption of the monopolized good. 25
Breyer gives an example from the energy sector. If coal is produced competitively but oil production is monopolized, then consumers may purchase some coal instead of oil because of the lower price of coal, even though the relative social costs of producing coal are higher than oil. 26
If the regulator can require increased competition in the oil industry, allocative efficiency will be improved within the energy sector. 27
Breyer also states that the effectiveness of regulatory decisions can be measured using the standards of competition. 28
22 Ibid at 391. 23 Ibid at 16. 24 Ibid at 391. 25 Ibid at 16. 26 Ibid at 17. 27 Ibid. 28 Ibid. 58
Breyer also notes: “Monopolists may …lack sufficient incentive to hold production costs at low levels.” 29 While monopolists do have some incentive to lower costs, so that they can increase their profits, they do not face pressure from competitors who could capture market sales by lowering their own costs and therefore lowering their prices. In other words, for a monopolist there is a “carrot”, 30 but no “stick”; 31 monopolists “may be lazy about production costs.” 32 Breyer notes: “[t]he extent to which regulation can counteract this tendency is doubtful.” 33
3.2.2.2 Income Transfer
Typically “the monopolist will raise the price of some of his services far above a regulated or competitive level.” 34 As a result, income is transferred from the users of the service to investors. This is generally seen as a regressive income transfer, and therefore undesirable. 35 Breyer states, “The more essential the service provided by the monopolist, the greater the amount that this income transfer is likely to be.” 36 There is no social benefit to allowing a monopolist to earn these increased profits. Thus, income transfer can be “a strong reason for regulating the prices and profits of the natural monopolist.” 37
3.2.2.3 Fairness
A competitive market provides an incentive against treatment of customers in an arbitrary or unjustifiably discriminatory way. For example, if a store is rude to customers or provides inadequate service, customers may switch to a competing store. By contrast, if
29 Ibid at 16. 30 Ibid . 31 Ibid. 32 Ibid . 33 Ibid at 16. 34 Ibid at 19. 35 Ibid. 36 Ibid at 20. 37 Ibid. 59
an unregulated monopolist firm treats customers unfairly, customers have “no ready recourse.” 38 Breyer states:
The regulatory system, by providing recourse for grievances against the monopolist, offers a remedy that to some extent makes up for the lack of competition’s guarantees against unjustified discrimination. 39
3.2.2.4 Power
Breyer notes that “[r]egulation is also advocated by those who fear concentration of substantial social or political power in the hands of a single firm that controls an essential product.” 40 The argument is that regulatory requirements such as “the need to file reports, the fear that improper conduct might prompt hostile governmental action, the feeling of public responsibility that regulation may engender in the minds of the firm’s executives” 41 may lead a monopolistic firm to act in a “socially responsible” 42 way.
However, Breyer is skeptical as to whether regulation is, in fact, effective in achieving this aim.
Breyer concludes:
the classic case for economic regulation – regulating the prices and profits of the natural monopoly—rests partly on economic grounds, partly on political and social grounds, and upon a host of unproved (and possibly unprovable) assumptions. However, enough of these assumptions are plausible to make regulation an apparently reasonable governmental response to the natural monopoly. 43
Kahn states that a large part of the regulation of natural monopolies consists of “the imposition and administration of restrictions on entry and on what might otherwise have
38 Ibid. 39 Ibid. 40 Ibid. 41 Ibid. 42 Ibid. 43 Ibid. 60
been independent and competitive price and output decisions.” 44 Richard Posner notes that typically, regulatory commissions control entry into regulated markets by requiring new entrants to apply for approval to construct and operate facilities. 45
3.2.3 Regulation as a Substitute for Competition
In a natural monopoly environment, regulation provides a surrogate for competition. 46 According to Kahn, regulation should be aimed at producing the same results as competition:
“…the single most widely accepted rule for the governance of the regulated industries is to regulate them in such a way as to produce the same results as would be produced by effective competition, if it were feasible.” 47
Kahn makes the point that regulation tends to “spread” 48 and beget more regulation.
Regulation can cause unforeseen consequences which in turn need to be regulated. Kahn gives the example of the history of the regulation of oil production in the United States.
At common law, the rule of capture states that “every landowner is entitled to whatever oil or gas he can draw up from the reservoir that lies under his own land and that of his neighbors.” 49 Quotas placed on individual oil wells to avoid the inefficient outcomes of the unregulated rule of capture created an artificially enhanced incentive to drill additional wells. As a result, the drilling of wells also had to be regulated.
The goal in regulating public utilities should always be to create as little regulation as is necessary to mimic the results a properly functioning competitive market would
44 Alfred Kahn, supra note 1, Vol II page 1 45 Richard Posner, supra note 12 at 606. 46 Peter Cameron, s upra note 11 at 30. 47 Alfred Kahn, supra note 1, vol I at 17. 48 Ibid , vol II at 28. 49 Ibid , vol II at 29. 61
provide. While neither regulation nor competition is a perfect solution, the goal of public utility regulation should be to find “the best possible mix of inevitably imperfect regulation and inevitably imperfect competition.” 50
3.2.4 Oil and Natural Gas Transmission Pipelines as Natural Monopolies
Crude oil 51 and natural gas transmission pipelines 52 can be considered to be natural monopolies, at least when the first oil or natural gas pipeline is built in a given market.
The incremental cost to an incumbent pipeline owner of shipping one more unit of product in the pipeline is minimal compared to the capital cost that would be faced by a new market entrant wishing to construct another pipeline. This is true until the oil or gas transmission market grows to the point where the incumbent pipeline reaches full capacity. Without regulation, the pipeline owner could exact monopolistic or excessively high rates from customers.
Kahn explains that for natural gas transmission pipelines,
the main potential economies of scale are to be found in employing pipe of the maximum diameter available and, to a lesser extent, of further increasing its capacity, within limits, by increasing pressure and by “looping,” that is, by constructing parallel lines running through the same compressor stations. 53
Once the market has expanded to the point where more than one pipeline is needed, competition among different companies owning different pipelines may exist.
Kahn explains that at this point, it is not necessary from an economic perspective to have
50 Ibid , vol I at xxxvii. 51 MacFadyn, “Petropolitics”, supra note 3 at 31. See e.g. Trans Mountain Pipeline ULC Toll Methodology for Expanded Trans Mountain Pipeline System (May 2013), RH-001-2012 at 18 online: NEB http://www.neb-one.gc.ca [Trans Mountain Expansion Decision] 52 S H Wellisz, “Regulation of natural gas pipeline companies: An economic analysis” (1963) 71(1) Journal of Political Economy 30 at 36; Nikol J Schultz, “Light-Handed Regulation” (1999) 37 Alta L Rev 387 at para 27. 53 Alfred Kahn, supra note 1, vol II at 153. 62
one firm own all of the pipelines in a given area; the industry is no longer a natural monopoly in that geographical location. Pipelines can “criss cross” 54 each other and there can be competition “both in areas between lines and near their points of junction.” 55
Kahn notes that in the US, there has been much discussion of the “proper role of competition” 56 in natural gas transmission pipelines in recent years. In the 1950s in the
US, the goal of both industry and the Federal Power Commission was to extend natural gas supply to areas of the US without full service. Now that “something like a nation- wide network” 57 has developed in the US, there are many more opportunities for competition. Kahn states:
Pipeline companies may compete not only for the privilege of serving the incremental demand of existing markets but also for the patronage of existing customers, as contracts between distributors and pipelines come up for renewal. 58
As natural gas markets grow, often new facilities are required because existing pipelines have reached their full capacity. If those new facilities are built by a new entrant, the competitive advantages of having another market player might be more important than any economies of scale that may arise by having the incumbent monopolist or dominant market force build the required facilities. 59
54 Ibid , vol II at 153. 55 Ibid. 56 Ibid at 152. 57 Ibid 58 Ibid at 153. 59 Northern Natural Gas Company et al v. Federal Power Commission , 399 F 2d 953 (1968), per Judge Wright, cited in Alfred Kahn , supra note 1, vol II at 163. 63
3.2.5 Posner’s Counter Argument: Regulation Ineffective for Natural Monopolies
Not all economists believe that regulation is appropriate for natural monopolies. For example, Richard A Posner states that the benefits of natural monopoly or public utility regulation do not outweigh its costs and, in general, it would be better even in the case of natural monopoly to allow market forces to govern, subject only to antitrust laws (in the
US). 60 He argues that regulatory commissions control entry into regulated markets by requiring new entrants to apply for approval to construct and operate new facilities.
Posner argues that the problem with regulatory barriers to entry of new firms into an industry is that they allow the incumbent monopolist to continue to extract monopoly profits for longer than it would be able to do so in the absence of regulation. 61 In a competitive market, a monopolist is discouraged from setting prices too high because a new player may enter the market with lower prices and gain market share. Where the regulator limits entry of new firms, a monopolist is able to charge higher prices without fear of losing market share to a new entrant. Posner concludes that regulators should not control entry.
While Posner would prefer that public utilities and common carriers be deregulated, 62 he recognizes that this is “probably not a practical objective” 63 given that they have now been regulated for some time. He recommends, among other things, that there should be
60 Richard Posner, supra note 12 at 549-50. The US antitrust laws can be compared to Canadian competition laws. 61 Ibid at 606-661. 62 Ibid at 638. 63 Ibid at 639. 64
no regulatory barriers to entry and competition, 64 and, more specifically, that regulators should be given the flexibility to remove restrictions on entry to the market. 65
3.2.6 Regulation to Provide Open Access to Transmission Pipelines
One of the major goals of regulation of transmission pipelines is to establish open access to pipelines for third parties. 66 Unlike transmission and distribution, oil and gas production and supply markets can be competitive 67 and are not considered to be natural monopolies. Open access to transmission is fundamental to the establishment of competitive oil and natural gas production and supply markets. 68 Without regulation, open access to transmission would likely never happen. In the absence of regulation, a dominant owner of transmission or distribution pipelines can quickly become the principal barrier to entry of new market players in supply markets. 69 The transmission pipeline owner may control access by extracting monopoly rents from customers, which could theoretically be any price up to the cost of building an alternative system (or switching to another fuel). 70
Tony Prosser gives the example of regulation for competition in the UK, where new domestic markets “have only been created through constant regulatory pressure in the
64 Ibid at 638. 65 Ibid at 641. 66 Peter Cameron states that “[t]he core aim of most market reform programs is the creation of enforceable rights of access for third parties to the transmission and distribution networks.” Peter Cameron, supra note 11 at 30. 67 Bartlomiej Nowak, “Independence of the Polish Energy Regulator after the Third Energy Package: Chosen Aspects,” in Robert Zajdler, ed, EU Energy Law: Constraints with the Implementation of the Third Liberalisation Package, (Newcastle upon Tyne: Cambridge Scholars Publishing, 2012) 129 at 132. 68 See e.g. Bartlomiej Nowak, “Equal Access to the Energy Infrastructure as a Precondition to Promote Competition in the Energy Market: The Case of European Union” (2010) 38 Energy Policy 3691 at 3699. Nowak states that open access to electricity and natural gas transmission and distribution is essential for the development of competitive energy markets in the European Union. 69 Peter Cameron, supra note 11 at 30. 70 Ibid at 32. 65
face of foot-dragging by regulated companies.” 71 The creation of a market “involves creating a substructure of rules and other institutional and normative devices”, 72 including rules required to create a “level playing field such as the continuing prohibitions of undue discrimination by a dominant firm.” 73
3.2.7 Summary of Economic Theory Applicable to Regulation of Oil and Natural Gas Pipelines
This chapter has stated that oil and natural gas transmission pipelines can be natural monopolies. The economic analysis above provides the following principles for regulation of oil and natural gas pipelines:
1. The goal of regulation of natural monopolies should be “to produce the same
results as would be produced by effective competition, if it were feasible.” 74
2. The regulator should set the price of monopolist transmission service near
incremental cost in order to prevent economic waste. 75
3. In developed oil and natural gas transmission networks, competition may
exist and the regulator ought not to prevent entry of new firms. 76
4. In order to encourage the development of competitive oil and gas commodity
markets, the regulator ought to establish open access to oil and natural gas
transmission pipelines. 77
71 Tony Prosser, supra note 45 at 197. 72 Ibid. 73 Tony Prosser, supra note 45 at 197. 74 Alfred Kahn, supra note 1, vol I at 17. 75 Stephen Breyer, supra note 16 at 16. 76 Alfred Kahn, supra note 1, vol II at 153, Richard Posner, supra note 12. 77 E.g. Nowak, supra note 68 at 3699. 66
We will now review the approach of the NEB with respect to the above analysis of economic principles.
3.3 The NEB and Competitive Oil and Gas Markets
3.3.1 NEB Policy Statements: Competitive Oil and Gas Markets
The NEB has noted both in the context of oil pipelines 78 and natural gas pipelines 79 that pipelines tend to be natural monopolies. The NEB supports the operation of “well- functioning competitive markets.” 80 The NEB retains its discretion to regulate pipelines under its jurisdiction where regulation is necessary in the public interest. When a shipper or other directly affected party files a complaint with the NEB regarding treatment by a pipeline company, the NEB will typically hold a hearing to deal with the complaint. 81
The Chair and CEO of the National Energy Board, Gaétan Caron emphasized the importance of competitive markets in a speech he gave to the 2013 Canadian Energy
Summit, stating:
“the NEB’s approach to regulation continues to be premised on the belief that markets work. The Board can step in if, for some reason, markets are not functioning properly, but we believe that well-functioning, competitive markets efficiently balance supply and demand through adjustments in
78 In Trans Mountain Pipeline ULC Toll Methodology for Expanded Trans Mountain Pipeline System (May 2013), RH-001-2012, online: NEB http://www.neb-one.gc.ca (the 2012 Trans Mountain Expansion Decision ), the NEB stated at page 18: “crude oil pipelines like Trans Mountain tend to be natural monopolies and, as a result, highly concentrated markets are to be expected.” 79 In the Mackenzie Gas Project Reasons for Decision (2010) GH-1-2004, online: NEB
prices. They also lead to competitive, innovative, and robust energy systems.” 82
One of the NEB’s goals as set out in its Strategic Plan is that “Canadians benefit from efficient energy infrastructure and markets.” 83 In order to determine whether NEB- regulated pipelines are succeeding in meeting this goal, the NEB periodically assesses
the economic functioning of the pipeline transportation system. In a well- functioning transportation system: • Available pipeline capacity moves products to consumers; • Services meet shippers’ needs at just and reasonable prices; • Pipeline companies can attract capital to build and expand their systems.” 84
The NEB considers that “[a]n efficient pipeline transportation system effectively responds to changing market conditions.” 85 There have been dramatic changes to oil and gas markets since 2007. Due to technological advances, large quantities of oil and gas can now be produced from tight and shale formations in Canada and the US, and oil sands production has increased. Energy markets have been responding to these changes.
The construction of new pipelines is one response to these changes; it takes many years to plan, seek regulatory approval for, and construct new pipelines.
82 Ibid . 83 National Energy Board, Who we are and our governance, online:
3.3.2 NEB Decisions: Competitive Transportation Markets
3.3.2.1 Introduction
The Mackenzie Valley Pipeline Decision , the TransCanada Restructuring Decision , and the North Bay Junction Decision are all examples of decisions where the NEB recognized the importance of competitive markets. 86
3.3.2.2 TransCanada Mainline Restructuring Decision
In the TransCanada Mainline Restructuring Decision in March 2013, 87 the NEB recognized that the TransCanada Mainline “faces increased competitive risk.” 88 The
NEB stated that it was TransCanada’s responsibility to ensure that the Mainline remains competitive and that “a functioning free market” 89 would determine the extent to which shippers and consumers chose to use the TransCanada Mainline. The NEB concluded:
TransCanada must not look to regulation to shield the Mainline from its fundamental business risk. It must address the underlying competitive reality in which the Mainline operates. 90
3.3.2.3 Mackenzie Valley Pipeline Decision
In the context of its 2010 decision regarding the Mackenzie Valley Pipeline (the
Mackenzie Valley Pipeline Decision ) the NEB stated that economic regulation of pipelines is a “substitute for the competitive economic forces that would normally work
86 The Mackenzie Valley Pipeline Decision and the TransCanada Restructuring Decision will both be discussed in more detail in chapter 5. 87 TransCanada PipeLines Limited, NOVA Gas Transmission Ltd., and Foothills Pipe Lines Ltd., Tolls and Tariff Application, (March 2013), RH-003-2011 [ 2013 TransCanada Mainline Restructuring Decision], online: NEB https://docs.neb-one.gc.ca/ll- eng/llisapi.dll/fetch/2000/90465/92833/92843/665035/711778/941262/939799/A3G4A3_- _TransCanada_PipeLines_Limited%2C_NOVA_Gas_Transmission_Ltd._and_Foothills_Pipe_Lines_Ltd._ Hearing_Order_RH-003-2011_Reasons_for_Decision.pdf?nodeid=939800&vernum=-2; 88 Ibid at 3. 89 Ibid at 3. 90 Ibid at 3. 69
in a fully functioning market.” 91 The NEB stated that “economic regulation of federal pipelines by the National Energy Board is intended to produce outcomes that are similar to what would happen in a competitive market.” 92 The NEB stated that the goal of economic regulation of pipelines is to ensure that pipeline capacity “is provided at a price, and in amounts, that would be expected from a competitive market.” 93
In reviewing the MacKenzie Valley Pipeline application, the NEB was aware that the project may or may not be constructed depending on whether natural gas prices were high enough to justify the project at the time the approval was granted. The NEB appears to have been satisfied to review the project based on its criteria and to allow market forces to determine, after an approval, whether the project would be constructed or not.
3.3.2.4 North Bay Junction Decision
In its December 2004 decision on proceeding RH-3-2004 regarding the North Bay
Junction Application from TransCanada, the NEB stated that the role of the NEB in a particular case depends on the circumstances of each case. Specifically, the NEB stated:
A market environment in which efficient market signals are sent is part of this goal. When and where conditions exist which allow for the functioning of a workably competitive market, the Board is inclined to allow the market to operate and to evolve naturally according to its own choices. At the same time, the Board will not hesitate to provide a regulatory solution when a market solution is not available or comes with unacceptable costs. 94
The NEB went on to state:
91 Mackenzie Gas Project (December 2010), GH-1-2004 vol II at 171, online: NEB
In striving for economic efficiency, the Board is of the view that the impacts on customers with limited options as well as the impacts on existing infrastructure are relevant considerations. 95
3.3.3 The National Energy Board Act (NEBA): Preventing Economic Waste
The NEBA contains provisions preventing pipeline companies from engaging in unjust discrimination against customers 96 or from charging tolls that are not just and reasonable. 97 These provisions are consistent with Breyer’s justification for regulation of natural monopolies as avoiding economic waste or preventing a monopolist firm from raising prices higher than incremental cost. 98
3.3.4 The NEB: Entry of New Firms
3.3.4.1 Introduction
The NEB controls entry into pipeline transportation markets; a company wishing to construct a pipeline must apply to the NEB for a certificate of public convenience and necessity. 99 The NEB assesses the availability of supply and the existence of markets, among other things, in determining whether to approve a pipeline; 100 this can be seen as an assessment of whether there is room in the market for another firm.
The Express Pipeline Decision, the Alliance Pipeline Decision, and the Wild Horse
Decision are examples of cases where the NEB approved the construction of a pipeline that would compete with an existing pipeline. Thus, these decisions show that in a
95 Ibid. 96 RSC 1985, c N-7, section 67. 97 RSC 1985, c N-7, section 62. 98 Breyer, supra note 16 at 16. 99 National Energy Board Act, RSC 1985, c N-7, s. 29 100 National Energy Board Act, subsections 52(2)(a) and (b) 71
functioning competitive market, the NEB does not generally act to prevent entry of a new firm. All of these decisions are discussed at greater length in chapters 4 and 5.
3.3.4.2 Express Pipeline Decision
In 1997, the NEB approved construction of the Express Pipeline, even though it would compete for supply from the WCSB with the existing Interprovincial Pipeline. 101
3.3.4.3 Alliance Pipeline Decision
In 1998, the NEB approved construction of the Alliance Pipeline, 102 after assessing the risk that it would compete for supply with the existing Nova Gas
Transmission Ltd. (NGTL) pipeline system. Although NGTL had originally objected to
Alliance’s application, NGTL and Alliance subsequently reached an agreement which dealt with NGTL’s concerns regarding possible underutilization of NGTL’s facilities
(and other issues), and NGTL withdrew the bulk of its evidence filed with the NEB. The
NEB found that the potential commercial impacts on existing pipeline infrastructure were acceptable and approved the Alliance pipeline. The NEB also recognized in the Alliance
Decision the “lumpy” 103 nature of investment in new pipelines, meaning that any greenfield pipeline must be constructed on a large enough basis to “take advantage of economies of scale.” 104 This remark of the NEB is consistent with the views of Kahn noted above regarding economies of scale for natural gas pipelines.
