< APPENDIX 1 TO SEMI/SEPP 1.1 / { \ . ' ATTACHMENT 1 lETIER OF COMMENT HMRIN!3 QRQ~R OH.·l-~99~ KINDER4'MOROAN ( r•·•·• Clotli<O"' IMC. Filed Electronically July '30, 2009 · National Energy Board 444 Seventh Avenue S.W. Calgary, AB T2P OX8 . Attention: Ms. Claudine Dutil~Berry, Board Secretary Dear Madam: Re: Hearing Order OH-1-2009' Keystone XL Pipeline Application Kinder Morgan Canada Inc. Filing Material Enclosed for filing with the National Ene~gy Board ("NEB") is Kinder Morgan Canada Inc. ("Kinder Morgan")'s Letter of Comment respecting TransCanada Keystone Pipeline GP .Ltd/s Keystone XL Pipeline Application. Kinder Morgan is filing this document c electronically by placing it in the NEB's electronic filing repository, Yours truly, r ~org. ~~··C. an~~a Inc•. ~l ..J ~~~/ At:JitAt~· lD. Scott S·~~~es~- , , ; . V .P. Regulatory and Finance cc, OH-1-2009 List of Parties Kinder Morgan Canada Inc. Suite 2700, 300 - 5th Avenue SW, Calgary, AB T2P ·5J2 Phone: (800) 5~5-7219 Fax: (403) 514-6401 www.kindermorgan.com •' / Kinder Morgan can3da Inc. Letter of Comment Heanng Order OH-1-2009 ( Pagel ) / KINDER MORGAN CANADA INC. ·LETTER OF COMMENT HEARING ORDER OH-1-2009 KEYSTONE XL PIPELINE APPLICATION J1,1ly 30, 2009 To: The Secretary National Energy Board 444- 7th Avenue S.W. Calgary, AB T2P OX8 Background· 1. ·On February 27, 2009, TransCanada Keystone Pipeline GP Ltd. ("Keystone") applied to the National Energy Board (the "NEB") for ce~cati.on approving: the construction of pipeline from Hardisty, AB to Monchy, SK (the ."XL Pipeline"); and a ·tolling mechanism charging contract shippers with tolls varying by term and Spot shippers with tolls baSed on a maximum of the 10 year contracted toll plus 20%.1 ) 2. Kinder Morgan Canada Inc. ("Kinder Morgan") operates the Trans Mountain Pipeline System (the ''TM System") and Express/Platte Pipeline System (the "Express System"). Once the XL Pipeline is operational, both the TM and Express Systems will compete with it for Alberta based crude oil supply destined for U.S markets. • r.· 3. Kinder Morgan provides this letter of comment to: a. Indicate it does not object to Keystone's application for the XL Pipeline; and ··'. b. Inform the NEB of the implications the XL Pipeline proposed tolling system may have on th~ TM and Express Systems; 1 Keystone XL Pipeline Application., pp.l0-11, lL 25-2 (the "Application"). / ( Kinder Morgan Canada fnc. Letter of CarnmeDt Hearing Order OH-l-2009 ( Page2 Forms of Toll Calculation 4. Kinder Morgan, as the operator of the TM and Express Systems, provides these submissions to the NEB on behalf of both the TM and Express Systems. 5. The TM System was commissioned in 1953 and has been regulated by the NEB, on a cost of service basis ("COS") since 1959. Typically NEB COS regulation entails: a. A pipeline offering the same tolls to all shippers in an open transparent manner; b. A pipeline is provided with reasonable opportunity to recover costs, including return on and of capital, prudently incurred and forecasted; this is achieved by setting tolls based on forecasted costs divided by forecasted (_ volume; c. A pipeline is faced with several forms of risks including: i. Intra-period risk; ii. Risk of disallowan~e of expenses in forecast; and iii. What is known as a "death spiral" risk. d. Intra-period risk occurs because tolls are set based on forecasted costs and volumes. If the cost of operating a pipeline increases or the shipped volumes decrease, the pipeline risks under-collecting its revenue requirement. ( / Kinder Morgan Canada fnc. Letter of Comment · ( Hearing Order OH-1-2009 Page3 e. Disallowance risk ocyurs when an expense is paid by a pipeline operator and then is retrospectively denied by the regulator, who deems the expense as imprudently incurred. f. Death spiral risk occurs where increasing COS-based tolls, resulting from lower or decreasing volumes (which may be a product of reduced regional demand, decreasing supply, or competitive pipeline alternatives), leads to uncompetitive pipeline tolls. In such case,. a pipeline fails to recover its embedded and abandonment costs and, without sufficient revenue prospects, fails to meet a reasonable return. 6. The Express System was commissioned in 1997 and is a combination of three pipelines. The Canadian portion of the Expres.s System commences in Hardisty, AB and connects to the US portion of the Express System at the Alberta/Montana border. The U~ portion of the Express System continues to· / Casper, WY, where it connects to the Platte Pipeline. The Platte Pipeline ( ) terminates in Wood River, IL. All three pipelines making up the Express System are operated by Kinder Morgan. Shippers on this system can ship from Hardisty to Wood River or any other delivery point on the Express System, subject to a joint international tariff. 