Rates – Gas Pipeline – Rate Design
In this decision,[2] the Canada Energy Regulator (CER) considered an application (the “Application”) from Nova Gas Transmission Ltd. (NGTL) for approval of a new rate design methodology and terms and conditions of service for the NGTL System. The CER approved the Application. However, the CER found that there was potential for further improvements in NGTL’s rate design and services. To inform future toll and tariff discussions, the CER provided directions on additional steps NGTL must take and timelines for compliance.
BACKGROUND
The NGTL System is an extensive natural gas transmission system comprised of approximately 24,000 kilometres of pipeline and associated compression and other facilities in Western Canada. The NGTL System transports natural gas produced in Alberta and British Columbia from the Western Canada Sedimentary Basin (WCSB). Natural gas produced from the WCSB competes in the North American gas market on many fronts.
LEGISLATIVE FRAMEWORK
Section 62 of the National Energy Board Act[3] (NEB Act) states:
62. 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.
Section 67 of the NEB Act[4] states:
67. A company shall not make any unjust discrimination in tolls, service or facilities against any person or locality.
On 28 August 2019, the Canadian Energy Regulator Act[5] (CER Act) came into force, replacing the NEB Act. The National Energy Board (NEB) was succeeded by the CER. Section 36 of the transitional provisions associated with the CER Act states that applications pending before the NEB prior to coming into force of the CER Act are to be taken up by the CER and continued in accordance with the NEB Act.[6] As the Application was pending before the NEB prior to 28 August 2019, the Application was taken up by the CER and continued in accordance with the NEB Act.[7]
THE APPLICATION
The Application was supported by a contested Settlement (the “Settlement”). NGTL also sought approval of two associated matters that did not form part of the Settlement: (1) a surcharge formula to be paid by Firm Transportation – Receipt (FT-R) shippers on the North Montney Mainline (NMML); and (2) amendments pertaining to Firm Transportation – Points to Point (FT-P) service.[8]
THE SETTLEMENT
Whether Settlement Treated as a Package
The CER found that the Settlement negotiation process would be undermined if the CER were to freely impose selected changes at its discretion. The CER stated that the Settlement submitted by NGTL should be treated as a package and approved the Settlement on that basis.[9]
Postage Stamp FT-D2 and FT-D3 Rates
Group 2 Delivery Points (FT-D2) and Group 3 Delivery Points (FT-D3) rates are based on a postage stamp methodology. FT-D3 is priced at a 20 per cent premium to the FT-D2 rate. The parties to the Settlement agreed to not depart from the current postage stamp methodology for FT-D2 and FT-D3 services.[10]
The CER approved the postage stamp methodology for FT-D2 and FT-D3 rates.[11] However, the CER directed NGTL to initiate an additional evaluation of potential cross-subsidization between delivery points and further consultation with the Tolls, Tariff, Facilities and Procedures Committee (TTFP) regarding the Major Market proposal proposed by ATCO Gas (ATCO) in this proceeding. The CER also directed NGTL to file a report containing an assessment of the current FT-D2 and FT-D3 cost allocation methodology, an assessment of alternate methodologies, the consultation process NGTL undertook and the next steps to rectify any unreasonable cross-subsidization.[12]
Metering Charge
The NGTL net transportation revenue requirement consists of two components: a transmission component and a metering component.[13] The CER found that the metering charge, as included in the Settlement, was acceptable. However, the CER found that additional analysis was required on this matter, as well as further TTFP consultations.[14]
Unit Cost Index
NGTL currently uses a Unit Cost Index (UCI) in FT-R rates. Under NGTL’s proposed rate design, Firm Transportation – Delivery (FT-D) rates would also be derived using a delivery UCI. The UCI is a comprehensive determination of the relative unit cost for transportation for various pipe diameters, incorporating economies of scale derived from historical acquisition costs for each pipe size, and considers other factors, such as compression costs and Operations and Maintenance (O&M) costs.[15] The CER did not find, as suggested by ATCO, that small diameter pipe is being unreasonably over-allocated costs within the UCI methodology. The CER noted ATCO’s acknowledgement that NGTL’s evidence that pipe integrity costs are generally not correlated to pipeline diameter lessened ATCO Gas’s concerns on this issue.[16]
Length of Contract Term and Term-Up Provision
Under the Settlement, the default minimum contract term in constrained areas of the System is an eight-year total term with a minimum primary term between two years and five years.[17] The CER approved the minimum contract term length and no term-up provision.[18]
Intra-Basin / Export Shipper Contract Terms
The CER found that differences in contract term length between Group 1 Delivery Points (FT-D1) and intra-basin shippers were not unjustly discriminatory. NGTL’s evidence demonstrated that the discrepancy arises from the practical need to allocate capacity differently for intra-basin versus export delivery points.[19]
Rural Gas Interconnections
Rural gas interconnections (“Taps”) allow rural end users with an average daily demand of less than 1 TJ and peak daily demand of less than 5 TJ to access the NGTL System.[20] The CER accepted NGTL’s commitment in the Settlement to hold discussions with a view to codifying in the NGTL’s Tariff the existing practices pertaining to Taps.[21]
Default Tolling of Extensions
The CER questioned the value and appropriateness of the default rolled-in provision, as drafted in the Settlement. The CER noted, however, that no provision could relieve or prevent the CER from exercising its regulatory oversight of a tolling methodology.[22] The CER, therefore, interpreted the default methodology provision as solely a commitment by NGTL to its shippers to use rolled-in tolling as a starting point when beginning discussions on future projects. Tolling treatment of future extension projects, the CER found, must be addressed on a case-by-case basis.[23]