101 Express Pipeline Ltd. Facilities and Toll Methodology Application (June 1996) OH-1-95, online: NEB http://www.neb-one.gc.ca [Express Decision ] 102 Alliance Pipeline Ltd on behalf of Alliance Pipeline Limited Partnership, (November 1998), GH-3-97 online NEB http://www.neb-one.gc.ca [Alliance Decision ] 103 Ibid at 35. 104 Ibid at 21. 72
The NEB recognized that construction of the Alliance Pipeline, in addition to the existing NGTL system, could lead to excess capacity for a while, but that in a competitive market, there is always “potential for some duplication of facilities.” 105 The
NEB stated: “duplication which results in beneficial competition may be considered to be in the public interest.” 106 This is consistent with the principle later expressed by the
NEB in its report entitled: Canadian Pipeline Transportation System: Energy Market
Assessment that some excess pipeline capacity is desirable for the efficient functioning of oil and natural gas commodity markets. 107 Further information regarding the Alliance
Pipeline Decision is provided in chapter 5.
3.3.5 NEB: Open Access to Oil and Gas Transmission Pipelines
The establishment of open access to both oil and natural gas pipelines has been a key objective of the NEB at least since 1987, after the deregulation of oil and natural gas commodity markets. 108 In the TransCanada GH-2-87 Decision , the NEB first described the principle of open access to natural gas pipelines as follows:
The Board, however, considers it essential that all terms and conditions of access to a pipeline be clearly reflected in the tariff in order to ensure that there are no undue service restrictions imposed by pipeline companies involved in the marketing or producing sectors of the natural gas sector. In the Board's view, prospective shippers are entitled to know the conditions of access to a pipeline system in advance of contract negotiations, as this knowledge will allow market participants to make informed supply and
105 Ibid at 39. 106 Ibid at 39. 107 National Energy Board: Canadian Pipeline Transportation System: Energy Market Assessment, (Calgary, April 2014) at 5, online: http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/trnsprttn/2014trnsprttnssssmnt/2014trnsprttnssssmnt-eng.html [National Energy Board 2014 Transportation Report]. 108 See e.g. TransCanada PipeLines Limited: Applications for Facilities and Approval of Toll Methodology and Related Tariff Matters (July 1988) GH-2-87, online: NEB http://www.neb-one.gc.ca [TransCanada Decision GH-2-87 ] 73
market decisions thereby contributing to the efficient functioning of the natural gas market. 109
In numerous decisions, 110 the Board has emphasized the importance of transparency in negotiations with shippers regarding access to capacity, and stated that shippers on all pipelines should be given the terms and conditions of access to a pipeline in advance of the open season, so that the shippers and the pipeline company would be on an “equal footing” 111 in negotiations and that there would be no potential for an abuse of market power.
In the Keystone Base Decision, the NEB quoted the above passage from the
TransCanada GH-2-87 Decision. It stated that it requires open access to both oil and gas pipelines as “an important prerequisite to enable the effective and efficient operation of the market, ” 112 and that open access was particularly important for oil pipeline systems with contracted capacity.113
In the Northern Gateway Report , the Joint Review Panel (JRP) stated that one of the obligations as a common carrier is “to provide service with reasonable terms and conditions and to make these terms and conditions available to all categories of shippers and potential shippers in a clear and orderly way.”114 Accordingly, the JRP directed
109 Ibid at 92. 110 See e.g. TransCanada PipeLines Limited North Bay Junction Application (December 2004), RH-3-2004 at 9, online: NEB
Northern Gateway to prepare a single document containing “all tariff-related matters.” 115
The JRP also underlined the importance of transparency of terms of access to the pipeline, stating:
Fairness requires that prospective shippers know the terms of access to a pipeline in advance of contracting for capacity. This knowledge will allow market participants to make informed supply, market, and transportation decisions, which will contribute to the efficient functioning of the petroleum market. 116
The NEB states on its website that it
“requires that pipeline companies operate according to the principle of ‘open access’. This means that all parties must have access to transportation on a non-discriminatory basis. In addition, tolls for services provided under similar circumstances and conditions with respect to all traffic of the same description, carried over the same route, must be the same for all customers.” 117
3.3.6 The NEB: As Little Regulation as Possible
3.3.6.1 Komie North Decision
In the Komie North Decision , the NEB noted that it “typically favours competitive outcomes.” 118 The NEB stated further that “healthy competition”119 means tolls on pipelines that are “consistent with user-pay, economic efficiency and proper price signals to the market.” 120 The NEB declined to recommend approval 121 of the Komie North
Board and the federal Minister of the Environment to assess the environmental, social and economic effects of the Enbridge Northern Gateway Project: Northern Gateway Report vol I at 8. 115 Ibid . 116 Ibid . 117 National Energy Board, “Who we are and our governance – Our Responsibilities-The Construction and Operation of Pipelines and Power Lines – Traffic, Tolls and Tariffs online: < http://www.neb-one.gc.ca/clf-nsi/rthnb/whwrndrgvrnnc/rrspnsblt-eng.html#s2>. 118 NOVA Gas Transmission Ltd. Facilities Application (January 2013) GH-001-2012, at 45 online: NEB http://www.neb-one.gc.ca [Komie North Decision ]. 119 Ibid . 120 Ibid. 121 Based on amendments to the National Energy Board Act made in 2012, the NEB now makes recommendations to the Minister of Natural Resources as to whether a proposed pipeline should be approved (RSC 1985, c N-7, section 52). 75
Section of an extension to an existing natural gas pipeline proposed by Nova Gas
Transmission Ltd in Northern BC, basically because it would use regulated tolls priced at
“well below costs” 122 to compete with an existing pipeline belonging to a competitor in that area, Westcoast Energy Inc. carrying on business as Spectra Energy Transmission
(Westcoast). 123 The Komie North Decision is discussed further in chapter 5.
The Komie North Decision is noteworthy as it is one of the few decisions where the
NEB declined to approve the construction of facilities. The NEB’s approach in the
Komie North Decision is consistent with the regulatory goal of using as little regulation as possible, and with Kahn’s observation about the danger of regulation “spreading.” 124
If the NEB had approved the Komie North segment, it would have allowed NGTL to use regulatory protection to unfairly compete with an existing pipeline. This would have been a distortion of the market.
The NEB tends not to impose a regulated outcome on parties where the parties have demonstrated that they have negotiated a fair and reasonable arrangement. For example, in the Alliance Pipeline Decision, the NEB approved the proposed pipeline in part because Alliance had reached an agreement with its competitor, NGTL.
3.4 Conclusions
The approach of the NEB in regulating oil and natural gas transmission pipelines is generally consistent with economic theory regarding regulation of natural monopolies as
122 Komie North Decision, supra note 118 at 45. 123 Ibid at 24. 124 Alfred Kahn, supra note 1 vol II at 28. 76
a substitute for competition, and with the concept that regulation should find “the best possible mix of inevitably imperfect regulation and inevitably imperfect competition.” 125
NEB policy statements and decisions show that the NEB supports the operation of competitive markets. Where markets are not functioning properly, the NEB has the power to adjudicate disputes. The NEB can intervene in the public interest 126 and can hear complaints from shippers or customers who argue that tolls are not just and reasonable 127 or are unjustly discriminatory. 128
The NEB recognizes that “Canadians benefit from efficient energy infrastructure and markets.” 129 The NEB has also approved the construction of pipelines that would compete with existing pipelines.
125 Ibid , vol I at xxxvii. 126 NEBA section 12. 127 NEBA sections 62 and 63. 128 NEBA section 67. 129 National Energy Board- Home –Who we are and our governance - Strategic Plan – Goals – online: http://www.neb-one.gc.ca/clf-nsi/rthnb/whwrndrgvrnnc/strtgcpln-eng.html 77
Chapter 4: National Energy Board Practice Regarding Allocation ofof CapacityCapacity inin OilOil Pipelines
4.1 Introduction
NEB regulated oil pipelines are generally described asas commoncommon carriers,carriers, yetyet todaytoday most of them have at least some capacity allocated to firm contracts. This chapter examines the changes to oil transportation markets thatthat havehave ledled thethe NEBNEB toto approveapprove firmfirm capacity. It presents the criteria applied by the NEB to determine whether the allocation of firm capacity is consistent with the common carrierier obligation,obligation, andand itit reviewsreviews relevantrelevant decisions. It also examines other key NEB decisions regarding capacity in oil pipelines.
4.2 The Nature of the “Common Carrier ” Obligation for NEB Regulated Oil Pipelines
This section discusses the nature of the “common carrier” obligation of oil pipelines as set out in section 71(1) of the National Energy Board Act (NEBA) ,1 as described on the
NEB website, by commentators, and in a key NEB decision, the PanCanadian Decision .
Oil pipeline companies are required to transport alll oiloil offeredoffered toto them,them, unlessunless thethe
NEB grants an exemption. Specifically, section 71(1) of the NEBA sta tes:
71. (1) Subject to such exemptions, conditions or regulations as the Board may prescribe, a company operating a pipeline for the transmission of oil shall, according to its powers, without delay and with due care and diligence, receive, transport and deliver all oil offered for transmission by means of its pipeline. 2
While subsection 71(1) does not specifically refer toto commoncommon carriage,carriage, thethe NEBNEB hashas noted that section 71(1) “most closely relates to the common law duties of a common
1 RSC 1985, c N -7. 2 Ibid . 78
carrier pipeline.” 3 Economists Robert L. Mansell and Jeffrey R. Church state that a common carrier pipeline “may not refuse to supply service and …must serve in a nondiscriminatory fashion.” 4 They suggest that a common carrier pipeline is “created by government edict and it, by definition, requires regulation,” 5 and that on a common carrier pipeline, “when transmission capacity is insufficient, available capacity must be rationed on a pro rata basis across all customers, usually on the basis of their nominated shipping volumes.” 6
The NEB has the following definition of “common carrier” in its online dictionary entitled “Pipeline Tolls and Tariffs: A Compendium of Terms:”
A pipeline company that is obligated to ship all product offered to it for transmission, without contract and usually by monthly nominations. In the event that capacity is not available to meet all requests, services are prorated amongst users. 7
This appears to be a historical definition. It does not reflect current NEB practice, which allows shippers and pipeline companies to enter into contracts for firm service provided that certain criteria are met.
In the PanCanadian Decision,8 the NEB discusses at length the nature of the common carriage obligation on owners of oil pipelines. This decision has been cited by
3 Interprovincial Pipe Line Inc. Facilities and Toll Methodology (December 1997), OH-2-97 at 49, online: NEB
numerous NEB decisions. 9 PanCanadian Petroleum Limited (PanCanadian) applied for an order requiring Interprovincial PipeLine Inc. (IPL) to transport natural gas liquids
(NGL) for PanCanadian from Kerrobert, Saskatchewan to markets in eastern Canada and the United States. The NEB held that in this case, the composition of the NGL was such that it fit under the definition of “oil” under section 2 of the NEBA . Thus, the pipeline in question was an oil pipeline subject to the common carriage obligation under section
71(1) of the National Energy Board Act (NEBA) .
Under IPL’s operating procedures, IPL required consent from existing shippers prior to adding another shipper. Amoco was the only existing NGL shipper on IPL, and
Amoco objected to IPL providing service to PanCanadian, because PanCanadian had requested that its NGL be commingled with Amoco’s product. The NEB stated that the common carriage obligations of an oil pipeline are relative, not absolute, obligations that are tempered by a test of reasonableness. The NEB also noted that it has the power to increase or decrease the statutory common carriage obligations of an oil, gas, or commodity pipeline. Specifically, the NEB stated as follows:
[C]ompliance with the common carrier provisions is determined by a test of reasonableness, which is a relative concept. Section 71 of the NEB Act is consistent with [the] common law approach because it permits the Board to tailor the statutory obligations of both oil and gas pipelines to fit any unique circumstances which may exist. Thus, the Board can increase or decrease the statutory common carrier obligations of an oil, gas or commodity pipeline in respect of their carriage of oil, gas or another commodity. 10
9 See e.g. Novagas Clearinghouse Pipelines Ltd (May 1997), OH-2-96, online: NEB
On the concept of reasonableness, the NEB cited Patchett & Sons Ltd v Pacific Great
Eastern Railway Co in which the Supreme Court of Canada held that a railway company’s common carrier obligations to provide reasonable facilities were limited by the concept of reasonable service and that common carriers “cannot be compelled to bankrupt themselves by doing more than what they have embraced within their public profession.” 11
The NEB also noted that no provision in a pipeline company’s tariffs could detract from the common carrier obligations imposed by the NEBA . Section 67 of the NEBA obliges IPL to avoid unjustly discriminatory practices.
The Board held that IPL, in not providing public access for NGL to be transported on its pipeline, had failed to comply with its common carrier obligations, and that IPL’s operating procedure of requiring consent from other shippers before commingling NGL had resulted in unjust discrimination in contravention of s. 67 of the NEBA .
4.3 The Importance of Firm Contracts for Oil Pipelines in the Current Competitive Market
Applications from pipeline companies for approval of firm contracts on new crude oil pipelines tend to be made in the context of a competitive offering of service by the pipeline company. Most new pipelines today will compete for supply (shipper volumes) with an existing pipeline or pipelines. As a result, the pipeline company will typically offer lower tolls to shippers in order to entice them to ship on the new pipeline instead of an incumbent pipeline (which may have cost-of-service tolls). In exchange for the lower tolls and secure access, the pipeline company will require the shipper to sign a firm
11 (1959), SCR 271, 78 CRTC 282. 81
service contract. The firm service contracts in turn assist the pipeline company in
acquiring financing for the pipeline by enabling it to demonstrate that volume risk is
shared with shippers.
New pipeline projects require “significant upfront investment.” 12 Parties 13 have
suggested that without firm commitments from shippers, new pipelines 14 and pipeline expansions 15 would not be built.
The firm service contracts are usually known as Transportation Service Agreements
(TSAs). Under a TSA, the shipper will commit to ship a specified volume of oil, natural
gas, or other products. For oil pipelines, TSAs are typically ten to fifteen years in length.
If the shipper does not, in a given month, ship the volume of product specified in the
TSA, the shipper will still be required to pay the fixed toll component, which is
essentially the reservation charge for the right to transport the oil or gas. For volumes
actually transported, the shipper will also pay the variable toll component, which includes
a charge for fuel used to operate the pump stations of an oil pipeline, or compressor
stations for a natural gas pipeline.
12 In the context of new natural gas pipelines, see e.g. the remarks of the NEB in TransCanada PipeLines Limited, NOVA Gas Transmission Ltd., and Foothills Pipe Lines Ltd., Tolls and Tariff Application, (March 2013), RH-003-2011 at 125 [ 2013 TransCanada Mainline Restructuring Decision], online: NEB
In exchange for making the long term volume commitment, the firm shipper typically pays a lower toll than that paid by uncommitted shippers, and is guaranteed
“unapportioned access.” The guarantee of unapportioned access means that if capacity on the pipeline becomes scarce and subject to apportionment (prorationing), the firm shippers’ capacity will not be cut back; only uncommitted shippers will be prorationed.
In some cases, firm shippers are given renewal rights.
Shippers and industry representatives indicated that the requirement for shippers to sign long term firm service contracts of 15 to 20 years is a major financial commitment on the balance sheet of a shipper. 16 A shipper provided the following hypothetical example: if a shipper signed a firm service contract to ship 50,000 barrels per day (bpd) on an oil export pipeline at a toll of approximately $4.50 per barrel, this would be a commitment to pay approximately $1.6 billion over 20 years. It may be difficult or impossible for a junior producer to make this size of financial commitment.
Typically, oil producers are required to sign firm service contracts for a specific volume a long time before the producers know what their own requirements for additional capacity will be, and before final financial information about construction costs and tolls on the proposed pipeline is available. 17 One producer gave the example of having to sign a firm service contract for additional capacity, in order to ensure that
16 This was a common sentiment expressed by shippers and by other industry representatives. As noted above, individuals interviewed requested that the names of their companies or organizations their own names not be identified in this paper. 17 For example, this was the case for the firm contracts for the Trans Mountain Expansion : Trans Mountain Pipeline ULC (May 2013), RH-001-2012 at 18, online: NEB
capacity would be available, more than a year before the producer would be aware of the volume of production from a new production asset, such as a new oil sands mine.
The Express Decision, in 1997, is the first NEB decision approving the allocation of capacity to firm contracts on a new pipeline. 18 The Express Pipeline would compete for supply from the WCSB with the existing Interprovincial Pipeline. Both pipelines started at Hardisty, Alberta. The Express Pipeline would transport oil to Casper, Wyoming, to access new markets in the US, while the existing Interprovincial Pipeline ran to Chicago,
Illinois. The NEB ruled that the firm contracts negotiated by Express were not in contravention of its common carrier obligations, and described the role played by firm or contract shippers as follows:
In regard to the matter of discrimination under the NEBA , the Board is of the view that lower tolls, renewal rights, and preferred access for contract shippers are justified by the support those shippers provide for the financing of the pipeline and their sharing with Express of the risks associated with the pipeline. 19
4.4 NEB Criteria for Firm Capacity to be Consistent with the Common Carriage Obligation
Since 1997, the NEB has held, in a number of decisions, that allocation of capacity to firm service is not inconsistent with the common carriage obligation of an oil pipeline pursuant to section 71(1) of the NEBA , provided that two criteria are met. The two criteria are:
18 Express Decision , supra note 14 . 19 Express Decision, supra note 14 at 23. 84
• The pipeline company must have held a fair and transparent “open season”
whereby any interested shipper could commit to the Firm Service offered; 20
and
• A “reasonable” percentage of capacity must be reserved for uncommitted
volumes or “spot” shipments.21
The determination of what is a reasonable percentage of uncommitted capacity is a matter for the NEB’s judgment “based on the specific circumstances that may exist.” 22
The NEB has also considered whether the pipeline company is able to “readily expand” its facilities. 23 In cases where these criteria are satisfied, the NEB has held that the oil pipeline company is acting in a manner consistent with its common carrier obligations. 24
The sections below contrast the two criteria established in relevant NEB decisions to the relevant criteria set out in the NEB Filing Manual. The sections below also review decisions in which the NEB has determined that a reasonable percentage of capacity was reserved for uncommitted volumes, and decisions in which the NEB substituted its own views for the views of the pipeline company regarding a reasonable percentage.
20 See e.g.: TransCanada Keystone Pipeline GP Ltd (September 2007), OH-1-2007 at 23, online: NEB http://www.neb-one.gc.ca [Keystone Base Decision]; Express Decision, supra note 14, Enbridge Southern Lights Decision , (February 1, 2008), OH-3-2007, online: NEB
4.4.1 Section 71(1) Requirements in the NEB Filing Manual
The NEB Filing Manual 25 contains provisions regarding applications pursuant to subsection 71(1) of the NEBA . None of the NEB decisions reviewed refer to it. In addition, the Filing Manual does not reference the second of the two key criteria set out in the relevant NEB decisions for what are essentially exemptions from the requirements of subsection 71(1): that a ‘reasonable’ percentage of capacity must be reserved for uncommitted or ‘spot’ shipments, or, alternatively, that the facilities must be readily expandable.
For applications for exemptions from subsection 71(1), the Filing Manual requires that the applicant provide evidence that:
o “an open season was held offering all of the capacity to be contracted to anyone interested in shipping; and
o Allowing the exemption is in the public interest.” 26
The Filing Manual also states that “[t]he open season must be conducted in a manner which provides all interested shippers the same opportunity to participate and allows adequate time for their consideration of the issues.” 27 The Filing Manual indicates that the application should include detailed information regarding the open season as follows:
A subsection 71(1) application should include copies of all notices of the open season, the timing and method of providing notice, all correspondence between the pipeline and parties interested in contracting with the pipeline and any expressions of interested (sic) in or concerns regarding the application. The applicant should also provide an indication
25 See Filing Manual – Guide S – Access on a Pipeline online:
of the results of the open season and a sample or standard form contract to indicate the arrangements contemplated. 28
It would be prudent for an applicant to comply with these requirements in addition to reserving a reasonable percentage of pipeline capacity for uncommitted shippers.