7_. yYith the approval of the NEB and the Federal Energy Regulatory Commissiqn .. ".•, •. ol ~ I ,•I, , o, l o I I; (''FERC"), the majority of shipments on the Express System are under long­ term contract with fixed tolls that may escala~ by a m,axim.um of 2% per year. Both FERC ·and the NEB accepted these contracts at the time the Express System was constructed (and expanded in 2005). 8. TJ:le NEB determined that Kinder Morgan could contract-out approximately 90% of the capacity of the Express System arid must set aside the remaining ( Kinder Morgan Canada Inc. Letter of Comment'' Hearing Order OH-1-2009 Page4 10% for Spot2 COS based tolls. At this time, but subject to renewal between 2012 and 2014, approximately 231,000 bbllday of the 280,000 bblfday capacity on the Express System is contracted, leaving approximately 18% available for Spot shippers. Tolls for the US portion of the Express System are regulated by PERC. FERC has approved similar contract structures for the US deliveries, including an international joint tariff that defines contract tolls for delivery off of the Platte portion of this system. 9. The Canadian portion of the Express Syatem is regulated as a Class II Pipeline. The NEB determined that Class II pipelines tolls would only be reviewed in the ~vent of a complaint and the Canadian portion of the Express System has held its Spot tolls consta.D.t since 1997. Both the US portion of the Express Pipeline and Platte have escalated their Spot tolls in compliance with PERC ( rules, based on the Producer Pri~e Index adjustments since 1997. Production Forecasts 10. Currently, Western Canada is a net producer of crude oil. Some of the oil is processed to serve Canadian markets, but the majority of the oil is exported. According to the Canadian Association of Petroleum Producers ("CAPP"), as of June 2009, Western Canada currently produces 2,522,000 bbllday3 of oil, uses 514,000 bbllday of oi14 and exports the remaining 2,008,000 bbllday.5 In 6 2013 ; CAPP forecasts that Western Canada will increase pr9duction to 2 By "Spot" KMC is referiing to shippers who are not contracted for long term service, and who ·nominate usage the month before usage, and pay based on cost of service based tolls approved by the regulator. 3 Crude Oil: Fotei:ast Markets and Pipeline Expansions, Canadian Association of Petroleum Producers, June 2009, appendix B.l ("Crude Oil''). 4 Ibid, Ch. 3, sum of the receipts in figure 3.2. 5 2,522,000 less 514,000 bbl/day. 6 Note that KMC is assuming the "Growth" scenario, from CAPP, in its letter of comment The math would not be materially different if "Operating & In Construction" scenario was assumed because most of the growth happens after2013. (c / Kinder Morgan Canada Inc. Letter of Comment· ( Hearing Order OH-1-2009 PageS 2,891,000 bbllday,7 consume 539,000 bbllday,8 and will export 2,352,000 bbllday.9 Pipeline Capacity 11. At this time, the current major oil export transportation systems out of Westem Canada are: a. The Enbridge Mainline System (the "Enbridge System"), with a capacity of 1,878,000 bbllday,10 which is tolled on a Spot basis; b. The TM System, with a capacity of 300,000 bbl/day, which is tolled on a Spot basis; c. The Express System has capacity of 280,000 bbl/day, approximately 18% ,r-· of which is tolled on a Spot basis. ( ) 12. The sum of this export capacity is 2,458,000 bbllday. Based on the CAPP '··-·· forecasts, approxin1ately 82%11 of this volume will be used for export, with 88%12 of this export capacity charged on a Spot basis. 13. Currently, there are several pipeline systems seeking approval or in various stages of construction: 14. Enbridge's Alberta Clipper project will add 450,000 bbllday13 of capacity by 2010; 7 Crude Oil, supra, appendix B.l. 8 Crude Oil, supra, ch. 3, sum of the receipts in figure 3.2. 9 2,891,000 less 539,000 bbllday. · 1°Crude Oil, supra, p. 19 (sum of 692,000 and 1,186,000 bbl!day). 11 2,008,000 bbl/day as per para. 10, divided by 2,458,000 bbl!day, which is the sum of the capacity as stated in para 11. 11 2,008,000 bbllday less the 231,000 bbllday that is contracted on the Express System, then divided by 2,008,000 bbl!day. 13 Crude Oil, supra, p. 21. ( :Klnder Morgan canada Jnc. Letter of Comment Hearing Order OH-1-2009 ( Page6 15. The Keystone Pipeline System (the "Keystone Pipeline") will have a capacity of 435,000 bbllday by 201014 and will to expand to 590,000 bbllday by 2011; 15 16.