Flow Data and Toll Filings
The CER found that the information in Table 1.5-9 in response to NEB IR No.1.5 is relevant for the future interim and final tolls applications that implement the approved rate design.[24] Table 1.5-9 provided distance and diameter data for NGTL’s proposed East Gate delivery tolling. The CER noted this information provides transparency regarding allocation factors, which can change over time and can have a significant impact on the resulting rates.[25] The CER, therefore, directed NGTL to include the same type of information in all future filings for interim and final tolls under the approved rate design.[26] The CER also acknowledged NGTL’s commitment to use data for NGTL System flows from the most recent months of February and July to determine the FT-D paths.[27]
The CER indicated it expects NGTL to implement the proposed rate design within a reasonable time frame but did not impose any specific direction on implementation timing. However, the CER directed NGTL to file with the CER, at the time of its final 2020 rates application, its updated NGTL System Tariff in its entirety incorporating the revisions approved in this decision and the final 2020 rates, tolls and charges that NGTL is seeking the CER’s approval to implement.[28]
FT-P Amendments
NGTL applied for additional FT-P amendments that did not form part of the Settlement[29]:
- the FT-P adjustment would increase from 4 cents/Mcf/d to 10 cents/Mcf/d, and
- an FT-P Price Point D would be implemented with a discount set at 85 per cent of the FT-P Price Point A when three eligibility criteria are met.
These measures were uncontested and approved by the CER.[30]
NORTH MONTNEY MAINLINE TOLLING METHODOLOGY
The Settlement specified that shippers on the NMML would be subject to a surcharge in addition to the otherwise applicable rates under the NGTL rate design. The specific methodology to be applied to NMML shippers, including the NMML Surcharge Formula and Surcharge Coefficient, was included in NGTL’s Application. However, it did not form part of the Settlement.[31]
The CER approved the NMML Tolling Methodology, including the NMML Surcharge Formula and the proposed Surcharge Coefficient of 0.3.[32] However, the CER imposed a condition on NGTL should gas transported on the NMML be delivered to new large volume markets and certain accounting requirements specific to the NMML.[33]
BROADER CONSIDERATIONS
The CER indicated it was concerned with NGTL ensuring appropriate cost accountability for shippers requiring receipt extensions and the capability of the distance of haul methodology to recognize future flow patterns. Accordingly, the CER directed NGTL to file ongoing information to enable transparency and accountability to the CER and shippers over time.[34]
The CER stated that fundamental risk is not materializing on the NGTL System at this time but remains a long-term risk.[35] Continuing the practice of regularly updating depreciation assumptions and providing revised studies reduces the future risk of undepreciated facilities.[36] The CER, therefore, directed NGTL to file a depreciation study in the second-half of 2023, including certain capital spending and capital maintenance information.[37]
In the NEB’s previously issued North East British Columbia Decision[38] (the “NEBC Decision”), the NEB directed NGTL to file certain information with its next toll filing regarding NGTL’s policies affecting capital spending for system expansions, NGTL’s depreciation policy and practices, and NGTL’s tolling methodology and tariff provisions.[39] In the Application, NGTL put forth a mix of the existing rate design methodology with some proposed amendments. The CER found that the proposed changes were generally responsive to the NEBC Decision as they introduced stronger cost accountability for receipt shippers.[40] However, the CER directed NGTL to file, and continue to make available certain information for the benefit of the CER and interested parties.[41]
The CER acknowledged NGTL’s position regarding the production of a five-year toll forecast to assess the cumulative impacts of its capital spending program. Instead of a five-year toll forecast, the CER directed NGTL to extend the narrative accompanying the unit cost of transportation data in its Annual Plan.[42]
CER DECISION
The CER approved the Application. The CER found that the Settlement would result in tolls that are just and reasonable and not unjustly discriminatory.[43] The CER found that the Settlement is consistent with the cost-based/user-pay principle and promotes proper price signals in alignment with the economic efficiency principle.[44] Further, the CER found that the Settlement complied with the NEB’s Settlement Guidelines.[45] Overall, the proposed amendments represent an improvement in aligning tolls with the underlying costs of providing service.[46]
Notwithstanding its approval of the Application, the CER indicated it sees a need for continued improvements in NGTL’s rate design and services. Throughout the decision, the CER provided direction to NGTL regarding additional obligations to disclose information and facilitate discussions among the TTFP and interested parties regarding areas of concern.[47] The CER indicated it expects a pipeline company to share sufficient information with shippers on an ongoing basis. Shippers should be able to obtain information from a pipeline company during negotiations without having to resort to the information request process of a hearing.[48]
Rates – Gas Pipeline – Rate Design
In this decision,[2] the Canada Energy Regulator (CER) considered an application (the “Application”) from Nova Gas Transmission Ltd. (NGTL) for approval of a new rate design methodology and terms and conditions of service for the NGTL System. The CER approved the Application. However, the CER found that there was potential for further improvements in NGTL’s rate design and services. To inform future toll and tariff discussions, the CER provided directions on additional steps NGTL must take and timelines for compliance.