4.4.2 NEB Decisions regarding Firm Service in Oil Pipelines
Most of the NEB decisions approving the allocation of capacity on oil pipelines to firm service relate to applications for new pipelines with competitive tolls that will compete with existing pipelines. 29 The NEB has also approved the allocation of capacity
to firm contracts on an existing pipeline, 30 on an application for expansion of a pipeline, 31 and on a line reversal. 32
The approach of the NEB is to encourage competition in pipelines, by encouraging
the adoption of competitive tolls 33 and the construction or expansion 34 of pipelines that will open up new markets for Canadian producers. This is consistent with the NEB’s support of “competitive markets” 35 and the advantages of competition provided in chapter 3.
28 Ibid. 29 See e.g. Keystone Base Decision, supra note 20; Express Decision, supra note 14 . 30 See e.g. Trans Mountain Westridge Decision , supra note 15. 31 Trans Mountain Expansion Decision, supra note 24; Keystone Pipeline GP Ltd. Application for Approval of a Variance Pursuant to Section 21 of the Act to the Facilities Approved by the OH-1-2007 Proceeding (1 July 1, 2008) OH-1-2008, online: NEB
For example, the proponent in the Keystone Base application noted that it would compete with other pipelines. 36 The NEB recognized in its decision that “the market for oil transportation has evolved and will continue to evolve to embrace commercial arrangements better suited to meet the needs of market participants.” 37 As a result, “under certain conditions and circumstances”, 38 it is acceptable for common carriage oil pipelines to have firm contractual commitments to capacity. In most cases, the majority of capacity is subject to firm transportation, with the residual amount of capacity being available for uncommitted volumes.
4.4.3 Requirements for Open Seasons
The requirement for a fair and transparent open season is a part of providing open access to transportation capacity. An open season must be done in a “fair and transparent manner” 39 and all potential shippers must have a “fair and equal opportunity to participate.” 40 In its Express Decision 41 , the NEB made the point that all shippers should be made aware that if they do not enter into the firm service agreements, they will not get the same services as those entering into the firm service agreements.
The phrase “open season” does not appear in the NEBA .
Sometimes a pipeline company will have several rounds or stages of open seasons.
The pipeline company may learn through a first stage of an open season that there is more
36 Keystone Base Decision, supra note 20 at 16 37 Ibid at 24. 38 Ibid at 24. 39 See e.g. Enbridge Bakken Decision, supra note 21 at 22. 40 See e.g. Report of the Joint Review Panel for the Enbridge Northern Gateway Project (2013), OH-4- 2011, online: http://gatewaypanel.review-examen.gc.ca/clf-nsi/dcmnt/rcmndtnsrprt/rcmndtnsrprt-eng.html. [Northern Gateway Report ]; Keystone Base Decision, supra note 20 at 23; Enbridge Southern Lights Decision , supra note 23 at 56. 41 Supra note 14, at 27. 88
demand for capacity than originally anticipated, or that shippers would prefer different terms and conditions of service than those offered. As a result, the pipeline company may offer subsequent stages to the open season. For example, the NEB has approved a single stage open season in the context of a line reversal, 42 a two stage open season in the context of a proposed pipeline, 43 and a three stage open season in the context of an application for expansion of capacity on an existing pipeline. 44
A pipeline company representative interviewed 45 suggested it would not be helpful for the NEB to establish specific rules regarding open seasons, because every project is different, and what is required will vary with the size and nature of the projects. A major shipper indicated that pipeline companies typically test the market informally by meeting with shippers, explaining the project and its rationale and economics, and giving the shippers some time to consider the project. By the time the formal open season is announced, the pipeline company will already have a good idea of which shippers are considering signing contracts and the approximate volumes to which shippers will commit.
In its Trans Mountain Expansion Decision the NEB held that the Open Season process undertaken by the pipeline company was “fair,” 46 “transparent,” 47 and
“appropriate” 48 despite some unique aspects to the process which will be discussed
42 See e.g. Enbridge Bakken Decision, supra note 21. 43 See e.g. Enbridge Southern Lights Decision., supra note 23 44 See e.g. 2013 Trans Mountain Expansion Decision, supra note 24. 45 As described in chapter 1, parties interviewed requested that the names of their companies and their own names not be identified in this thesis. 46 2013 Trans Mountain Expansion Decision, supra note 24 at 13. 47 Ibid at 1. 48 Ibid at 13. 89
below. The NEB provided some guidance as to elements of an acceptable open season in its remarks in this decision:
In this case, the Board is satisfied that all parties who were interested in contracting volumes on the Expanded System had an opportunity to do so during three binding rounds of Open Season. In the Board’s view, participants in the Open Season were sophisticated commercial parties and they were provided with sufficient information in a timely manner. 49
4.4.4 What Constitutes a Reasonable Percentage Reserved for Uncommitted Volumes?
As noted above, the NEB has held that in order to ensure that an oil pipeline company is compliant with its common carrier obligations, a “reasonable” percentage of capacity must be reserved for uncommitted shippers, and that the determination of what is reasonable is a matter for the NEB’s judgment based on the specific circumstances.
This approach is consistent with the broad discretion of the NEB regarding the common carriage obligation.
In all except two of the NEB decisions reviewed, the NEB has approved the percentage of capacity reserved for uncommitted shippers proposed by the pipeline company. Percentages approved range from 6% to 21%. In considering what constitutes a reasonable percentage of capacity, the NEB considers whether the capacity of the pipeline is readily expandable (for example, by the addition of pump stations). 50
In the Vantage Pipeline Decision, 51 Vantage Pipeline Canada Inc. (Vantage) proposed to construct a pipeline to transport liquid ethane from North Dakota, United
States, through Saskatchewan, to interconnect with the Alberta Ethane Gathering System
49 Ibid at 12. 50 E.g. 2007 Keystone Base Decision, supra note 20 . 51 Vantage Pipeline Canada ULC Reasons for Decision, (1 January 2012), OH-3-2011, online: NEB
near Empress, Alberta. The NEB considered this pipeline to be an oil pipeline subject to section 71(1) of the NEBA . Vantage reserved 10% of the capacity of the pipeline for uncommitted shippers, and the NEB found that this was reasonable, in part because
Vantage had indicated that the capacity of the pipeline could be expanded if two additional pump stations were added.
In the Enbridge Bakken Decision ,52 21% of the Bakken Pipeline, a proposed crude oil pipeline, was reserved for uncommitted shippers, and the NEB found that this was reasonable, in part because Enbridge had indicated that the capacity could be expanded should additional space was required by shippers.
In the Keystone Base Decision, at the time of the application, 22% of the capacity of the proposed pipeline was available for uncommitted shippers. 53 However, the pipeline company appears to have anticipated future demands for firm service, because the pipeline company only committed to reserve 6% of the nominal capacity of the pipeline to be offered as uncommitted capacity in the future. Keystone stated that if additional shipper demand were to materialize, it may offer a portion of the uncommitted capacity through a future open season. 54 Despite the possibility that only 6% of capacity may be available for uncommitted shippers, the NEB approved this arrangement, presumably in part because the capacity of the pipeline was readily expandable. A major factor in the
NEB’s approval of the capacity allocation in the Keystone Pipeline was that the shippers had voluntarily signed long-term firm transportation contracts, indicating that the market was working.
52 Enbridge Bakken Decision, supra note 21 53 Keystone Base Decision, supra note 20 54 Ibid at 22. 91
In Express, 15% of the capacity of a proposed crude oil transmission pipeline was reserved for uncommitted shippers. 55 The NEB did not discuss the basis on which the
NEB found this to be reasonable.
In its Trans Mountain Expansion Decision , the NEB approved Trans Mountain’s proposal to reserve 20% of capacity for uncommitted shippers. 56 The Board noted that the proposed allocation was not opposed by any party to the proceeding, and that this allocation “should provide shippers with adequate capacity on a monthly basis while allowing Trans Mountain to secure sufficient long-term volumes to support the investment required for the Expansion.” 57
4.4.5 Does the NEB ever decline to approve the amount of capacity reserved for firm shippers?
While the range in percentages of capacity reserved for uncommitted shippers varies greatly, it is clear based on the 1997 Interprovincial Pipe Line Decision 58 and the 2010
Keystone XL Decision 59 that the NEB will, in some cases, exercise its discretion to require pipeline companies to change their tariffs to allocate a reasonable proportion of capacity to uncommitted shippers. This approach is also seen in the draft conditions proposed by the Joint Review Panel in the Northern Gateway Report. 60
The 1997 Interprovincial Pipe Line Decision deals with an application for the approval of facilities and a tolling methodology in order to reverse the direction of flow
55 Express Decision , s upra note 14 . 56 Trans Mountain Expansion Decision, supra note 24 at 29. 57 Ibid at 32. 58 1997 Interprovincial Pipe Line Decision, supra note 3. 59 Keystone Pipeline GP Ltd . (March 1, 2010), OH-1-2009 at 30, online: NEB http://www.neb-one.gc.ca [Keystone XL Decision]. 60 Report of the Joint Review Panel for the Enbridge Northern Gateway Project (2013), OH-4-2011, online: http://gatewaypanel.review-examen.gc.ca/clf-nsi/dcmnt/rcmndtnsrprt/rcmndtnsrprt-eng.html. [ Northern Gateway Report ]. 92
of crude oil in Line 9 between Montreal, Quebec and Sarnia, Ontario. 61 Various refiners had signed firm contracts for 100% of available capacity. The NEB rejected the arrangement proposed by IPL, largely, it seems, because there were no alternatives other than IPL available for shippers. The NEB held that in order for IPL to meet its common carrier obligations, IPL would be required to keep available for nominations on a monthly basis, 20 per cent of the capacity on the reversed Line 9. The NEB gave two reasons for its decision on this point. First, the NEB noted that although IPL had conducted an open season, “there was considerable uncertainty as to whether the Board would approve the reversal, what the tolls would be, the costs to be underpinned by the [firm service contracts]…, timing of applications to the Board and reversal of the line.” 62 Second, the
Board noted that Line 9 represented “the only direct connection to bring offshore crude to the Ontario market.” 63 The line had “low levels of contamination, and it was strongly preferred by the Ontario refiners.” 64 The NEB was not convinced by IPL’s assertion that expansion facilities could be added, noting that IPL had made no attempt to provide such service.
4.4.5.1 The Three Keystone Decisions
The Canadian portions of the Keystone pipeline system were approved in three separate
NEB proceedings as follows:
(1) Keystone Base, from Hardisty AB to Haskett, Manitoba, approved by the
NEB in proceeding OH-1-2007 (the Keystone Base Decision )65
61 Information regarding more recent applications to reverse Line 9 is provided in chapter 2. 62 1997 Interprovincial Pipe Line Decision, supra note 33 at 53. 63 Ibid. 64 Ibid. 65 Keystone Base Decision, supra note 20 93
(2) The Cushing Expansion, which added capacity to Base Keystone, approved by
the NEB in proceeding OH-1-2008 (the Keystone Cushing Expansion
Decision )66
(3) Keystone XL, from Hardisty, Alberta to Monchy, Saskatchewan, approved by
the NEB in a decision in 2010 following proceeding OH-1-2009, 67 (the
Keystone XL Decision ) which will be discussed in more detail below.
In the Base Keystone and Cushing Expansion applications, Keystone proposed to reserve 6% of capacity for uncommitted volumes, and in both of these decisions, the
NEB approved this percentage.
In the Keystone XL proceeding, Keystone again proposed to reserve 6% of capacity for uncommitted volumes. During the proceeding, the NEB invited comments from the parties on a proposal to require Keystone to reserve 20% of the total capacity of the combined Base Keystone and Keystone XL pipelines for uncommitted volumes.
Keystone responded that a reservation of 20% for uncommitted volumes was unnecessary as there would be sufficient pipeline infrastructure into the US Midwest. Keystone also stated that there was a risk that the Keystone pipelines would be underutilized, and that reserving 20% of capacity for uncommitted volumes would give Keystone less flexibility in managing the underutilization risk. Keystone proposed instead that “a ten per cent reservation could be accommodated.” 68
66 Keystone Pipeline GP Ltd. Application for Approval of a Variance to the Facilities Approved by the OH- 1-2007 Proceeding (1 July 1, 2008) OH-1-2008, online: NEB
The NEB required that 12% of capacity should be reserved for uncommitted volumes. The NEB stated that the amount of capacity to be set aside for uncommitted volumes “is a matter of judgment and based on the circumstances of any specific case.” 69
The NEB noted that the volumes identified by Keystone to be transported on the
Keystone XL Pipeline had originally been used to justify the Cushing expansion, which had been approved by the NEB in Decision OH-1-2008. The NEB found, based on
Keystone’s evidence, that having uncommitted capacity would allow Canadian producers
“added flexibility to respond to market conditions and create opportunities to develop a broader range of U.S. customers and market opportunities.” 70 As a result, the NEB determined that in this case, based on the Canadian public interest, the NEB would set the level of uncommitted capacity “at the higher end of the range.” 71 Basically, the NEB overruled the proponent’s proposal for uncommitted volumes even though, in this case, no party other than Enbridge, TransCanada’s competitor, had challenged the proposed allocation of 6% of capacity to uncommitted shippers. 72
4.4.5.2 Northern Gateway Report
The Northern Gateway application is unusual in that it is the only current major oil pipeline application in which the applicant did not require shippers to sign firm contracts prior to the filing of the application. 73 Instead, the Funding Participants (shippers) had signed Funding Support Agreements by which they contributed over $10 million each
69 Ibid at 50. 70 Ibid. 71 Ibid. 72 Ibid at 45. 73 Northern Gateway Report, supra note 40, vol II at 348. 95
towards the regulatory costs of preparing and filing the application with the NEB. 74 For each $10 million unit of financial support, a Funding Participant received certain options, including an option to secure up to 50,000 bpd of capacity on the oil pipeline at a lower toll. Shippers were reluctant to sign firm contracts in advance of the regulatory filing due to the uncertainty of obtaining a timely approval for a greenfield pipeline project in northern BC. Part of that concern stemmed from anticipated opposition to the project from First Nations. Firm contracts will be signed well in advance of construction, should the project be approved.
In its application, Northern Gateway proposed to reserve 5% of the term shippers’ committed volume for uncommitted shipments. 75 The Joint Review Panel, in a list of draft conditions for the pipeline, invited comments from parties on a possible requirement that 10% of capacity be reserved for uncommitted volumes. Northern Gateway objected to the 10% proposal, noting that increasing the capacity for uncommitted volumes would be unfair to the Funding Participants, who, in exchange for assuming part of the risk of the pipeline application, collectively had options to pay discounted tolls on 95% of the capacity of the pipeline. The Joint Review Panel noted that the proposed pipeline
in providing access to Pacific Basin markets, would be a significant and strategic addition to the western Canadian Pipeline system overall. In the Panel’s view, it would provide producers with valuable flexibility in their transportation options and allow for the development of a significantly broader range of customers. From a public interest perspective, these factors would, in the Panel’s view, suggest that the uncommitted reserve capacity proposed by Northern Gateway be increased.76
74 Ibid . 75 Northern Gateway proposed to reserve 25,000 bpd of capacity for uncommitted volumes, which is equal to 5% of the term shippers’ committed volume, or approximately 4.8% of the total capacity of the proposed oil pipeline of 525,000 bpd : ibid , vol II at 3 & 349. 76 Ibid, vol II at 352. 96
Despite this view, the Joint Review Panel ultimately removed the 10% requirement from the conditions, likely because the Northern Gateway application discussed here is a facility application, and so conditions on tolling are inappropriate. The JRP concluded that it
continues to be of the view that meaningful access for uncommitted shippers to a system of the scale and strategic importance of Northern Gateway would entail reserve capacity for both the condensate import and the oil export pipelines of not less than 10 percent. 77
On June 17, 2014, the Governor in Council approved the Northern Gateway Project, subject to the 209 conditions set out by the Joint Review Panel .78 It is anticipated that
Northern Gateway will file a tolling application with the NEB which would include an application for approval of the percentage of capacity to be reserved for uncommitted volumes. The above remarks appear to be a strong hint to Northern Gateway that it will have to build its justification for the 5% reservation or risk the imposition of a 10% reservation. If the NEB were to approve the 5% reservation it would be the lowest percentage ever approved by the NEB.
4.4.6 The Impact of Uncertainty regarding the Percentage to be Reserved for Uncommitted Volumes
A pipeline company representative explained the challenges resulting from the lack of predictability regarding the NEB’s findings as to what percentage of capacity in oil pipelines must be reserved for spot shippers. Prior to filing a tolling application with the
77 Ibid , vol II at 352. 78 National Energy Board, Decision Statement Issued under Section 54 of the Canadian Environmental Assessment Act , 2012 and Paragraph 104(40(b) of the Jobs, Growth and Long-term Prosperity Act to Northern Gateway Pipelines Inc. on behalf of Northern Gateway Pipelines Limited Partnership for the Enbridge Northern Gateway Project (17 June 2014) , online: http://gatewaypanel.review-examen.gc.ca/clf- nsi/hm-eng.html. 97
NEB, the pipeline company negotiates firm service contracts with shippers based on an assumption the company makes about how much capacity will be available for firm shippers. If the NEB decision requires that a greater percentage of capacity be reserved for spot shippers, the pipeline company may have to renegotiate contracts with firm shippers based on a smaller percentage of the volume being available for firm service.
4.5 Do Oil Pipeline Companies Today have Market Power?
4.5.1 The Industry Perspective
As noted in Chapter 1, representatives of major Canadian oil shippers were interviewed. Several themes emerged from these discussions. Shippers noted that it was important to shippers that major pipeline companies such as Kinder Morgan and
Enbridge construct oil pipelines, as these companies have the experience and the ability to obtain the financing necessary to do so. 79 Shippers indicated that additional oil pipeline capacity is required due to the differential between the price for crude oil sold in
Alberta and the world price for oil as described in chapter 1. As a result, shippers indicated that they felt obligated to support all of the major proposed export pipeline projects -- the Trans Mountain Expansion, Northern Gateway, Keystone XL, and Energy
East -- because of the uncertainty as to whether any or all of these projects will receive regulatory approval.
One oil shipper opined that pipelines still hold a natural monopoly. Shippers noted that the general absence of objections from shippers in tolling applications by pipeline companies to the National Energy Board ought not to be taken as active support from the
79 As noted in chapter 1, shippers interviewed requested that the names of their companies and their own names not be identified in this paper. 98
shippers for the tolls proposed by the pipeline company. It indicated, rather, that shippers had no choice but to go along with whatever tolls the pipeline company proposed, due to the high demand for capacity in oil export pipelines.
4.5.2 Two Trans Mountain Decisions – the 2011 Trans Mountain Capacity Reallocation Decision and the 2013 Trans Mountain Expansion Decision
In most of the NEB proceedings, shippers do not tend to describe the pipeline on which they ship their products as a “monopoly.” They do not tend to criticize the approach of the pipeline company in negotiations or in its application. Typically in NEB proceedings, shippers on a pipeline system will either intervene in support of the shipper’s application, or remain silent. However, shippers on the Trans Mountain pipeline have both criticized the approach taken by Trans Mountain and referred to Trans
Mountain as a “monopoly” in two recent Trans Mountain Decisions – the Trans
Mountain Westridge Decision and the Trans Mountain Expansion Decision . Trans
Mountain is unusual in that it is still the only oil pipeline to the west coast of Canada and that it “serves a distinct market.”80 As described in chapter 2, other oil pipelines now face competition in their destination markets.
4.5.2.1 The Trans Mountain Westridge Decision (RH-2-2011) 81
The Trans Mountain Westridge Decision is important for several reasons. First, it is the only case in which the NEB approved the adoption of firm contracts on an existing crude oil pipeline as opposed to applications for new pipelines or expansion of capacity on existing pipelines. In all other cases reviewed, NEB approval of the firm contracts was predicated on the need for firm shippers to underpin the capital costs of the
80 Trans Mountain Westridge Decision, supra note 15 at 17. 81 Trans Mountain Westridge Decision , supra , note 15. 99
capacity expansion or new facilities. Second, in this case, an approval was granted despite the strenuous objections of shippers on the pipeline who stated that the approval sought was contrary to the principle of common carriage.
The Trans Mountain Pipeline runs from Edmonton to Burnaby, BC (near
Vancouver). It had been regularly operating under apportionment since 2005. 82 Shippers on the Trans Mountain pipeline system are divided into Land Shippers and Dock
Shippers. The Land Shippers ship crude oil and refined petroleum products to destinations in BC. They also ship crude oil to four Washington State refineries through a US affiliate at Sumas on the BC/Washington State border. 83 The Dock Shippers ship crude oil all the way to the Westridge Dock at Burnaby, BC, on the west coast, where it is loaded into ocean tankers and barges and shipped to overseas markets, primarily in Asia.
The Dock Shippers need to be able to ship volumes in “vessel-sized” 84 increments equal to the capacity of the ocean tankers; they need to coordinate their shipments with marine transportation schedules, and their shipments need to take place on an “all-or-nothing basis”. 85 Thus, it was not economically efficient for the Dock Shippers to ship volumes other than in increments equal to the capacity of the ocean tankers. Also, without firm service, it was difficult to develop new markets in Asia, as customers sought a guaranteed source of supply.
In order to accommodate the Dock Shippers’ needs, Trans Mountain proposed to reallocate a portion of capacity from Land Shippers to Dock Shippers, and to implement firm service for 68% of the Dock capacity. Firm Shippers would sign 10 year contracts
82 Ibid at 1. 83 Ibid . 84 Ibid at 30. 85 Ibid at 30. 100
and pay a premium for the privilege of receiving firm service, known as the Firm Service
Fee. 86 The Firm Service Fee was established through the Open Season process. Trans
Mountain proposed to use the Firm Service Fee “to advance incremental capital projects and conduct preliminary activities in support of a potential expansion of the [Trans
Mountain] Pipeline.” 87 The payment of a higher toll for firm service is unusual in the
Canadian context; on all other oil pipelines with firm service, firm shippers pay reduced tolls in exchange for making the long term commitment to ship specified volumes. Trans
Mountain held an open season in which any party could subscribe to firm service to the
Westridge Dock. Overall, 18% of the pipeline would be subject to firm commitments, and 82% would be available for uncommitted volumes.88
Several shippers on the Trans Mountain system objected to Trans Mountain’s application, arguing that it was inconsistent with Trans Mountain’s common carrier obligations. Imperial argued that converting existing common carriage capacity to contract was inappropriate given the shortage in capacity and that “many shippers [had] based their investments and operations on the fundamental premise that the pipeline is a common carrier pipeline with no contract carriage.”89 Chevron argued that Trans
Mountain was a monopoly as it is the only crude oil pipeline to the west coast of Canada and it “serves a distinct market.” 90
Despite these objections, the NEB approved Trans Mountain’s application. It noted that Trans Mountain now faced competition from current and future pipelines
86 Ibid at 29. 87 Ibid at 38. 88 Ibid at 20. 89 Ibid at 23. 90 Ibid at 17. 101
serving the WCSB, including those on which the NEB had previously approved some contracted capacity. It stated that the approval of firm service would help Trans
Mountain to “retain volumes and lower its long-term volume risk.” 91 It recognized the importance of the development of new offshore markets for Canadian producers and noted that “uncertainty in acquiring pipeline capacity to the Westridge Dock could be an obstacle” 92 to developing these offshore markets. The NEB noted that it has a “wide discretion” 93 in determining compliance with subsection 71(1) of the NEBA and that it is able to “tailor the statutory obligations to fit any unique circumstances which may exist.” 94 As a result, the remaining uncommitted capacity was sufficient for Trans
Mountain to meet its common carrier obligations.
The NEB noted that “shippers do not have any acquired rights to capacity on the
Pipeline by virtue of past use.” 95 Therefore, it was acceptable for Trans Mountain to convert existing capacity to firm service.
In approving the Firm Service Fee, the NEB held that it complied with the requirements of section 62 of the NEBA that tolls must be just and reasonable 96 and section 67 of the NEBA that tolls not be unjustly discriminatory. 97 The NEB’s reasoning was based largely on the fact that the Firm Service Fee was established “following an
91 Ibid at 20. 92 Ibid at 20. 93 Ibid at 29. 94 Ibid at 29. 95 Ibid at 30. 96 RSC 1985, c-n-7, s. 62 states: All tolls shall be just and reasonable, and shall always, under substantially similar circumstances and conditions with respect to all traffic of the same description carried over the same route, be charged equally to all persons at the same rate. 97 RSC 1985, c-n-7, s. 67 states: A company shall not make any unjust discrimination in tolls, service or facilities against any person or locality. 102
open, transparent and fair Open Season process where all potentially interested commercial parties were invited to participate.” 98
4.5.2.2 2013 Trans Mountain Expansion Decision (RH-001-2012)
In this application, Trans Mountain Pipeline ULC (Trans Mountain) applied for approval of the toll methodology and the terms and conditions that would apply to a proposed expansion to the Trans Mountain pipeline. After the expansion, the Trans
Mountain pipeline system would have a capacity of approximately 890,000 bpd. 99
In 2011, Trans Mountain had preliminary discussions with existing shippers and other parties regarding the proposed capacity increase. Based on initial interest, Trans
Mountain held Round 1 of the Open Season. 100 Trans Mountain required shippers to sign confidentiality agreements, which meant that the shippers could not discuss the negotiations with each other. Trans Mountain conducted its negotiations one-on-one with individual shippers.
In response to comments made by shippers, Trans Mountain made changes to the documents to be signed by shippers – the Facilities Support Agreement (FSA) 101 and the
Transportation Service Agreement (TSA) as well as to the Rules and Regulations of the
98 Trans Mountain Westridge Decision , supra note 15 at 36. 99 Trans Mountain filed its facilities application for the expansion with the NEB on 16 December 2013. The NEB will hold an oral hearing in January 2015 on the facilities application and will submit a report to the federal cabinet recommending whether or not the project should proceed by no later than 2 July 2015: NEB: National Energy Board to Hold Oral Public Hearing for Proposed Trans Mountain Pipeline Expansion Project: News Release (2 April 2014) online:
Tariff.102 As a result of Rounds 1 and 2 of the Open Season, Trans Mountain received qualifying commitments for firm service from nine shippers.
After Round 2 of the Open Season, Suncor Energy Products Partnership (SEPP) filed a complaint with the NEB regarding a requirement in section 2.2 of the FSA for shippers to provide support and cooperation, and not oppose Trans Mountain’s efforts to obtain regulatory approvals. In a preliminary ruling, the NEB struck down section 2.2.103 In its ruling, the NEB stated that shippers should be able to raise concerns about tolls and tariffs, and noted that “[t]he ability of prospective shippers to raise valid concerns is a key part to the Board’s adjudicative process” 104 as this information helps the Board to make informed decisions on applications. As a result, Trans Mountain held a third round of the open season. In response, four additional shippers – Suncor Energy Marketing Inc.,
SEPP, Total, and Canadian Natural Resources Ltd -- made firm commitments to ship specified volumes on the proposed expansion. This suggests that section 2.2 may have prevented these shippers from committing to earlier volumes on the pipeline. As a result of the additional interest expressed, Trans Mountain added 200,000 bpd of capacity to the project, and filed a revised tolling application, making the total capacity of the pipeline
890,000 bpd.
In the NEB proceeding on the merits of the application, both Suncor and Total E&P
Canada Ltd (Total), two shippers on the Trans Mountain system, argued, essentially, that given the lack of alternatives in transportation from the WCSB to the west coast of
Canada and therefore in access to Asian markets, shippers were forced to accept unfair
102 Ibid , (Application at paragraph 19). 103 Trans Mountain Expansion Decision, supra note 24, National Energy Board Letter Decision on Section 2.2 Application, 17 August, 2012. 104 Ibid at 1. 104
negotiating conditions and unjustly high tolls. Suncor explained that crude oil prices in
Asian markets are significantly higher than in the interior of North America, 105 that there had been high levels of apportionment on the Trans Mountain Pipeline System, and that
WCSB producers were facing price discounts in the range of $20-$30 per barrel because of the lack of access to Asian markets. 106 Suncor argued that these factors meant that
Trans Mountain could exert significant market power during open season negotiations.
Other possible alternatives were not economically feasible given that shippers could receive substantially higher netbacks shipping on the Trans Mountain system than with other alternatives. Because Trans Mountain had control over the decision whether or not to proceed with the expansion, it was “understandable” that Western Canadian oil producers would decide to pay the excessive tolls proposed by Trans Mountain to avoid or minimize “the risk of continued discounts resulting from insufficient transportation capacity to the highest value markets for western Canadian crude oil.” 107
Total also objected to the application despite having signed a commitment to firm service. Total argued that the open season process was neither fair nor transparent, that the NEB had insufficient information before it to determine whether the rates proposed by Trans Mountain were just and reasonable, and that the commercial basis for the project should be improved, among other things. Total argued that the discounted oil price differential and the limited number of alternatives for transporting oil had “forced” shippers to agree to high fees and tariffs and “service on inappropriate terms rather than
105 Trans Mountain Expansion Decision , supra note 24 at 16. 106 Trans Mountain Expansion Decision, supra note 24 (Evidence of Suncor Energy Marketing Inc. (SEMI) and Suncor Energy Products Partnership (SEPP) at 12). 107 Trans Mountain Expansion Decision, supra note 24 (Evidence of Suncor Energy Marketing Inc. (SEMI) and Suncor Energy Products Partnership (SEPP) in Trans Mountain Expansion Proceeding at 12). 105
risk losing the opportunity.” 108 Possibly out of concern that Trans Mountain would decide not to proceed with the proposed capacity expansion, Total did not request a completely new negotiation process, but simply an order that negotiations be extended to ensure that the negotiated settlement would be consistent with the Board’s Guidelines for
Negotiated Settlements of Tolls, Traffic and Tariffs.
George R. Schink, an economist testifying as an expert witness for Trans Mountain, argued that Trans Mountain faced competition from transportation of crude oil by rail and from both existing and proposed pipelines. He stated that Trans Mountain faced origin market (supply) competition from the Enbridge mainline and the Express/Platte pipeline system as well as Keystone Base. 109 He also stated that Trans Mountain faced future competition from the proposed Enbridge Northern Gateway and Keystone XL pipelines, the proposed Energy East project, and potential additional rail crude oil takeaway capacity.
As noted above, the NEB approved Trans Mountain’s proposed allocation of capacity. 110 The NEB agreed with Trans Mountain that shippers were using rail and alternative pipelines as alternatives to Trans Mountain. 111 The NEB also stated that both
Keystone XL and Northern Gateway were already “sufficiently developed as potential alternatives to the Trans Mountain pipeline to act as limiting factors on the market power of Trans Mountain.” 112
108 Trans Mountain Expansion Decision, supra note 24 (Evidence of Total at Transcript, 7904) 109 Ibid , Direct Evidence of George R. Schink, Table IV.1: Current, Expected, and Potential Competitors in the Western Canada Crude Oil Origin Market) (June 29, 2012) at 55). 110 Ibid at 29. 111 Trans Mountain Expansion Decision , supra note 24 at 18. 112 Ibid. 106
The NEB was not concerned about the fact that Trans Mountain had met with shippers one by one and had prevented shippers from discussing the negotiations among themselves. The NEB accepted Trans Mountain’s evidence that confidentiality agreements are common in the industry and that “they do not taint the fairness of the negotiated process if the Open Season process is fair and transparent.” 113
4.5.2.3 Industry Perspective on the Trans Mountain Expansion Decision
One pipeline company I interviewed noted that in negotiations with shippers, shippers alternated between wanting to have the strength in negotiations afforded by cooperation with other shippers, and wanting to keep confidential their commercial information such as monthly volumes nominated and maximum capacity of receipt points (such as refineries) for competitive reasons. In the majority of NEB oil pipeline cases reviewed, the pipeline company negotiated with shippers as a group, and did not require shippers to sign agreements preventing them from talking to each other about negotiations.
One shipper interviewed surmised that if the NEB had struck down the tolls of Trans
Mountain as not being just and reasonable, or required Trans Mountain to reopen negotiations with shippers, it ran the risk of having Trans Mountain decide not to proceed with the expansion because it would not provide an adequate rate of return for its investors. Given the importance of the expansion to the Canadian economy, the NEB appears to have decided that it was appropriate to interfere as little as possible with the commercial decisions made by Trans Mountain and by shippers signing FSAs.
113 Ibid at 13. 107
4.5.3 Lower Firm Service Tolls for Committed Shippers are not Unjust Discrimination
Pursuant to section 67 of the NEBA , tolls and service must not be unjustly discriminatory. In the PanCanadian Decisi on, the NEB stated that the question of what constituted “unjust discrimination” was a matter for the “considered judgment” of the
Board. 114 Section 63 of the NEBA provides that a determination by the NEB regarding whether there is unjust discrimination in a given case is a question of fact.
The NEB has held that lower tolls, renewal rights, and unapportioned access for committed shippers are not unjust discrimination. 115 This is because the firm shippers provide support for the financing of the pipeline and share the financial risk of the new pipeline with the pipeline company. In finding that lower tolls for firm service are not unjustly discriminatory, the NEB has taken into consideration the fact that a number of sophisticated shippers had executed firm service agreements. 116
In the Express Decision , the NEB noted that contract shippers are not prevented from filing complaints with the Board as a result of their contractual commitments made to the pipeline company, and that the NEB continues to be responsible to ensure that tolls are just and reasonable for both contract and uncommitted shippers.
In the Enbridge Bakken Decision , the Board noted that no party had raised concerns about the higher tolls to be paid by uncommitted shippers. 117 The Board found that the toll differential between uncommitted and committed shippers would not result in unjust discrimination. The Board added:
114 PanCanadian Decision, supra , note 8 at 12. 115 See e.g. Federated Decision, supra note 9; Express Decision, supra note 14 at 23; Enbridge Bakken Decision, supra note 21. 116 See e.g. Trans Mountain Expansion Decision, supra note 24. 117 Enbridge Bakken Decision, supra note 21 . 108
The Board recognizes that Enbridge Bakken is operating in a very competitive environment. The Project is considered commercially at-risk, with only a portion of that risk being offset through the existence of long- term transportation contracts. The Board accepts that uncommitted shippers are charged a higher toll than shippers who have signed TSAs. 118
In the 2010 Keystone XL Decision , the NEB approved tolls for uncommitted shippers that were 20% higher than firm shippers with a 10 year contract, with tolls for firm shippers decreasing over the length of the contract term. 119 The Board noted that these tolls were “market-based rather than cost-based and …the result of negotiations between sophisticated parties.” 120 The Board accepted that “this is a reflection of shippers having provided differing levels of financial support to the Keystone XL Project and accepting differing levels of risk” 121 and that this toll structure was just and reasonable.
4.6 Unique Cases regarding Capacity in Oil Pipelines, and the NEB Approach
The importance placed by the NEB on the competitive market is also evident in two other decisions worthy of discussion. The first, the Chevron Priority Destination
Designation Application, relates to the NEB interpretation of a provision in the Trans
Mountain tariff regarding capacity. The second relates to an application by Trans-
Northern to be relieved of its common carriage obligations.
118 Ibid at 23. 119 Keystone XL Decision , supra note 59 at 46. 120 Ibid at 51. 121 Ibid at 46. 109
4.6.1 Chevron Priority Destination Designation Decision 122
In this proceeding, Chevron applied for a designation of its Burnaby oil refinery as a
Priority Destination pursuant to the Tariff on the Trans Mountain Pipeline. The Trans
Mountain Pipeline had been under apportionment since 2010, meaning that Uncommitted
Shippers have only been able to ship proportionally lower volumes of crude oil than the volumes they nominated.
“Priority Destination” is defined under section 1.58 of the Tariff as a refinery, marketing terminal or other facility connected to and capable of receiving petroleum from the Trans Mountain Pipeline system and so designated by the NEB by reason that it is not capable of being supplied economically from alternative sources. (emphasis added) The
Trans Mountain Tariff stipulates that in times of apportionment, available capacity will be allocated first to Firm Shippers (shippers that signed long term contracts with the
Pipeline). Of the remaining capacity, Uncommitted Shippers (shippers that did not sign long term contracts with the Pipeline) nominating to Priority Destinations will have priority over all other nominations.
Chevron did not have firm service on the pipeline. 123 While Chevron had explored other alternatives to the Trans Mountain Pipeline, it stated that it would have to incur substantial capital costs and to pay transportation operating costs that would be about five times higher than the transportation costs pursuant to the Trans Mountain Tariff.
122 Chevron Canada Limited Priority Destination Designation Application (15 July 2013) MH-002-2012, online: NEB http://www.neb-one.gc.ca. For additional information regarding this Application, see: Jennifer Hocking, “Burnaby Refinery not a Priority Destination under Pipeline Tariff”, online: University of Calgary
The NEB denied the application. It noted that other refiners served by Trans
Mountain had used several different supply options in order to mitigate supply risk, and that Chevron also had a responsibility to establish alternative supply options.
In effect, the NEB’s message to Chevron was that it could not rely on a regulated solution where there were market options available.
4.6.2 The Trans-Northern Decision 124
The Trans-Northern proceeding is noteworthy because it contains the NEB’s views on the interpretation of subsection 71(3) of the NEBA . Under subsection 71(3), the Board may issue an order requiring a pipeline company to provide new facilities needed to receive, transport and deliver hydrocarbons, provided that such an order will not place an undue burden on the pipeline company. Specifically, subsection 71(3) states:
s. 71.(3) The Board may, if it considers it necessary or desirable to do so in the public interest, require a company operating a pipeline for the transmission of hydrocarbons, or for the transmission of any other commodity authorized by a certificate issued under Part III, to provide adequate and suitable facilities for
(a) the receiving, transmission and delivering of the hydrocarbons or other commodity offered for transmission by means of its pipeline,
(b) the storage of the hydrocarbons or other commodity, and
(c) the junction of its pipeline with other facilities for the transmission of the hydrocarbons or other commodity,
if the Board finds that no undue burden will be placed on the company by requiring the company to do so. 125
124 Trans-Northern Application for the Proposed Suspension of Service on the Don Valley Lateral (November 2000) (MH-3-2000) NEB online: http://www.neb-one.gc.ca [Trans-Northern Decision] 125 RSC 1985, c N-7. 111
The Trans-Northern Decision deals with a plan by Trans-Northern to decommission the Don Valley Lateral, a pipeline to the Toronto Harbour. Trans-Northern planned to decommission the line because it was costing in excess of $500,000 per year to operate while generating only $70,000 in revenues, with no potential for increased revenues.
Roy-L was the only shipper to express concern about the suspension of service. Based on a request from Roy-L, the NEB ordered Trans-Northern to file an application which would establish whether it should be granted relief from its common carrier obligations pursuant to subsection 71(1), and whether it should be required to maintain suitable facilities pursuant to subsection 71(3).
Roy-L had access to truck and marine transportation alternatives, although trucking would cost more than shipping the petroleum products by pipeline, and marine delivery was “generally not economically viable.” 126 Roy-L argued, based on the wording of subsection 71(3), that the test to be applied by the NEB in interpreting subsection 71(1) was whether the continuation of the common carrier obligation would place an undue burden on the oil pipeline company.
The NEB disagreed. The wording and purposes of subsections 71(1) and (3) are different. Subsection 71(3) gave the Board the “extraordinary power to order a company to provide new facilities.”127 In applying subsection 71(3), the Board noted,
the burden on a [pipeline] company would be one relevant factor to be considered and balanced with any other existing public interest factors in determining what is reasonable in the circumstances. 128
126 Ibid at 12. 127 Ibid at 9 . 128 Ibid at 9. 112
As in the cases cited above, the NEB asserted that compliance with the common carrier provisions of subsection 71(1) should be determined by “a test of reasonableness, which permits the Board to tailor the statutory obligations of an oil pipeline to fit any unique circumstances that may exist.” 129 The NEB granted Trans-Northern relief from subsection 71(1), again allowing market forces to operate.
4.7 Conclusions
Although NEB-regulated oil pipelines are generally described as common carriers, today most oil export pipelines have firm contracts for the majority of their capacity. The
NEB justifies this on the grounds that it supports “well-functioning competitive markets.” 130 The NEB recognizes “the market for oil transportation has evolved and will continue to evolve to embrace commercial arrangements better suited to meet the needs of market participants.” 131 In today’s competitive oil transportation markets, firm contracts on oil pipelines may be necessary to underpin the financing of the pipeline.
The NEB has consistently held that firm contracts are not inconsistent with common carrier obligations provided that two criteria are met. First, a fair and transparent open season must have been held; and second, a reasonable percentage of capacity must be reserved for uncommitted volumes. It is difficult to predict the percentage of capacity that must be reserved, and the NEB Filing Manual does not refer to this criterion. In order to provide clarity and transparency for both pipeline companies and shippers, it is recommended that the NEB codify requirements for exemptions from the common carrier
129 Ibid at 9. 130 Gaétan Caron, “National Energy Board Update” (Speech delivered at the Canadian Energy Summit, 8 November 2013), online:< http://www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndprsnttn/2103/nbpdt/nbpdt- eng.html>. 131 Keystone Base Decision, supra note 20 at 24. 113
obligation, including establishing a presumption as to the percentage of capacity to be reserved for uncommitted volumes. These recommendations are developed fully in chapter 6.