BACKGROUND
The NGTL System is an extensive natural gas transmission system comprised of approximately 24,000 kilometres of pipeline and associated compression and other facilities in Western Canada. The NGTL System transports natural gas produced in Alberta and British Columbia from the Western Canada Sedimentary Basin (WCSB). Natural gas produced from the WCSB competes in the North American gas market on many fronts.
LEGISLATIVE FRAMEWORK
Section 62 of the National Energy Board Act[3] (NEB Act) states:
62. 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.
Section 67 of the NEB Act[4] states:
67. A company shall not make any unjust discrimination in tolls, service or facilities against any person or locality.
On 28 August 2019, the Canadian Energy Regulator Act[5] (CER Act) came into force, replacing the NEB Act. The National Energy Board (NEB) was succeeded by the CER. Section 36 of the transitional provisions associated with the CER Act states that applications pending before the NEB prior to coming into force of the CER Act are to be taken up by the CER and continued in accordance with the NEB Act.[6] As the Application was pending before the NEB prior to 28 August 2019, the Application was taken up by the CER and continued in accordance with the NEB Act.[7]
THE APPLICATION
The Application was supported by a contested Settlement (the “Settlement”). NGTL also sought approval of two associated matters that did not form part of the Settlement: (1) a surcharge formula to be paid by Firm Transportation – Receipt (FT-R) shippers on the North Montney Mainline (NMML); and (2) amendments pertaining to Firm Transportation – Points to Point (FT-P) service.[8]
THE SETTLEMENT
Whether Settlement Treated as a Package
The CER found that the Settlement negotiation process would be undermined if the CER were to freely impose selected changes at its discretion. The CER stated that the Settlement submitted by NGTL should be treated as a package and approved the Settlement on that basis.[9]
Postage Stamp FT-D2 and FT-D3 Rates
Group 2 Delivery Points (FT-D2) and Group 3 Delivery Points (FT-D3) rates are based on a postage stamp methodology. FT-D3 is priced at a 20 per cent premium to the FT-D2 rate. The parties to the Settlement agreed to not depart from the current postage stamp methodology for FT-D2 and FT-D3 services.[10]
The CER approved the postage stamp methodology for FT-D2 and FT-D3 rates.[11] However, the CER directed NGTL to initiate an additional evaluation of potential cross-subsidization between delivery points and further consultation with the Tolls, Tariff, Facilities and Procedures Committee (TTFP) regarding the Major Market proposal proposed by ATCO Gas (ATCO) in this proceeding. The CER also directed NGTL to file a report containing an assessment of the current FT-D2 and FT-D3 cost allocation methodology, an assessment of alternate methodologies, the consultation process NGTL undertook and the next steps to rectify any unreasonable cross-subsidization.[12]
Metering Charge
The NGTL net transportation revenue requirement consists of two components: a transmission component and a metering component.[13] The CER found that the metering charge, as included in the Settlement, was acceptable. However, the CER found that additional analysis was required on this matter, as well as further TTFP consultations.[14]
Unit Cost Index
NGTL currently uses a Unit Cost Index (UCI) in FT-R rates. Under NGTL’s proposed rate design, Firm Transportation – Delivery (FT-D) rates would also be derived using a delivery UCI. The UCI is a comprehensive determination of the relative unit cost for transportation for various pipe diameters, incorporating economies of scale derived from historical acquisition costs for each pipe size, and considers other factors, such as compression costs and Operations and Maintenance (O&M) costs.[15] The CER did not find, as suggested by ATCO, that small diameter pipe is being unreasonably over-allocated costs within the UCI methodology. The CER noted ATCO’s acknowledgement that NGTL’s evidence that pipe integrity costs are generally not correlated to pipeline diameter lessened ATCO Gas’s concerns on this issue.[16]
Length of Contract Term and Term-Up Provision
Under the Settlement, the default minimum contract term in constrained areas of the System is an eight-year total term with a minimum primary term between two years and five years.[17] The CER approved the minimum contract term length and no term-up provision.[18]
Intra-Basin / Export Shipper Contract Terms
The CER found that differences in contract term length between Group 1 Delivery Points (FT-D1) and intra-basin shippers were not unjustly discriminatory. NGTL’s evidence demonstrated that the discrepancy arises from the practical need to allocate capacity differently for intra-basin versus export delivery points.[19]
Rural Gas Interconnections