114
Chapter 5: National Energy Board Practice Regarding Access to Natural Gas Pipelines
5.1 Introduction
This chapter reviews the principle of open access as applied to natural gas pipelines.
It also reviews NEB decisions regarding applications pursuant to subsections 71(2) and
71(3) of the NEBA for access to natural gas pipelines and for the extension of facilities, and decisions demonstrating that the NEB supports competitive natural gas mark ets.
Natural gas pipelines are described as contract carriers, meaning that they “provide transmissiontransmission serviceservice forfor gasgas ownedowned byby othersothers accordaccordinging toto aa privateprivate contractcontract betweenbetween thethe pipeline company and the shipper,” 1 as was explained in chapter 2. Contract carriers are not required to carry all natural gas offered to them for transportation. However, since the deregulation of natural gas prices in 1986, 2 thethe NEBNEB hashas requiredrequired naturalnatural gasgas pipelinepipeline companies to provide access to any shipper who meets the elig ibility criteria in the tariff.
In addition, pursuant to subsections 71(2) and 71(3) of the National Energy Board Act
(NEBA ), a shipper may apply for NEB orders requiring the pipelinepipeline companycompany toto grantgrant access and to provide the facilities needed to grant a ccess. 3
Open access to natural gas pipelines was necessary in order to ensure the development of a successful natural gas commodity market. Open access is now required for both oil and natural gas pipelines, and both oil and natural gas pipelines are pr ohibited
1 Robert L Mansell & Jeffrey R Church, Traditional and Incentive Regulation: Applications toto NaturalNatural GasGas Pipelines in Canada , (Calgary: Van Horne Institute for International Transportation and Regulatory Affairs, 1995) at 20. [Mansell and Church] 2 As indicated in TransCanada PipeLines Limited (July 1988) GH -2-87, online: NEB http://www.neb - one.gc.ca [TransCanada Decisi on GH-2-87 ] 3 RSC 1985, c N -7. 115
from unjust discrimination in tolls, service or facilities pursuant to section 67 of the
NEBA .
Under section 52.(2)( c) of the NEBA, the NEB may consider the “economic feasibility” of a proposed pipeline in making its recommendation as to whether or not a certificate of public convenience and necessity should be issued. Section 52 applies to both oil and natural gas pipelines. In cases where a proposed natural gas pipeline will compete with an existing pipeline or pipelines, the NEB has required that all or almost all of the capacity of the pipeline be committed to firm shippers through precedent agreements 4 to ensure that the pipeline is “economically feasible,” 5 or, in other words, that the facilities are likely to be used at a reasonable level and that the tolls are likely to be paid. 6 In addition, the pipeline company must provide evidence of signed
Transportation Service Agreements (TSAs or firm contracts) prior to commencement of construction. 7 Where the proposed pipeline has insufficient commitments from shippers to demonstrate that it is economically feasible, the NEB may decline to recommend approval of the pipeline. 8
Today, both oil and natural gas pipelines have firm contracts. The primary difference between the allocation of capacity in oil pipelines and natural gas pipelines is that while
4 A precedent agreement is an agreement between a potential shipper and a pipeline company stating that the parties will sign a Transportation Service Agreement once certain conditions are met, such as NEB approval of the pipeline company’s application. The Precedent Agreement commits the shipper to shipping certain volumes and the pipeline company to providing that capacity provided that those conditions are met. See e.g. definition of Precedent Agreements provided in Mackenzie Gas Project (December 2010), GH-1-2004 at 180, online: NEB
oil pipelines are required to reserve a reasonable percentage of capacity for spot shippers, natural gas pipelines may allocate all of their capacity to firm contracts, and are not required to reserve any capacity for spot shippers. This is because oil pipelines are characterized as common carriers, and natural gas pipelines are characterized as contract carriers.
5.2 Open Access to Natural Gas Pipelines
Based on Decision GH-2-87 , the North Bay Junction Decision ,9 and the Mackenzie
Valley Pipeline Decision , it is now clear that in the current era of deregulated natural gas prices, natural gas pipeline companies must provide open access to all shippers that meet the eligibility requirements of the pipeline’s tariff. Unlike oil pipelines, natural gas pipeline companies are not required or expected to reserve capacity for uncommitted shippers. Each of these decisions will be discussed below.
In Decision GH-2-87, the NEB first set out the principle of open access to natural gas pipelines in the context of the creation of deregulated natural gas markets.10 This decision is cited in many other NEB decisions. 11 In the proceeding, TransCanada applied for approval of new facilities in eastern Canada to expand the capacity of its pipeline system. TransCanada noted that it was required to provide “non-discriminatory transportation service to all customers that meet minimum eligibility criteria approved by
9 TransCanada PipeLines Limited North Bay Junction Application (December 2004), RH-3-2004, online: NEB
the Board.” 12 The NEB observed that TransCanada was “making progress in moving towards an open access pipeline.” 13 The NEB pointed to various initiatives, including
“construction of facilities for short-term contracts serving long-term markets” 14 that were aimed at the development of a competitive natural gas market. Historically, the capacity in natural gas pipelines was primarily subject to long term contracts, and the capacity in oil pipelines was allocated through short term contracts or monthly nominations, as explained in chapter 2. The availability of short term contracts on TransCanada eliminates one more distinguishing feature in the treatment of capacity in oil and natural gas pipelines.
The NEB stated that TransCanada was required to offer in its tariff, “equal, non- discriminatory access to all prospective shippers” 15 , and that this was “subject to the availability provisions of the toll schedule.” 16 It was important that “ all terms and conditions of access” 17 (NEB emphasis) to the pipeline be provided in the tariff rather than in individual contracts negotiated between TransCanada and prospective shippers, because the tariffs must be filed with the NEB for approval. Including this information in the tariff would bring this information into the public domain and ensure that the pipeline company did not unjustly discriminate between its own affiliates and other shippers, if that pipeline company is involved in “the marketing or producing sectors of the natural
12 Supra note 7 at 92. 13 Ibid. 14 Ibid. 15 Ibid. 16 Ibid. 17 Ibid. 118
gas industry.” 18 The NEB stated that a part of the principle of open access is transparency regarding the terms and conditions of access, as follows:
In the Board’s view, prospective shippers are entitled to know the conditions of access to a pipeline system in advance of contract negotiations, as this knowledge will allow market participants to make informed supply and market decisions thereby contributing to the efficient functioning of the natural gas market. 19
The NEB has quoted this passage in many decisions – for example, in the North Bay
Junction Decision ,20 The Mackenzie Valley Pipeline Decision, 21 and in the context of an oil pipeline in the Keystone Base Decision. 22 In the North Bay Junction Decision , the
NEB explains that its remarks in Decision GH-3-87 regarding the requirement for open access and explicit disclosure of all terms and conditions apply to all pipelines, irrespective of whether there is an affiliate engaged in energy commodity markets. 23
5.2.1 The Mackenzie Valley Pipeline Decision
In 2010, the NEB recommended that the Mackenzie Valley Gas Project, including the pipeline, be allowed to proceed in the public interest, and the federal Cabinet approved it in March 2011. 24 It is the most recent major natural gas pipeline approved in
Canada. The facilities described in the application included the Mackenzie Valley
Pipeline, a 1195.8 kilometre long pipeline designed to take gas from natural gas fields in
18 Ibid. 19 Ibid. 20 North Bay Junction Decision , s upra note 9 at 9, note 1. 21 Mackenzie Valley Pipeline Decision, supra note 4 at 183. 22 Keystone Base Decision, supra note 11 at 24. 23 Supra note 9 at 9, footnote 1. 24 Imperial Oil: Operations: Mackenzie Gas Project, online: the Northwest Territories to northwestern Alberta and on to southern markets, and related facilities. 25 The decision contains a clear statement from the NEB that open access is a fundamental principle for natural gas pipelines, and that the pipeline must be “accessible to all shippers that meet the terms of the tariff.”26 The decision also includes this wording from decision GH-2-87: “prospective shippers are entitled to know the conditions of access to a pipeline system in advance of contract negotiations.” 27 The NEB directed the proponents to include in the tariff “all terms and conditions of access to the Mackenzie Valley Pipeline.” 28 The NEB held that pipeline companies could not, as a term of a contract, require shippers to agree that they would not challenge any aspects of the pipeline company’s toll and tariff principles before the NEB. 29 To hold shippers to such a requirement is contrary to the NEB’s “principles and fundamental tenets of open access.” 30 5.2.2 Open Seasons for Natural Gas Pipelines The Mackenzie Valley Pipeline Decision also required that the proponents file with the NEB the details of an open season. My research suggests that this is the first NEB decision in which a natural gas pipeline company was required to perform an open season. This requirement is consistent with the NEB’s view of natural gas pipelines as subject to the principle of open access. 25 Mackenzie Valley Pipeline Decision , supra note 4 vol II at 1. 26 Ibid, vol II at 182. 27 Decision GH-2-87, supra note 2 at 92, cited in Mackenzie Valley Pipeline Decision , supra note 4, vol II at 183. 28 Mackenzie Valley Pipeline Decision, supra note 4, vol II at 183. 29 Ibid . The NEB also made this point in the context of an oil pipeline in Trans Mountain Pipeline ULC (May 2013), RH-001-2012 at 18, online: NEB The NEB does not provide any details regarding the requirements for a satisfactory open season in the context of a natural gas pipeline, nor does the NEB Filing Manual 31 contain any indication that an open season is required for natural gas pipelines. In the Alliance Pipeline application, the proponent indicated that it had held an open season. 32 The NEB did not comment on this. 5.3 Subsections 71(2) and 71(3) of the NEBA: Applications for Access to Natural Gas Pipelines and for the Extension of Facilities 5.3.1 Introduction Where a shipper has been unable to obtain access to capacity in a NEB-regulated natural gas pipeline by negotiating with the pipeline company, the shipper may apply to the NEB for an order requiring the pipeline company to receive, transport and deliver the natural gas pursuant to subsection 71(2) of the NEBA. Specifically, subsection 71(2) of the NEBA provides as follows: Orders for transmission of commodities 71. (2) The Board may, by order, on such terms and conditions as it may specify in the order, require the following companies to receive, transport and deliver, according to their powers, a commodity offered for transmission by means of a pipeline: (a) a company operating a pipeline for the transmission of gas; and (b) a company that has been issued a certificate under Part III authorizing the transmission of a commodity other than oil. 31 Filing Manual – Guide S – Access on a Pipeline Online: Subsection 71(2) applications are often accompanied by applications pursuant to subsection 71(3) for an order that in essence requires the pipeline company to provide the facilities needed in order to give effect to a section 72(2) order, if no undue burden will be placed on the pipeline company. Subsection 71(3) provides: Extension of facilities s. 71.(3) The Board may, if it considers it necessary or desirable to do so in the public interest, require a company operating a pipeline for the transmission of hydrocarbons, or for the transmission of any other commodity authorized by a certificate issued under Part III, to provide adequate and suitable facilities for (a) the receiving, transmission and delivering of the hydrocarbons or other commodity offered for transmission by means of its pipeline, (b) the storage of the hydrocarbons or other commodity, and (c ) the junction of its pipeline with other facilities for the transmission of the hydrocarbons or other commodity, if the Board finds that no undue burden will be placed on the company by requiring the company to do so. 33 5.3.2 National Energy Board Filing Manual The National Energy Board Filing Manual (Filing Manual) states that prior to making an application pursuant to subsection 71(2) or (3), the applicant should have unsuccessfully requested access or adequate and suitable facilities from the pipeline operator. 34 This accurately reflects the NEB’s practice as indicated by the discussion of decisions in this paper. 33 RSC 1985, c N-7. 34 Filing Manual – Guide S – Access on a Pipeline Online: The Filing Manual also states that the application should include all relevant correspondence between the applicant and the pipeline operator, as well as correspondence with other affected parties where that correspondence would provide clarity and assist the NEB in its decision. After an application is filed with the NEB, the NEB will ordinarily seek comments from the pipeline operator. 5.3.3 Subsection 71(2) and 71(3) Decisions The NEB only rarely grants subsection 71(2) and 71(3) orders, preferring to leave the market to operate. In the following decisions the NEB declined to grant subsection 71(2) or subsection 71(3) orders: Indeck and RG & E, Northland Power, Fletcher Challenge, and Murphy Oil . In the Renaissance Decision ,35 the NEB granted a subsection 71(2) order, and in the Cyanamid Decision , the NEB granted a subsection 71(3) order. All of these decisions will be discussed below. 5.3.3.1 Indeck and RG & E Decision 36 In the Indeck and RG & E Decision , a shipper, Indeck Gas Supply Corporation (Indeck), and an end use customer, Rochester Gas and Electric Corporation (RG&E), both applied to the NEB for orders requiring TransCanada PipeLines Limited (TransCanada) to receive, transport, and deliver natural gas from Empress, Alberta, to a proposed export point at Chippawa, Ontario, and to provide adequate and suitable facilities to do so, pursuant to subsections 71(2) and 71(3) of the NEBA. Both Indeck and RG&E had missed the deadline established by TransCanada for applications for transportation service commencing 1 November 1991. As of 35 TransCanada PipeLines Limited (November 1996), GH-3-96, online: NEB http://www.neb-one.gc.ca [Renaissance Decision] 36 TransCanada PipeLines Limited (November 1990), GH-5-89, online: NEB http://www.neb-one.gc.ca 123 TransCanada’s deadline, Indeck had not yet received executed agreements regarding the sale of gas from its customer, and RG&E also had not provided the required gas supply information to TransCanada. TransCanada argued, among other things, that granting Indeck’s application would effectively allow Indeck to jump ahead in the queue for transportation service, even though other shippers had filed requests for service earlier than Indeck. The NEB denied Indeck’s and RG&E’s applications for section 71 orders for two reasons. First, the NEB noted that “TransCanada had acted in a fair and reasonable manner” 37 and in accordance with its tariff and NEB procedures in establishing its deadline for applications for service. Second, the NEB stated that it was not persuaded by the evidence provided by Indeck and RG&E that their projects for export of natural gas to the US would be jeopardized by denying their section 71 applications. 5.3.3.2 The Northland Power Decision 38 In the Northland Power Decision , Northland Power (Northland) applied to the NEB for orders pursuant to subsections 71(2) and 71(3) of the NEBA requiring TransCanada to receive, transport and deliver natural gas from Empress Alberta to the point of interconnection of the TransCanada and Centra Ontario systems for delivery to Northland’s proposed Iroquois Falls, Ontario power project (the Iroquois Falls Project); 39 and to provide adequate and suitable facilities for doing so, among other matters. After the NEB hearing, Ontario Hydro announced that “due to the success of demand 37 Ibid at section 26.4. 38 TransCanada PipeLines Limited (April 1992), GH-4-91, online: NEB http://www.neb-one.gc.ca [GH-4-91 Decision]. 39 Ibid at 51. 124 management programs and a lower demand for electricity,” 40 the Iroquois Falls project was not required at that time and it was placed on hold. The NEB denied Northland’s application, noting that it was not satisfied that Northland had demonstrated the need for the requested facilities. 41 The NEB noted that Northland was in third position in TransCanada’s 1993-94 facilities application queue and that TransCanada would bring forward Northland’s application in future if Northland’s project had a sufficiently assured market for transportation services. 5.3.3.3 Fletcher Challenge Decision confirms that NEB may Require Natural Gas Pipelines to establish Open Access Tariff In this proceeding, Fletcher Challenge applied for an order under section 71 of the NEBA directing access to a gas pipeline owned by Renaissance. 42 The NEB declined to grant the order, but ordered Renaissance to file with the NEB a tariff for terms and conditions for the allocation of excess capacity and a non-discriminatory expansion policy. Renaissance was operating the pipeline as a contract carrier, and Renaissance was using all of the capacity of the pipeline. In order to provide access to Fletcher, the NEB would have had to order an expansion or an allocation of existing capacity. This decision is of interest because the NEB confirmed its recognition of gas pipelines as contract carriers and oil pipelines as common carriers. It went on to state that the NEB could impose conditions on the traffic, tolls, or tariffs which alter or modify the traditional role of both oil and gas pipelines as required by the public interest. The NEB also stated that group 2 gas pipelines (the smaller pipelines) may be required to establish an open access tariff to allow all parties to have an equal opportunity to access 40 Ibid at 52. 41 Ibid at 52. 42 Fletcher Challenge Energy Canada Inc. Letter Decision (22 December 1999) (NEB). 125 the pipeline on similar contractual terms if it has been shown to be in the public interest to do so. 5.3.3.4 Murphy Oil Complaint regarding Westcoast Energy 43 In this proceeding, Murphy Oil applied for an order requiring Westcoast to receive, transport and process gas offered by Murphy, and to provide adequate and suitable facilities for the interconnection of Westcoast’s South Peace Pipeline and Murphy facilities, pursuant to subsections 71(2) and 71(3) and section 12 of the NEBA. 44 Murphy submitted that Westcoast was unjustly discriminating against Murphy, contrary to section 67 of the NEBA, by refusing to provide gathering and processing service for Murphy’s blended acid gas. Westcoast responded that Murphy Oil was a competitor as Murphy had built its own gas processing plant. 45 If Westcoast were compelled to dispose of acid gas for a competitor, valuable processing capacity would be taken up at Westcoast’s existing plants, which was needed to provide processing service for raw gas delivered through Westcoast’s gathering facilities. 46 The Board denied the order. It found that Murphy had not demonstrated that Westcoast had discriminated against it by refusing to provide service and capacity to Murphy. 47 It also recognized that if Westcoast were required to provide acid gas disposal for Murphy “it could impair Westcoast’s ability to compete to provide raw gas 43 Murphy Oil Company Ltd Complaint and Application regarding Westcoast Energy Inc. carrying on business as Spectra Energy Transmission (Westcoast) Letter Decision RHW-1-2011 (23 August 2011) National Energy Board [Murphy Oil Decision]. 44 Ibid at 3. 45 Ibid at 4. 46 Ibid at 5. 47 Ibid at 7. 126 processing service and expose Westcoast to the risk of underutilization of facilities.” 48 It also noted that there was no indication of Westcoast preventing competition and “the fact that Murphy built its own gas processing plant is indicative of a lack of barriers to entry.” 49 The NEB recognized that “a corporate entity has the right, subject to legislative requirements, to make decisions in its private interest.” 50 The NEB also noted that if it were to direct Westcoast to offer acid gas disposal services to its competitors, including Murphy, the potential loss to Westcoast from the underutilization of its gathering and processing facilities would be greater than the cost to Murphy of drilling a second acid gas disposal well. 51 5.3.3.5 Renaissance Decision In the Renaissance Decision , Renaissance Energy Ltd. (Renaissance) applied to the NEB for orders pursuant to subsections 71(2) and 71(3) of the NEBA requiring TransCanada to receive, transport, and deliver natural gas from Empress, Alberta to Emerson, Manitoba, and to provide adequate and suitable facilities for doing so. 52 Renaissance’s application was unique in that it intended to deliver gas to Rogers Sugar to process sugar beets, for about five or six months of the year. For the remainder of the year, Renaissance intended to use the TransCanada system to deliver gas to Emerson, Manitoba to supply short-term export markets. Renaissance requested firm service on TransCanada’s system for a 10 year term. From Emerson, Renaissance intended to use currently available interruptible service on Centra Manitoba for domestic deliveries to 48 Ibid at 12. 49 Ibid at 10. 50 Ibid at 12. 51 Ibid at 12-13. 52 TransCanada PipeLines Limited (November 1996) GH-3-96, online: NEB: http://www.neb-one.gc.ca [GH-3-96 Decision]. 127 Rogers Sugar and by Great Lakes and/or Viking on a short-term basis for export deliveries. TransCanada objected to Renaissance’s application in part because Renaissance intended to use downstream interruptible service instead of firm service, and TransCanada asserted that this did not comply with TransCanada’s requirement for assurance of downstream take-away capacity. As in the Indeck and RG&E Application discussed above, TransCanada expressed concern that approval of Renaissance’s application would result in Renaissance receiving preferential treatment relative to other shippers, and that a relaxation of TransCanada’s principles for applications for service in this case could lead to other shippers seeking similar relaxation of the principles. 53 The NEB granted Renaissance an order pursuant to subsection 71(2), citing the unique nature of Renaissance’s request, and noting that it will review each application for an order under subsection 71 “on a case-by-case basis.” 54 In this case the NEB set out the following factors for consideration, without limitation, in its review of applications pursuant to subsection 71(2): [t]he nature of the specific service request, the impact of the request on the existing system and shippers, the risk of under-utilized facilities, the cost of providing the service, and the likelihood of the Board receiving a large number of similar requests. 55 The Board held that approval of Renaissance’s application was in the public interest because it would benefit a domestic market (Rogers Sugar and the sugar industry). 56 The Board also took into consideration several facts. First, the volume of gas sought to be 53 Ibid at 44. 54 Ibid at 46. 55 Ibid at 45. 56 Ibid at 46. 128 transported by Renaissance was small (no more than 145 cubic metres per day). Second, Renaissance, “one of Canada’s top producers and an experienced shipper and marketer,” 57 was prepared to provide financial assurances to TransCanada to protect it from the risk of default on Renaissance’s demand charge obligations. Third, no party had opposed Renaissance’s application. The NEB emphasized that the approval was an exception and was not to be construed as a precedent for interpretation of TransCanada’s tariff. The NEB indicated that a subsection 71(3) order was not required as TransCanada had confirmed that no additional facilities were required to accommodate Renaissance’s transportation request. 5.3.3.6 Cyanamid Decision (GH-3-86) 58 In this proceeding, Cyanamid Canada Pipeline Inc. (Cyanamid) applied to the NEB for approval to construct certain natural gas pipeline facilities, and for an order pursuant 58 Cyanamid Canada Pipeline Inc ., (December 1986) GH-3-86, online: NEB http://www.neb-one.gc.ca [Cyanamid Decision]. On December 10, 1986, at about the same time as the NEB issued its decision in GH-3-86, the Ontario Energy Board (OEB) issued a decision in which it held that the OEB had jurisdiction over bypass lines in Ontario. The OEB characterized bypass lines as cases where the end-user of natural gas in Ontario, such as Cyanamid, bypasses the local distribution company, such as Consumers’ by connecting directly with the TransCanada system. The Divisional Court of the Supreme Court of Ontario essentially confirmed the OEB’s decision in a decision dated March 26, 1987 (Action No. 1243-86). After the decision of the Divisional Court of the Supreme Court of Ontario, the Federal Court of Appeal (FCA) considered a reference regarding whether the NEB had jurisdiction over the pipeline facilities proposed to be constructed and operated by Cyanamid. The Federal Court of Appeal concluded that the NEB did not have jurisdiction over the proposed facilities ( Reference by the National Energy Board pursuant to subsection 28(4) of the Federal Court Act , 48 DLR (4 th ) 596, [1987] FCJ No. 1060, 48 DLR (4 th ) 596. The Federal Court of Appeal decision left undisturbed all of the NEB analysis regarding market signals, economic efficiency, and what was then subsection 59(3) of the National Energy Board Act . Thus, while the decision of the FCA overturned the NEB decision on constitutional grounds, the NEB decision is still of interest as it reflects the views of the NEB regarding the importance of allowing market signals to be conveyed given that natural gas markets were moving to market sensitive gas pricing. (GH-3- 86 at 32-33.) On February 15, 1988, the Ontario Court of Appeal released a decision holding that the Cyanamid pipeline was subject to provincial legislative authority (as noted in Alexander J Black, “Canadian Natural Gas Deregulation: Contractual Impediments and Discriminatory Consequences”, (1989) 7 Journal of Energy and Natural Resources Law 42. Cyanamid Canada Pipeline Inc. and Cyanamid Canada Inc. then filed a Notice of Appeal with the Supreme Court of Canada. The Appeal was discontinued on September 26, 1989. 129 to subsection 59(3), the predecessor section to subsection 71(3), directing TransCanada to construct interconnecting facilities between the TransCanada pipeline system and the proposed facilities of Cyanamid at TransCanada’s Black Horse Station, near Welland, Ontario. 59 These approvals would allow Cyanamid to construct its own facilities to bypass existing natural gas pipeline facilities owned by Consumers’ Gas Company Ltd. (Consumers’), and avoid paying Consumers’ tolls. Cyanamid utilizes natural gas as its feedstock to manufacture nitrogen fertilizer products near Welland, Ontario. 60 Prior to March 1986, Cyanamid purchased gas from Consumers’, which in turn purchased system gas from TransCanada. Cyanamid had entered into a gas purchase agreement directly with a gas producer in Alberta, so that it would no longer have to purchase gas from Consumers’ or pay Consumers’ transportation tolls. Cyanamid argued that its proposed bypass would substantially reduce its unit costs of transportation from TransCanada’s Black Horse Station to Cyanamid’s Welland fertilizer plant from $0.246/GJ to approximately $0.066/GJ (about a quarter of Consumers’ tolls). Cyanamid’s application appears to have been filed shortly after the deregulation of natural gas prices pursuant to the Western Accord and the Halloween Agreement discussed in chapter 2 pursuant to which “consumers of gas became free to arrange for the purchase of their gas requirements directly from gas producers.” 61 In considering Cyanamid’s application, the NEB noted that generally it is not in favour of duplication of existing facilities. 62 However, in this case, an order in favour of Cyanamid promoted economic efficiency as it would send a market signal to Consumers’ 59 Cyanamid Decision , supra note 58 at 1. 60 Ibid at 3. 61 Ibid . 62 Ibid at 33. 130 that its transportation tolls were not consistent with economic reality.” 63 Consumers’ tolls had been established prior to the creation of a competitive commodity market for natural gas. Due to “regulatory intervention” 64 this market signal had been impeded. The NEB noted that the Cyanamid bypass was in the public interest “in the current circumstances of the move to market sensitive gas pricing.” 65 The NEB granted Cyanamid’s applications for the bypass and interconnection facilities so that the proper market signal would be sent to Consumers’. It stated that the most efficient outcome would be if Cyanamid was able to use the NEB approvals to negotiate a lower transportation rate with Consumers, so that Cyanamid would not be motivated to construct the bypass. 5.3.3.7 Conclusions regarding subsection 71(2) and subsection 71(3) Applications From the above review of NEB decisions, it can be seen that the NEB will review all section 71 applications on a “case-by-case” basis, 66 and will only rarely approve applications pursuant to subsection 71(2) or (3). It is preferable to have the market resolve such matters. The NEB has denied subsection 71(2) and 71(3) applications where granting the orders sought would have allowed the applicant to improperly use the regulatory system to gain a competitive advantage in a functioning market. In Decisions GH-5-89 67 and GH-4-91, 68 the NEB declined to grant subsection 71(2) and (3) orders where to do so would have allowed the applicants to jump ahead of others in TransCanada’s queue for transportation service. In the Murphy Oil Decision , the NEB 63 Ibid .. 64 Ibid at 32. 65 Ibid at 33. 66 Decision GH-3-96 , supra note 52 at 46. 67 Decision GH-5-89 , supra note 36. 68 Decision GH-4-91 , supra note 38. 131 denied Murphy’s application for subsection 71(2) and 71(3) orders because the orders sought could impair Westcoast’s ability to compete.69 In the Renaissance Decision , the NEB has approved a subsection 71(2) application on an exceptional basis where approval would benefit a domestic market and the NEB was unlikely to receive a large number of similar requests for exceptional treatment. 70 (Renaissance). The NEB approved a subsection 71(3) application in the Cyanamid Decision , in a context where the market was not functioning properly and approval of the application would create the proper market signal.71 At the present time, there is excess capacity in the Prairies Segment and the Northern Ontario Line Segment of the TransCanada mainline, 72 as well as on the BC Westcoast Pipeline. 73 Until such time in the future as capacity may become tight on the major natural gas pipelines in Canada, it will generally be unnecessary for shippers to bring applications for orders for access to the TransCanada mainline or the BC Westcoast Pipeline. 5.4 NEB Supports Competitive Natural Gas Markets The NEB supports competitive markets in natural gas transportation and the development of competition in natural gas commodity markets. This section discusses three decisions recommending approval of new natural gas pipelines that support competitive natural gas markets –Alliance , Wild Horse , and Mackenzie Valley – and one 69 Murphy Oil Decision , supra note 43 at 12. 70 Renaissance Decision , supra note 52. 71 Cyanamid Decision, supra note 58. 72 National Energy Board: Canadian Pipeline Transportation System: Energy Market Assessment, (Calgary, April 2014) at 29-30, online: http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/trnsprttn/2014trnsprttnssssmnt/2014trnsprttnssssmnt-eng.html [National Energy Board 2014 Transportation Report]. 73 Ibid at 22. 132 decision, Komie North , in which the NEB recommended against approval of a new pipeline because it did not support competitive markets. It also discusses a key decision regarding enhancement of competition on a major existing natural gas pipeline – the TransCanada Mainline Restructuring Decision. 5.4.1 Alliance Pipeline 5.4.1.1 1997 Application In 1997, Alliance Pipeline Limited Partnership (Alliance) applied to the NEB for approval to construct and operate facilities including approximately 1565 km of mainline and related facilities from a point near Gordondale, Alberta to a point on the Canada/US border near Elmore, Saskatchewan. 74 NOVA Gas Transmission Ltd. (NGTL) initially opposed Alliance’s application. NGTL was concerned that there may not be sufficient gas supply for both existing NGTL pipelines and the proposed Alliance pipeline. 75 In response to the threat posed by the Alliance Pipeline, TransCanada and NGTL decided that it would be beneficial for them to merge. 76 The merger would require regulatory approval, and Alliance indicated that it would object. 77 Largely as a result of these developments, in April, 1998, NGTL and shippers (represented by the Canadian Association of Petroleum Producers (CAPP), NOVA Corporation, and the Small Explorers and Producers Association of Canada (SEPAC)) 74 Alliance Pipeline Ltd on behalf of Alliance Pipeline Limited Partnership, (November 1998), GH-3-97 online: NEB http://www.neb-one.gc.ca [Alliance Decision ] 75 Ibid at 15. 76 Bill White, “Alliance Pipeline: Founded by rebels with a cause” (2011), online: Alaska Natural Gas Transportation Projects: Office of the Federal Coordinator http://www.arcticgas.gov/Alliance-Pipeline- founded-by-rebels-with-a-cause. [Bill White] 77 Ibid. 133 signed the “Agreement on Natural Gas Pipeline Regulation, Competition and Change to Promote a Competitive Environment and Greater Customer Choice” (Agreement on Competition). Under that Agreement, the parties agreed to certain key principles including “the need to construct competitive incremental pipeline capacity from the Western Canada Sedimentary Basin (“WCSB”) by both new competitors and existing pipelines alike.” 78 The parties also agreed to negotiate the issues regarding possible underutilization of NGTL’s facilities and interconnections between Alliance and NTGL. After the Accord was signed, NGTL withdrew substantial portions of evidence which opposed the Alliance pipeline. Alliance argued that there would be no duplication of facilities, and that in the year in which the Alliance Pipeline commenced operation, there would be sufficient gas to completely fill Alliance’s firm capacity over and above what was currently being transported on the NGTL system. 79 Alliance proposed to market any available excess capacity as interruptible service at the same toll as the tolls paid by firm shippers. This interruptible service would be comparable to the spot capacity on oil pipelines discussed above. Two factors were key for the NEB in deciding to approve the Alliance pipeline. First, the NEB found that the Alliance Project was “economically feasible; i.e. that the applied-for facilities are likely to be used at a reasonable level over the life of the Project and that the demand charges will likely be paid,” 80 primarily because Alliance had firm 78 Cited in Alliance Decision , supra note 6 at 38. 79 Ibid at 36. 80 Ibid at 30. 134 contracts with 37 shippers for 98% of the capacity of the pipeline for terms of 15 years. 81 Alliance would have to confirm prior to commencement of construction that Transportation Service Agreements (firm contracts) had been signed for the subscribed capacity. 82 Second, the NEB found that the potential commercial impacts on existing pipeline infrastructure (the NGTL system) were acceptable, partly because of the Agreement on Competition described above, and partly because of what it described as the “lumpy” 83 nature of investment in new pipelines, meaning that any greenfield pipeline must be constructed on a large enough basis to “take advantage of economies of scale.” 84 The fifteen year contracts will expire in 2015. 5.4.1.2 2014 Tolling Application Alliance filed a tolls and tariffs application with the NEB on May 22, 2014. 85 In its application, Alliance stated that less WCSB gas is now being exported because of declining natural gas drilling and the increased use of natural gas domestically in the oil sands industry. At the same time, new natural gas sources in the northeastern United States have been competing with Alberta natural gas for markets in central Canada. As a result, there is increased competition among natural gas pipelines leaving western Canada. Alliance stated, “As utilization drops, cost of service tolls rise, impacting the competitiveness of WCSB natural gas in Canadian markets and markets in the US.” 86 In 81 Ibid at 26. 82 Ibid at 29. 83 Ibid at 35. 84 Ibid at 21. 85 Alliance Pipeline Application (22 May 2014) at para 13 online: NEB its application, Alliance seeks a more flexible, market-based approach to its tolls --it seeks to replace its current “cost of service tolls” with “at risk” tolls. 87 Alliance proposes to offer firm contracts of three to ten years in length,88 as well as flexible pricing for interruptible services and seasonal services. 89 Most of the shippers that signed 15 year contracts commencing in 2000 have declined to renew their contracts. Thus, as of December 1, 2015, approximately 92% of the Alliance pipeline capacity will become available to the market. 90 Alliance seeks approval of its new tolls so that they can be implemented prior to December 1. 5.4.2 Wild Horse Decision In this proceeding, Foothills Pipe Lines Ltd (Foothills) filed an application for approval to construct the Wild Horse Pipeline, consisting of 215.5 km of natural gas pipeline from Princess, Alberta to the international border near Wild Horse, Alberta and related facilities. 91 It would connect at the border with a pipeline proposed by Altamont Gas Transmission Company, which, in turn, would connect downstream with a proposed Western Market Centre in Wyoming to serve markets in the United States, and, ultimately, northern Mexico. In the period of time prior to the filing of Foothills’ application, the natural gas market had become “an increasingly short-term natural gas market place” 92 where flexibility was required. In response to this short-term market, Foothills did not require 87 Ibid at para 3. 88 Ibid at paras 38, 42. 89 Ibid at para 19. 90 Ibid at para 9. 91 An industry contact has indicated that the Wild Horse Pipeline was never built. A competing pipeline in the US was built instead that served the California market that Wild Horse had intended to serve. 92 Wild Horse Decision, supra note 6 at 46. 136 shippers to sign binding firm service agreements prior to the filing of its application with the NEB. Instead, Foothills merely required shippers to sign precedent agreements. Approximately 65% of the capacity of the proposed pipeline was covered by precedent agreements. 93 The NEB stated that it would allow “market and investment choices by shippers and the project sponsors to be made without undue regulatory interference.” 94 The NEB approved the Wild Horse Pipeline, with the condition that prior to commencement of construction, shippers would have to sign firm service agreements for the full capacity of the pipeline, with a minimum term of fifteen years.95 The NEB also noted that Foothills had stated that the tolls would be determined on a stand-alone basis. 96 As a result, the financial risks of the project would be borne by Foothills and the Wild Horse shippers. 97 5.4.3 Mackenzie Valley Pipeline The Mackenzie Valley Pipeline would be a basin opening pipeline; if constructed, it would be the first natural gas pipeline to the Mackenzie Delta, and would support the competitive development of natural gas in that area. The Mackenzie Valley Pipeline is a joint venture owned and operated by five Owner-Shippers (the Owner-Shippers). 98 84% of the capacity of the Mackenzie Valley Pipeline is subject to contracted capacity held by 93 Ibid at 45. 94 Ibid at 46. 95 Ibid at 46-47. 96 Ibid at 54. 97 Ibid . 98 Mackenzie Valley Pipeline Decision, supra note 4, vol II at 168. 137 the Owner-Shippers pursuant to Precedent Agreements for 15 or 20 year contracts with the proponents. 14% of the capacity is uncontracted. 99 The NEB recognized that the minimum 15 year contract for firm shippers was required to support financing of the construction of the project. The NEB stated that it would require that the Firm Service Transportation Agreements be signed before the commencement of construction. This would indicate that the demand charges for the pipeline would be paid and that “the pipeline is likely to be sufficiently well utilized over its economic life.” 100 Thus, this would indicate that the pipeline was economically feasible. In its decision, the NEB noted that gas transported through the Mackenzie Valley Pipeline would have to be competitive with other sources of gas supply in the North American market. 101 Parties in the proceeding had raised concerns that Mackenzie gas might not be able to successfully compete in the market, but this was not a reason for the NEB to deny its approval. An NEB approval would give the proponents “an opportunity to compete.” 102 99 The 14% uncontracted capacity was proposed by the proponents in their application. The NEB did not require the reservation of capacity for uncommitted volumes, but commented that it was “mindful of the desire for capacity to be available for third party shippers,” (vol II at 169), presumably because the pipeline would.be a basin opening pipeline. The Mackenzie Valley Pipeline could be constructed based on one of three scenarios, with one, three, or fourteen compressor stations in place, depending on the amount of capacity required. If no additional shippers beyond the Owner-Shippers signed contracts for capacity on the pipeline, it would be initially built with only one compressor station. With only one compressor station, the system would have a capacity of 27.3 Mm 3/d, with 86% of this capacity held by the Owner-Shippers through firm contracts, and 14% uncontracted capacity. Mackenzie Valley Pipeline Decision, supra note 4, vol II at 167. 100 Mackenzie Valley Pipeline Decision, supra note 4, vol II at 169. 101 Ibid. 102 Ibid. 138 5.4.4 Komie North Decision In Proceeding GH-001-2012: NOVA Gas Transmission Ltd. NGTL) applied for approval to construct and operate two sections of pipeline, the Komie North Section in northeastern British Columbia, and the Chinchaga Section in northwestern Alberta. 103 NGTL proposed to use rolled-in tolls for the new sections of pipeline. Under rolled-in tolls, both new and existing shippers on a system pay for new facilities out of the same cost pool. This meant that the tolls of the one shipper that had signed a firm contract for the use of the Komie North Section 104 would, in effect, be subsidized by all other NGTL shippers. The NEB recommended approval of the Chinchaga section to Cabinet but recommended against approval of the Komie North Section. 105 The NEB found that the Komie North Section would take volumes away from the existing Westcoast Energy Inc. 106 system by offering an alternative pipeline priced well below the cost of service. 107 NGTL’s proposed rate design would “unreasonably subsidize the extension of the NGTL Alberta System into an area where it would compete with infrastructure already in place.” 108 Tolls should be based on “cost causation” 109 to promote “economic efficiency through proper price signals to the market.” 110 In addition, only 17% of the Komie North Section was subject to firm contracts, and therefore NGTL had not established that there was sufficient shipper support for this section or that it would be economically 103 Komie North Decision, supra note 8. 104 Ibid at 40. 105 Ibid at 5. 106 Carrying on business as Spectra Energy Transmission; Komie North Decision, supra note 8 at 84. 107 Komie North Decision, supra note 8 at 45. 108 Ibid at 30. 109 Ibid . 110 Ibid. 139 feasible. 111 As a result, the NEB declined to recommend approval of the Komie North Section to Cabinet, and Cabinet, in turn, did not approve that section. 112 5.4.5 TransCanada Mainline Restructuring Decision The TransCanada Mainline Restructuring Decision is not directly related to the question of open access to pipelines. It is discussed here as an example of the NEB supporting the development of competition in natural gas transportation in the context of a rate application.113 TransCanada faced the same growing competition in natural gas transportation out of the WCSB as Alliance (described above). In the TransCanada decision, the NEB provided TransCanada with the discretion to set interruptible tolls in order to allow TransCanada to compete in transportation markets. TransCanada applied to the NEB in 2011 for approval of restructured pipeline services and tolling across its pipeline network in response to the competitive challenges it faces. 114 The NEB summarized the challenges facing the pipeline company as follows: The Mainline faces increasing competition for gas supply from intra- Alberta demand, other ex-Western Canada Sedimentary Basin (WCSB) pipelines and new markets for WCSB gas. The Mainline competes with pipelines from emerging shale and tight gas basins in the United States of America (U.S.), which deliver gas to eastern markets. The Mainline must adjust to this new environment because eastern consumers may not renew contracts for long-haul service and bypass infrastructure may be built. 115 111 Ibid at 32. 112 Order in Council PC 2013-379 April 18, 2013, online: Natural gas from new sources in the US Rockies region and the eastern US is increasingly competing with Canadian natural gas supply transported on the TransCanada Mainline into key markets such as Ontario, the US Midwest and the US Northeast. 116 In addition, new production from the Marcellus shale basin in the US northeast has displaced TransCanada Mainline volumes as US pipeline additions were constructed to transport Marcellus production to Ontario markets. 117 New advances in technology since 2005 have allowed firms to drill shale gas wells that produce at very high rates. 118 The Marcellus shale gas basin located in the US northeast has one of the largest sources of supply and lowest production costs of these basins.119 There has been an overall decline in natural gas production from the WCSB. 120 Between 1996 and 2008, supply costs in the WCSB increased, primarily because of the maturity of the basin. 121 In a mature basin, the likelihood of producers finding very large pools of gas declines. 122 In addition, in recent years, natural gas prices have been low, resulting in a negative effect on WCSB production. 123 Over the past five years, the level of long-haul FT (Firm Transportation) contracts on the TransCanada mainline has greatly decreased and led to lower throughput on the Prairies and Northern Ontario Line Segments of the TransCanada mainline. As a result, long-haul FT tolls increased, which in turn, resulted in the TransCanada mainline being less attractive to shippers. Instead of paying for firm service on long-haul volumes from 116 National Energy Board 2014 Transportation Report, supra note 72 at 8. 117 Ibid at 29. 118 TransCanada Mainline Restructuring Decision, supra note 113 at 8. 119 Ibid at 8. 120 Ibid at 9. 121 Ibid at 10. 122 Ibid at 10. 123 Ibid at 10. 141 Alberta or Saskatchewan to eastern Canada, shippers began using “discretionary services” such as STFT (Short Term Firm Transportation) and IT (Interruptible Transportation). Given the excess capacity on the Prairies and Northern Ontario Line segments of the mainline, shippers could access the capacity they need without entering into long term contracts for capacity. In addition, some customers in Ontario and Quebec switched from WCSB sources of gas to nearby sources of supply from the eastern US, primarily from the Marcellus shale basin. Gas is transported on US pipelines to receipt points such as Dawn in Ontario, and then transported the remaining distance on the TransCanada mainline through Ontario and Quebec to markets. As a result, shippers pay only short-haul tolls on the TransCanada mainline, which are cheaper than the long-haul tolls. 124 The NEB established multi-year fixed tolls for FT service, in order to provide toll certainty and stability for shippers. 125 It also provided TransCanada with flexibility to establish market based tolls for discretionary services -- Interruptible Transportation service and Short Term Firm Transportation Service.126 The NEB stated that its decision would enable TransCanada to compete in the market and that the market would determine the extent to which consumers and producers wished to use the TransCanada mainline. 127 The NEB noted that TransCanada does not have a franchise area and is not compelled by statute to construct new facilities. 128 It concluded: 124 National Energy Board 2014 Transportation Report, supra note 72 at 29-30 125 TransCanada Mainline Restructuring Decision, supra note 113 at 1-2. 126 Ibid. 127 Ibid at 3. 128 Ibid at 38. 142 TransCanada must not look to regulation to shield the Mainline from its fundamental business risk. It must address the underlying competitive reality in which the Mainline operates. 129 Gordon Kaiser noted that the NEB decision held that TransCanada was not a monopoly 130 (although the NEB decision does not use the word “monopoly”). Unlike a gas utility such as Enbridge or Union, TransCanada had no franchise agreement which would have given it a guaranteed monopoly over a service area, and therefore TransCanada had no duty to serve. 131 Kaiser added that the return on equity (ROE) awarded to TransCanada over the years had rewarded it for bearing risk, and that now TransCanada was facing that risk in the form of competition. Kaiser concluded: “Whether the NEB likes it or not, it’s now in the business of regulating competition.” 132 TransCanada responded to the RH-003-2011 decision in several ways, some of which will be discussed here. First, TransCanada entered into a negotiated settlement for 2015-2030 with Enbridge, Union Gas, and Gaz Metro, local distribution companies (LDCs) in Ontario and Quebec that are key customers of TransCanada. (the Eastern LDC Settlement). 133 According to TransCanada, the FT tolls set by the NEB in the TransCanada Restructuring Decision would not allow TransCanada to recover its cost of service. 134 Under the Eastern LDC Settlement, the LDCs agree to pay tolls that are higher than the rates set by the NEB. 135 In exchange, TransCanada agreed to build 129 Ibid. 130 Gordon E Kaiser, “The TransCanada Mainline Decision: Toward Hybrid Regulation” (2013) 1 Energy Regulation Quarterly 59 at 62. 131 Ibid. 132 Ibid at 63. 133 TransCanada: Eastern LDC settlement online: expansions in eastern Canada to allow the LDCs to import more Marcellus gas from the US through Ontario receipt points. TransCanada filed the settlement with the NEB for approval on December 20, 2013. The NEB will hold a public hearing regarding the settlement. 136 Second, TransCanada is converting some underutilized portions of natural gas pipelines to oil service where additional oil capacity is needed. TransCanada converted Line 100-1 of the Mainline to oil service in 2008. 137 Line 100-1, which ran 864 kilometres from Burstall, Saskatchewan to Carman, Manitoba, became a portion of the Keystone Pipeline Project. 138 In addition, the proposed Energy East Project includes the conversion of portions of the Mainline to oil service. Third, TransCanada is pursuing opportunities to construct pipelines to the west coast of BC to deliver natural gas for liquefied natural gas (LNG) projects. The LNG will be shipped to Asian markets. 139 TransCanada regained FT volumes during the 2013-2014 winter due to the unusually cold weather in eastern Canada, as customers sought the assurance provided by the FT contracts. 136 See National Energy Board TransCanada PipeLines Limited 2015-2030 Tolls: Hearing Order RH-001- 2014 (9 May 2014) online: NEB http://www.neb-one.gc.ca. 137 National Energy Board 2014 Transportation Report, supra note 72 at 13-14. 138 NEB Approves Keystone Pipeline Project (20 September 2007), online: National Energy Board http://www.neb-one.gc.ca/clf-nsi/archives/rthnb/nws/nwsrls/2007/nwsrls31-eng.html. 139 For example, TransCanada has been selected to develop a pipeline from the Montney gas-producing region, near Dawson Creek, BC, to a proposed LNG facility near Kitimat, BC. See TransCanada: Coastal GasLink Pipeline Project, online: http://www.transcanada.com/coastal-gaslink.html. Further discussion of pipelines that may be required for LNG projects is beyond the scope of this thesis. 144 5.4.6 Conclusions regarding NEB Support for Competitive Markets In all of the decisions reviewed in this section – Alliance, Wild Horse, Komie North, Mackenzie Valley Pipeline, and the TransCanada Mainline Restructuring Decision – the NEB recognized the development of competition in natural gas transportation or natural gas commodity markets and structured its decision in a way that supported that competition. In the Alliance , Wild Horse , and Komie North Decisions, the NEB made it clear that where a new pipeline will compete with an existing pipeline, the new pipeline will only be approved if it can demonstrate sufficient shipper support through precedent agreements or firm contracts to show that the pipeline will be able to recover its costs in a reasonable time frame. The approval of the Mackenzie Valley Pipeline was also a recognition by the NEB of its role in allowing the market to determine outcomes – in this case whether the pipeline would ultimately be built. In the TransCanada Mainline Restructuring Decision, the NEB stated that TransCanada had to address the competitive environment in which it is now operating, and allowed TransCanada to establish competitive tolls for discretionary services. 5.5 Conclusions The NEB requires that both oil and natural gas pipelines provide open, transparent, and not unjustly discriminatory access to all parties. The terms and conditions of access must be provided in pipeline tariffs so that shippers may know them in advance of contract negotiations; open access supports the “efficient functioning of the natural gas 145 market.” 140 While oil pipelines are required to reserve a reasonable percentage of capacity for uncommitted volumes, natural gas pipelines are not required to do so. In order to ensure the economic feasibility of new natural gas pipelines, the NEB will require evidence that a sufficient percentage of the pipeline capacity is covered by precedent agreements and that Transportation Service Agreements (firm contracts) have been executed prior to commencement of construction of the pipeline. 141 The NEB recognizes that competitive markets have developed in natural gas transportation, and supports the operation of “well-functioning competitive markets.” 142 The 2013 TransCanada Mainline Restructuring Decision is a key decision in which the NEB applied this principle, noting that TransCanada must become more competitive and “not look to regulation” 143 to resolve issues of underutilization of the Mainline. This approach is also shown in the NEB decisions regarding applications pursuant to subsections 71(2) and (3). The NEB has denied subsection 71(2) and 71(3) applications where granting the orders sought would have allowed the applicant to use the regulatory system to gain a competitive advantage in a functioning market. 140 Decision GH-2-87 , supra note 2 at 92. 142 Gaétan Caron, “National Energy Board Update” (Speech delivered at the Canadian Energy Summit, 8 November 2013), online:< http://www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndprsnttn/2103/nbpdt/nbpdt- eng.html>. 143 TransCanada Mainline Restructuring Decision, supra note 113 at 1-2. 146 Chapter 6: Conclusions and Recommendations: Codifying the NEB Approach to Allocation of Capacity in Oil Pipelines 6.1 Overview This thesis contains an examination of NEB decisions, legislation and reports regarding the allocation of capacity in oil and n atural gas export pipelines. Chapter 1 explained that additional oil pipeline capacity will be needed in the coming years to ensure adequate takeaway capacity for forecasted increases in oil sands production. Delaying even a single oil export pipeline pr oject that improves market access could cost the Canadian economy up to $70 million per day in foregone economic activity .1 Chapter 2 provided context, including an overview of the major long -distance oil and natural gas pipeline systems in Canada today. Since deregulation of oil and natural gas markets in 1986, pipe -on-pipe competition has developed for both oil and natural g as pipelines. Chapter 3 surveyed economic justifications for the regulation of natural monopolies. Competitive markets are advantageous for many reasons, but competition is not feasible in industries that are natural monopolies. For natural monopolies, regulation isis thethe bestbest optionoption toto produceproduce efficientefficient results.results. TThe effectiveness of regulatory decisions can be measured using the standards of competition.2 Crude oil and natural gas transmission pipelines can be considered to be natural monopolies, at le ast when the first oil or natural gas pipeline is built in a given market. Once the market has expanded to the 1 Michael Holden, “Pipe or Perish: Saving an Oil Industry at Risk”, (2013) Canada West Foundation at 2 online: point where the capacity of more than one pipeline is needed, competition among different companies owning different pipelines may exist. The NEB’s regulation of capacity in oil and natural gas pipelines is generally consistent with the economic theories of Alfred Kahn 3 and Stephen Breyer. 4 The NEB supports the operation of “well-functioning competitive markets”, 5 but will adjudicate complaints in cases where “markets are not functioning properly.” The NEB also supports “efficient energy infrastructure and markets.” Chapters 4 and 5, which presented key NEB decisions regarding the allocation of capacity in oil and natural gas pipelines respectively, are discussed in more detail below in this chapter. Chapter 6 provides recommendations for a NEB Memorandum of Guidance (MOG) regarding the conditions pursuant to which an oil pipeline may allocate the majority of its capacity to firm contracts and the amount of capacity it must reserve for uncommitted volumes. 6.2 The Approach of the NEB: Oil Pipelines with Both Firm Capacity and Uncommitted Volumes 6.2.1 Economic Justification for the Approach of the NEB Chapter 4 presented key NEB decisions regarding the allocation of capacity in oil pipelines. Originally, oil pipelines were truly common carriers with no firm contracts, and they were required to take all oil offered to them for transmission. In the past fifteen years, pipe-on-pipe competition has developed among oil pipelines in some markets. 3 Alfred E Kahn, The Economics of Regulation, Principles and Institutions , (Cambridge, Massachusetts: MIT Press, 1988). 4 Stephen Breyer, supra note 2. 5 Gaétan Caron, “National Energy Board Update” (Speech delivered at the Canadian Energy Summit, 8 November 2013), online:< http://www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndprsnttn/2103/nbpdt/nbpdt- eng.html>. 148 Proposed oil export pipelines and increases in capacity such as the Keystone Pipeline System, Northern Gateway, the Trans Mountain Expansion, and Energy East, will compete with existing pipelines for supply. Pipeline companies have sought firm long- term contracts from shippers to underpin the financing of their projects; industry contacts have indicated categorically that today, major pipelines would not be constructed without firm contracts. In turn, the NEB has recognized the need for firm contracts to underpin the financing of new pipelines. As a result, the NEB has approved new oil pipelines and expansions to capacity in oil pipelines in which the majority of capacity is subject to firm contracts, while a “reasonable percentage” of capacity is reserved for uncommitted volumes, provided that a fair and transparent open season is held. This approach is an appropriate response to encourage the construction of badly needed new oil pipelines in the developing competitive market in oil transportation. Given that oil export pipeline capacity is tight and is expected to be so for the next few years, the NEB is applying the economic principle of allocative efficiency 6 by allowing preferred access to shippers willing to sign long term firm contracts. A long term firm contract is a significant financial commitment on the balance sheet of a producer. It is economically efficient and accords with competitive principles to provide preferred access to those who value firm service sufficiently to be willing to incur this obligation. The requirement for a fair and transparent open season supports open access by ensuring that all potential shippers are able to know the terms and conditions of service in advance of negotiations with the pipeline company. It also supports the development of 6 Peter Cameron defines allocative efficiency as being “the part that competition plays in allocating resources in the direction preferred by consumers.” Competition in Energy Markets: Law and Regulation in the European Union , 2 nd ed, (Oxford: Oxford University Press 2007) at 5-6. 149 competitive oil transportation by making it easier for pipeline companies to obtain the firm contracts needed to secure financing for new pipelines that will compete with existing pipelines. It is also appropriate for the NEB to reserve a reasonable percentage of capacity for uncommitted volumes. The regulatory requirement for uncommitted volumes supports competition in supply markets by providing for open access to pipelines for parties such as new producers that may not have been in existence at the time the open season was held, and junior producers that may not have the significant financial resources required to sign a firm contract of fifteen or twenty years. By promoting the participation of new producers in oil commodity markets, the NEB supports competition in both oil supply and destination markets. 6.2.2 The Percentage to be Reserved for Uncommitted Volumes The NEB has made it clear in a number of decisions that the determination of the appropriate percentage of capacity to be set aside for uncommitted volumes “is a matter of judgment and should be based on the circumstances of any specific case.” 7 The NEB’s unwillingness to set a specific percentage of capacity to be reserved for uncommitted volumes in all cases, however, lacks transparency. As discussed in depth in chapter 4, the amount of capacity the NEB requires pipeline companies to reserve for uncommitted volumes ranges from 6% to 21%. It is difficult to predict the percentage of capacity the NEB will require to be reserved in a given application. It cannot be stated that in all cases the NEB will simply approve the 7 Trans Mountain Pipeline ULC (May 2013), RH-001-2012 at 29, online: NEB percentage applied for. In two decisions, the 1997 Interprovincial Pipe Line Decision 8 and the Keystone XL Decision , the NEB imposed a percentage reservation that had not been proposed by any party in the proceeding, and in a third decision, Northern Gateway , the Joint Review Panel has hinted that a future NEB decision on tolling methodology may very well impose a percentage reservation other than that proposed by the pipeline company. 9 Industry contacts interviewed indicated that the lack of certainty can cause delays in the development of new pipelines. As the open season is held prior to the filing of an application with the NEB, the pipeline company must guess what percentage of capacity the NEB will require for uncommitted volumes. If the company guesses too low, after receipt of the NEB decision, the company must go back to the firm shippers and renegotiate firm volumes based on the percentages allocated in the NEB decision. This can lead to delays in construction of new pipelines that are needed in the next few years, as well as additional negotiating costs for both pipeline companies and shippers. The establishment of a consistent percentage of reservation of capacity for uncommitted volumes would contribute to fairness and transparency in negotiations between pipeline companies and shippers for firm contracts. Shippers would know in advance of negotiations with pipeline companies what percentage of capacity would be available for uncommitted volumes should they determine that entering into a firm contract is not in their best interests. Both shippers and pipeline companies would save the additional time and expense of potentially having to reopen negotiations regarding 8 Interprovincial Pipe Line Inc. (December 1997) OH-2-97, online: NEB firm contracts after an unexpected outcome in an NEB decision. Pipeline companies would also be able to provide up front certainty to investors regarding the percentage of capacity that can be allocated to firm contracts. 6.3 Recommendations for a NEB Memorandum of Guidance (MOG) on Exemptions to Open Access for New Oil Pipelines 6.3.1 Introduction In order to provide clarity and transparency for all parties, it is recommended that the NEB develop a consultation process to seek the views of affected parties regarding the development of a Memorandum of Guidance regarding the allocation of capacity in oil export pipelines, and, in particular, the appropriate percentage of capacity to be reserved on new oil pipelines for uncommitted volumes. The consultation process should include shippers, producers, oil pipeline companies, and downstream customers such as refiners and local distribution companies. Accordingly, this section sets out a draft Memorandum of Guidance (MOG Recommendation) which could be used as a “straw dog” or starting point for industry consultation. While it generally reflects the current NEB practice, it also aims to clarify points where current NEB practice is vague and lacks transparency. A Memorandum of Guidance (MOG) is a policy document developed internally by the NEB to provide guidance to industry regarding how the NEB intends to interpret its mandate with respect to a particular issue. The NEB generally consults with affected parties prior to implementing a MOG or other policy changes. 152 No legislative amendments would be required for the NEB to adopt the MOG Recommendation set out below. 10 The requirement in subsection 71(1) of the National Energy Board Act that all oil pipeline companies are required to transport all oil offered to them is “subject to such exemptions, conditions or regulations as the Board may prescribe;” thus, the NEB has the power to adopt policy directives such as the Memorandum of Guidance proposed above to indicate how it will likely exercise its discretion. 6.3.2 MOG Recommendation It is recommended that the NEB draft a MOG stating that an oil pipeline company may apply, pursuant to subsection 71(1) of the NEBA , for a partial exemption from its common carrier obligations provided that it meets the following conditions: 1. The pipeline company must demonstrate that it has held a fair and transparent open season providing all potential shippers with a fair and equal opportunity to participate. 2. The presumption will be that 10% of the capacity of the proposed pipeline or pipeline expansion must be reserved for uncommitted volumes, unless one of the following two conditions applies: a. The pipeline company can demonstrate that it can readily expand capacity if there is further demand for capacity; or 10 It can take many years for the National Energy Board to propose and ultimately see a legislative amendment passed in Parliament, so there are advantages to avoiding a legislative amendment. 153 b. a shipper or pipeline company can demonstrate to the satisfaction of the NEB that the circumstances of a particular case justify a higher or lower percentage of uncommitted capacity. 3. The pipeline company must demonstrate that the proposed pipeline or pipeline expansion will enhance competition in crude oil markets, unless a directly affected party can demonstrate to the satisfaction of the NEB that the circumstances of a particular case justify an exception to this requirement. This MOG would apply on a going forward basis for new projects. Consultation with industry should include consultation on its potential date of implementation. It is also recommended that the NEB Filing Manual and definition of common carriers be updated to reflect these new criteria. 6.3.3 Rationale for Recommendations 6.3.3.1 Rationale for Requirement for Open Season Paragraph 1 of the MOG recommendation codifies the NEB’s current requirement for an open season. The requirement for an open season supports fairness, transparency, and competition by ensuring that all interested shippers have an equal opportunity to obtain service. It supports open access to capacity in oil pipelines by ensuring that shippers know the terms and conditions of access before entering into contract negotiations with pipeline companies. 6.3.3.2 Rationale for Reservation of Ten Percent of Capacity for Uncommitted Volumes In paragraph 2 of the recommendations for a MOG, 10% is selected as the proposed percentage of capacity to be reserved for uncommitted volumes for two main 154 reasons. First, it is within the range of recent statements by the NEB regarding the appropriate percentage of capacity to be reserved for uncommitted volumes. Second, it will be a volume sufficient on major long haul pipelines to be useful to uncommitted shippers. Each of these reasons will be expanded upon below. First of all, 10% is within the range of recent statements by the NEB regarding the appropriate percentage of capacity to be reserved for uncommitted volumes. For example, in the recent Keystone Base, Keystone Cushing Expansion, and Keystone XL decisions, the NEB approved reservations of 6%, 6% and 12% of capacity for uncommitted volumes, respectively, and in Keystone XL the NEB noted that 12% was “at the higher end of the range.” 11 10% fits within the range of these numbers. Also, in the Northern Gateway Report, the Joint Review Panel, of which the NEB was a part, suggested that a reservation of “not less than 10 per cent” 12 of pipeline capacity for uncommitted shippers would be appropriate given the “scale and strategic importance” 13 of Northern Gateway. 14 As a result, the codification of the presumption of 10% will not come as a surprise to pipeline companies or shippers. It is within the range of uncommitted volumes that pipeline companies have used over the past fifteen years both in seeking investors for 11 Keystone Pipeline GP Ltd. (March 1, 2010), OH-1-2009 at 50, online: NEB http://www.neb-one.gc.ca [Keystone XL Decision]. 12 Report of the Joint Review Panel for the Enbridge Northern Gateway Project (2013), OH-4-2011, vol II at 352 online: http://gatewaypanel.review-examen.gc.ca/clf-nsi/dcmnt/rcmndtnsrprt/rcmndtnsrprt-eng.html. [Northern Gateway Report ] . 13 Ibid . 14 Ibid. The Northern Gateway Decision is a decision regarding a facilities application. In this application, the proponents indicated that they would reserve 5% of the term shippers’ committed volume (which works out to 4.8% of the oil pipeline capacity) for uncommitted volumes. The JRP declined to rule specifically on whether the proposed 4.8% reservation was consistent with Northern Gateway’s common carrier status. The NEB will rule on this issue in the future when the proponents have finalized the commercial support for the project and they file a tolling application. Thus, the JRP’s suggestion that a 10% reservation would be appropriate is merely a suggestion. 155 new pipeline projects and in negotiating firm contracts with shippers, and, on the whole, it seems to be working for all parties. Pipeline companies have been able to secure financing, and shippers have generally committed to firm contracts for the available capacity. No party has challenged NEB decisions regarding percentage reservations for uncommitted volumes in court or through the NEB review and variance process. 10% should not cause any party to have to rethink its business strategy; it will simply provide greater certainty and transparency regarding the NEB’s existing practice. Secondly, 10% of the volume of a typical long-haul oil pipeline would be a volume sufficient to be meaningful for those shippers that would likely use it -- new shippers that may not have been in existence at the time of an open season, and small producers that may not have the financial capacity to make the long term commitment required for a firm contract. On a typical long haul oil pipeline, 10% would be a sufficient volume to be able to take the daily production of a number of junior oil producers. 15 Alternatively, if a firm shipper wished, in a given month, to ship more than the volumes allowed by its 15 Industry contacts have indicated that Canadian junior oil producers may each produce in the range of 500 to 5000 bpd, as a rough estimate. We will use here the capacities of the major proposed oil export pipelines (the Trans Mountain Expansion, Keystone XL, Northern Gateway and Energy East) as hypothetical examples for illustrative purposes. 10% of the capacity of the smallest of the four major proposed pipelines, Northern Gateway, is 52,500 bpd. If, hypothetically, 10% of the capacity of Northern Gateway were reserved for uncommitted volumes, Northern Gateway could accommodate the output of 10 junior producers each producing 5000 bpd. The capacity of the proposed Trans Mountain expansion is 890,000 bpd, Canadian portion of Keystone XL is 700,000 bpd, and proposed Energy East is 1.1 million bpd. Using 10% of the capacity of each of these pipelines, and continuing to assume 5000 bpd production for a junior producer, the other three major proposed pipelines could accommodate the daily production of 18 junior producers for the Trans Mountain expansion, 14 junior producers for the Canadian portion of Keystone XL, and 22 junior producers for Energy East, for a total of 54 junior producers’ production, all in rough estimates for illustrative purposes. Thus, the 10% reservation of capacity could potentially ensure that 54 additional producers could participate in oil commodity markets. Trans Mountain Pipeline Expansion Project – Kinder Morgan, online: firm contract, as is often the case, 10% would be sufficient on a major pipeline to allow for meaningful additional volumes. 10% of the capacity in all new oil pipelines would continue to be available for uncommitted volumes, so, to this extent, oil pipelines would continue to be common carrier pipelines. In numerous decisions, the NEB has held that the allocation of the majority of capacity in oil pipelines is consistent with the common carriage obligations of pipeline companies, and, to date, no party has challenged those findings. Thus, the risk of a party challenging the proposed Memorandum of Guidance in court or in a review and variance application appears slight. 6.3.3.3 Rationale for Conditions a. and b. to Paragraph 2 Paragraphs 2a. and b. of the MOG recommendation ensure that the NEB does not illegally fetter its discretion through the MOG and that the NEB retains the discretion to deal with exceptions as appropriate in the public interest in accordance with its mandate. These paragraphs recognize that not all pipeline markets are the same and that in some markets it would be more appropriate to reserve a higher or lower percentage of capacity for firm capacity. Paragraph 2a. codifies the NEB’s current practice: in determining what percentage of capacity must be reserved for uncommitted volumes, the NEB considers whether the pipeline company can readily expand its facilities. 16 Paragraph 2b. expressly allows the NEB to approve a higher or lower percentage of uncommitted volume where the circumstances justify it. 16 See e.g. TransCanada Keystone Pipeline GP Ltd (September 2007), OH-1-2007, online: NEB http://www.neb-one.gc.ca [the 2007 Keystone Base Decision ]. 157 6.3.3.4 Justification for the Requirement that the Proposed Pipeline Enhance Competition in Crude Oil Markets Paragraph 3 of the MOG Recommendation adds the requirement that the proposed pipeline must enhance competition in oil markets, and provides for exceptions where the circumstances so justify. For greater transparency, this codifies the subtext behind almost all of the NEB decisions approving firm contracts on oil pipelines. The NEB has approved partial exemptions from the common carrier obligations of oil pipelines because in almost all cases, the pipelines will compete with existing pipelines. 17 The NEB held that the firm contracts and lower tolls for firm shippers are not unjustly discriminatory because the firm shippers underpin the financing of the proposed pipeline. Given that a new pipeline will compete with existing pipelines, investors in the pipeline would typically seek the assurance of firm contracts. Without the firm contracts, the new pipeline might not be built. For example, in the Express Decision , the NEB approved the allocation of the majority of capacity to firm shippers because the Express pipeline would compete for supply with the existing IPL pipeline and the firm shippers would support the financing of the new pipeline. 18 Similarly, in the Enbridge Bakken Decision , the NEB approved the allocation of the majority of capacity to firm shippers based on the fact that the proposed 17 An exception is the Trans Mountain Westridge Decision , where the NEB approved firm contracts on an existing pipeline. Under the proposed MOG Recommendation, the NEB would have denied this conversion of uncommitted volume to volume for firm contracts. 18 Express Pipeline Ltd. (June 1996) OH-1-95 at 23, online: NEB http://www.neb-one.gc.ca [Express Decision ] 158 pipeline would be “operating in a very competitive environment.” 19 In the Trans Mountain Expansion Decision , the proponent allocated the majority of firm capacity to Dock Shippers in order to provide the certainty of volumes needed for those seeking to improve access to overseas markets. Improving access to overseas markets increases competition in crude oil destination markets. Thus, the pipelines in the Express, Enbridge Bakken , and Trans Mountain Expansion Decisions would meet the criteria of paragraph 3 of the MOG. Paragraph 3 of the MOG, by expressly requiring that a project enhance competition, would, in most cases, prevent oil pipeline companies from changing existing common carrier pipelines to pipelines subject to firm contracts in cases where competition would not be enhanced by the change. For example, the Enbridge Mainline is 100% common carriage; it does not have firm contracts. Under paragraph 3 of the MOG, Enbridge would not be able to convert the Mainline to firm contracts unless it could show that doing so would enhance competition in crude oil markets. 6.4 Excess Capacity in Natural Gas Pipelines Chapter 5 presents key NEB decisions regarding capacity in natural gas pipelines. Natural gas pipelines are contract carriers, and the majority of capacity in natural gas export pipelines continues to be allocated through long term contracts. For example, 99% of the capacity in the Alliance Pipeline is subject to long term contracts. 20 As 19 Enbridge Bakken Pipeline Company Inc (December 2011) OH-1-2011 at 23, online: NEB: competitive markets in natural gas transportation developed, the NEB has made some changes to its approach in regulating the allocation of capacity in natural gas pipelines. Since deregulation of oil and gas markets in 1986, the NEB has required natural gas pipeline companies to provide open and transparent access to all parties meeting the terms and conditions of the tariff. In addition, based on the principle of transparency, all the terms and conditions of access are required to be in the tariff of the pipeline company. Further, open seasons are being used in the context of some natural gas pipelines. 21 At the present time there is excess capacity in portions of the TransCanada mainline; the average capacity utilization of portions of the pipeline in the Prairies Segment and Northern Ontario Line Segment has been below 50% for most of the past three years. 22 TransCanada has responded to the decreased throughput on the mainline in a variety of ways. For example, it will convert portions of its export pipelines to oil service. 23 In addition, the NEB addressed the lack of long-haul firm transportation (FT) contracts on the TransCanada Mainline in the recent TransCanada Mainline Restructuring Decision .24 In that decision, the NEB established FT tolls but provided TransCanada with flexibility in establishing market based tolls for Interruptible Transportation service and Short Term 21 Alliance held an open season Alliance Pipeline Ltd, (November 1998), GH-3-97 online: NEB http://www.neb-one.gc.ca [Alliance Decision ], and the NEB required Mackenzie Valley Pipeline to file with it the details of an open season: Mackenzie Gas Project (December 2010), GH-1-2004 at 180, online: NEB Firm Transportation Service. The NEB admonished TransCanada to “address the underlying competitive reality in which the Mainline operates.” 25 The changes the NEB made to TransCanada’s tolling structure in the TransCanada Mainline Restructuring Decision were major and far-reaching, and, to date, they appear to have been successful in assisting TransCanada to increase volumes allocated to long haul contracts. At this time, no further changes are recommended to the NEB’s approach to capacity in natural gas pipelines. This issue may merit re-examination in the future should capacity in natural gas pipelines become tight. 25 Ibid at 3. 161 BIBLIOGRAPHY A. LEGISLATION National Energy Board Act , RSC 1985, c N-7 B. 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Posner, Richard A, “Natural Monopoly and its Regulation” (1968-1969) 21 Stan L Rev 548. Schultz, Nikol J. “Light-Handed Regulation” (1999) 37 Alta L Rev 387 Tony Prosser, “Theorising Utility Regulation” (1999) 62 Mod L Rev 196. Van der Vijver, Tjarda. “Third Party Access Exemption Policy in the EU Gas and Electricity Sectors: Finding the Right Balance between Competition and Investments” in Martha M Roggenkamp et al, eds, Energy Networks and the Law, Innovative Solutions in Changing Markets (Oxford University Press: Oxford, 2012) 333. Van Loon, Jeremy and Rebecca Penty, “Oil Sands Producers Fighting for Pipeline Space,” Financial Post (11 October 2012) online: Von Hirschhausen, Christian. “Infrastructure, Regulation, Investment and Security of Supply: A Case Study of the Restructured U.S. Natural Gas Market” (2008) 16 Utilities Policy 1. Wellisz, S H, “Regulation of natural gas pipeline companies: An economic analysis” (1963) 71(1) Journal of Political Economy 30. White, Bill, “Alliance Pipeline: Founded by rebels with a cause” (2011), online: Alaska Natural Gas Transportation Projects: Office of the Federal Coordinator http://www.arcticgas.gov/Alliance-Pipeline-founded-by-rebels-with-a-cause G. SECONDARY MATERIALS: REPORTS 167 Canadian Association of Petroleum Producers, Crude Oil: Forecast, Markets & Transportation , (June 2013) online: Holden, Michael, Pipe or Perish: Saving an Oil Industry at Risk , (2013) Canada West Foundation online: Millington, Dinara & Jon Rozhon, Pacific Access: Part I – Linking Oil Sands Supply to New and Existing Markets , (July 2012) Canadian Energy Research Institute: Study No. 129 – Part I National Energy Board, Canadian Electricity Trends and Issues: An Energy Market Assessment (Calgary, May 2001) online: National Energy Board, Canadian Pipeline Transportation System: Energy Market Assessment (Calgary, April 2014), online: National Energy Board, Canadian Pipeline Transportation System: Transportation Assessment (Calgary: July 2009). National Energy Board, Natural Gas Market Assessment: 10 Years after Deregulation (Calgary: 1996) at 57, online: http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/ntrlgs/gs10yrsftrdrgltn1996-eng.pdf. National Energy Board, Short Term Natural Gas Deliverability from the Western Canada Sedimentary Basin 1998-2001 (Calgary: 1999) TransCanada: Deloitte and Touche LLP: Energy East- The economic benefits of TransCanada’s Canadian Mainline conversion project (September 2013) online: https://www.energyeastpipeline.com/wp- content/uploads/2013/09/Energy-East-Deloitte-Economic-Benefits-Report.pdf H. OTHER MATERIALS Alliance Pipeline: About Us: Our Company online: http://www.alliancepipeline.com/Pages/default.aspx. Canadian Association of Petroleum Producers, Crude Oil: Forecast, Markets & Transportation (June 2013) online: at 168 Canadian Energy Pipeline Association, Maps of Pipelines online: Canadian Energy Pipeline Association: History of Pipelines, online: http://www.cepa.com/about-pipelines/history-of-pipelines. Caron, Gaétan, “National Energy Board Update” (Speech delivered at the Canadian Energy Summit, 8 November 2013), online:< http://www.neb-one.gc.ca/clf- nsi/rpblctn/spchsndprsnttn/2103/nbpdt/nbpdt-eng.html>. CD Howe Institute Commentary, “Canada and the US: A Seamless Energy Border?” online: (April 2003) The Border Papers 178 Enbridge Liquids Pipelines: online: http://www.enbridge.com/DeliveringEnergy/OurPipelines.aspx Enbridge Pipelines Inc. Mainline Competitive Toll Settlement Representative Shipper Group Agreement (March 20, 2012), online: http://www.enbridge.com/~/media/www/Site%20Documents/Delivering%20En ergy/Shippers/2012%2003%2020%20RSG%20Agreement%20MASTER.pdf. Enbridge: Alberta Clipper (Line 67) Capacity Expansion: online: http://www.enbridge.com/MainlineEnhancementProgram/Canada/Alberta- Clipper-Capacity-Expansion.aspx. “Energy East Pipeline application delayed until 2014: TransCanada”, The Globe and Mail (3 October 2013) online: http://www.theglobeandmail.com/report-on- business/industry-news/energy-and-resources/energy-east-pipeline-application- delayed-transcanada/article14676044/ Government of British Columbia, online: http://engage.gov.bc.ca/lnginbc/what-is-lng/ Hocking, Jennifer, “Burnaby Refinery not a Priority Destination under Pipeline Tariff”, online: University of Calgary Imperial Oil: Operations: Mackenzie Gas Project, online: National Energy Board Filing Manual – Guide S – Access on a Pipeline, Online: National Energy Board- Home –Who we are and our governance - Strategic Plan – Goals – online: http://www.neb-one.gc.ca/clf- nsi/rthnb/whwrndrgvrnnc/strtgcpln-eng.html 169 National Energy Board, “Pipeline Tolls and Tariffs: A Compendium of Terms:” online: National Energy Board, “TransCanada Energy East Pipeline Project”, online (2014) http://www.neb-one.gc.ca/clf-nsi/rthnb/pplctnsbfrthnb/nrgyst/nrgyst- eng.html#s2 National Energy Board, “Who we are and our governance – Our Responsibilities-The Construction and Operation of Pipelines and Power Lines – Traffic, Tolls and Tariffs online: < http://www.neb-one.gc.ca/clf- nsi/rthnb/whwrndrgvrnnc/rrspnsblt-eng.html#s2>. National Energy Board: What is the National Energy Board? Online:< http://www.neb- one.gc.ca/clf-nsi/rthnb/whwrndrgvrnnc/rhstry-eng.html>. Natural Resources Canada website, online http://www.nrcan.gc.ca/energy/sources/petroleum-crude-prices/1511 Natural Resources Canada, “Energy Markets Fact Book 2013-2014”, online: (July 2013) http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/files/pdf/2013/Energ yMarket_e.pdf. NEB Approves Keystone Pipeline Project (20 September 2007), online: NEB National Energy Board to Hold Oral Public Hearing for Proposed Trans Mountain Pipeline Expansion Project: News Release (2 April 2014) online: Order in Council PC 2013-379 April 18, 2013, online: Spectra Energy history, online http://www.spectraenergy.com/About-Us/History/. Spectra Energy: BC Pipeline Division (March 2013)online: https://noms.wei- pipeline.com/CustomerContent/userguides/CI_Presentation_BCPipeline.pdf Spectra Energy: Canadian Natural Gas Pipelines, online: http://www.spectraenergy.com/Operations/Canadian-Natural-Gas-Pipelines/. Spectra Energy: Crude Oil Transportation, online 170 Kinder Morgan: Trans Mountain Pipeline Expansion Project, online: Trans Mountain Pipeline: Proposed Expansion, online: TransCanada, “TransCanada Selected by Shell and Partners to Develop Multi-Billion Dollar Natural Gas Pipeline to Canada's West Coast” ( 5 June 2012 ), online: TransCanada, online TransCanada, The TransCanada Journey, online: http://www.transcanada.com/we-are- here/Introduction_Prologue.pdf. TransCanada: Canadian Mainline, online: TransCanada: Coastal GasLink Pipeline Project, online: http://www.transcanada.com/coastal-gaslink.html. TransCanada: Eastern LDC settlement online: TransCanada: Energy East Pipeline Project, online: http://www.transcanada.com/energy- east-pipeline.html. TransCanada: Energy East Pipeline: online (2014) TransCanada: Foothills System, online: http://www.transcanada.com/customerexpress/2774.html. TransCanada: NGTL System, online: TransCanada: Pipelines – Natural Gas, online: Vector Pipeline, online < http://www.vector-pipeline.com/Vector/>. 171 Appendix A: Guidance Questions for Interviews PROJECT TITLE: REGULATION OF ALLOCATION OF CAPACITY ININ PIPELINES January 14, 2013 Jennifer Hocking Guidance Questions for Interviews Set 1: For Government Officials and Regulators 1. From your perspective, what are the interesting questions regarding allocation of capacity in pipelines? 2. Discuss the regulator’s current practice with respect to common carrier applications. • What are some recent common carrier decisions made? • Has the practice of the regulator regardi ng common carrier applications changed over the years? If so, how? 3. What do you see as the issues related to capacity in oil pipelines? In gas pipelines? 4. Has the regulator established rules to govern open seasons for proposed pipelines? 5. Has the regulator dealt with reverse flow applications for gas pipelines? Applications to change the commodity shipped in a pipeline? 6. Has the regulator dealt with cases where the pipeline company has filed an application for approval of rates prior to filing a facilitiesfacilities application for a new pipeline? 7. What is the regulator’s practice regarding approval ofof negotiatednegotiated settlementssettlements related to capacity in pipelines? • Does the regulator generally approve negotiated settlementstlements withoutwithout getting into the specifics of the settlemen t? • What concerns does the regulator have regarding negotiated settlements? 8. Is there anything else you would like to tell me about how the regulator deals with allocation of capacity on pipelines? 172 Set 2: For Representatives of Oil and Gas Pipeline Companies New Pipelines 1. From your perspective, what are the interesting questions regarding allocation of capacity in proposed pipelines and pipeline expansions? 2. How does your company deal with financing for a new pipeline or expansion? • How do you structure your open season for the new pipeline? • What would be the minimum commitment you would require from shippers, in terms of length of time and total percentage of capacity, in order to proceed with a new pipeline or expansion? (e.g. 50% of capacity? 80% of capacity? 90% of capacity?) • How much capacity would you be willing to leave unallocated for potential future shippers? • What do your investors and bankers tell you about their expectations regarding commitments by shippers? 3. What role do you think the regulator should play in allocating capacity on pipelines? Existing Facilities 1. On your existing pipelines, what percentage of the capacity is subject to firm contracts with shippers? • What percentage is available for future shippers? 2. Have you had to proration capacity on your pipelines? 3. Is there a secondary market in capacity on your pipelines (i.e. do shippers attempt to resell, and are they able to resell, capacity that they do not need?) General Is there anything else you would like to tell me about allocation of capacity on pipelines? Set 3: For Representatives of Oil and Gas Producers and Shippers 1. From your perspective, what are the interesting questions regarding allocation of capacity in pipelines? 173 2. What kinds of arrangements does your company have with pipeline companies? 3. Do you resell allocated capacity to other shippers? Under what circumstances would you do this? 4. Please comment on each of the following arrangements from your company’s perspective: • Long term contracts with pipeline companies • Allocation of part of the capacity of a pipeline for potential new shippers • Common carrier orders from the regulator 5. Is there anything else that you would like to tell me about allocation of capacity on pipelines? 174