Rural gas interconnections (“Taps”) allow rural end users with an average daily demand of less than 1 TJ and peak daily demand of less than 5 TJ to access the NGTL System.[20] The CER accepted NGTL’s commitment in the Settlement to hold discussions with a view to codifying in the NGTL’s Tariff the existing practices pertaining to Taps.[21]
Default Tolling of Extensions
The CER questioned the value and appropriateness of the default rolled-in provision, as drafted in the Settlement. The CER noted, however, that no provision could relieve or prevent the CER from exercising its regulatory oversight of a tolling methodology.[22] The CER, therefore, interpreted the default methodology provision as solely a commitment by NGTL to its shippers to use rolled-in tolling as a starting point when beginning discussions on future projects. Tolling treatment of future extension projects, the CER found, must be addressed on a case-by-case basis.[23]
Flow Data and Toll Filings
The CER found that the information in Table 1.5-9 in response to NEB IR No.1.5 is relevant for the future interim and final tolls applications that implement the approved rate design.[24] Table 1.5-9 provided distance and diameter data for NGTL’s proposed East Gate delivery tolling. The CER noted this information provides transparency regarding allocation factors, which can change over time and can have a significant impact on the resulting rates.[25] The CER, therefore, directed NGTL to include the same type of information in all future filings for interim and final tolls under the approved rate design.[26] The CER also acknowledged NGTL’s commitment to use data for NGTL System flows from the most recent months of February and July to determine the FT-D paths.[27]
The CER indicated it expects NGTL to implement the proposed rate design within a reasonable time frame but did not impose any specific direction on implementation timing. However, the CER directed NGTL to file with the CER, at the time of its final 2020 rates application, its updated NGTL System Tariff in its entirety incorporating the revisions approved in this decision and the final 2020 rates, tolls and charges that NGTL is seeking the CER’s approval to implement.[28]
FT-P Amendments
NGTL applied for additional FT-P amendments that did not form part of the Settlement[29]:
These measures were uncontested and approved by the CER.[30]
NORTH MONTNEY MAINLINE TOLLING METHODOLOGY
The Settlement specified that shippers on the NMML would be subject to a surcharge in addition to the otherwise applicable rates under the NGTL rate design. The specific methodology to be applied to NMML shippers, including the NMML Surcharge Formula and Surcharge Coefficient, was included in NGTL’s Application. However, it did not form part of the Settlement.[31]
The CER approved the NMML Tolling Methodology, including the NMML Surcharge Formula and the proposed Surcharge Coefficient of 0.3.[32] However, the CER imposed a condition on NGTL should gas transported on the NMML be delivered to new large volume markets and certain accounting requirements specific to the NMML.[33]
BROADER CONSIDERATIONS
The CER indicated it was concerned with NGTL ensuring appropriate cost accountability for shippers requiring receipt extensions and the capability of the distance of haul methodology to recognize future flow patterns. Accordingly, the CER directed NGTL to file ongoing information to enable transparency and accountability to the CER and shippers over time.[34]
The CER stated that fundamental risk is not materializing on the NGTL System at this time but remains a long-term risk.[35] Continuing the practice of regularly updating depreciation assumptions and providing revised studies reduces the future risk of undepreciated facilities.[36] The CER, therefore, directed NGTL to file a depreciation study in the second-half of 2023, including certain capital spending and capital maintenance information.[37]
In the NEB’s previously issued North East British Columbia Decision[38] (the “NEBC Decision”), the NEB directed NGTL to file certain information with its next toll filing regarding NGTL’s policies affecting capital spending for system expansions, NGTL’s depreciation policy and practices, and NGTL’s tolling methodology and tariff provisions.[39] In the Application, NGTL put forth a mix of the existing rate design methodology with some proposed amendments. The CER found that the proposed changes were generally responsive to the NEBC Decision as they introduced stronger cost accountability for receipt shippers.[40] However, the CER directed NGTL to file, and continue to make available certain information for the benefit of the CER and interested parties.[41]
The CER acknowledged NGTL’s position regarding the production of a five-year toll forecast to assess the cumulative impacts of its capital spending program. Instead of a five-year toll forecast, the CER directed NGTL to extend the narrative accompanying the unit cost of transportation data in its Annual Plan.[42]
CER DECISION
The CER approved the Application. The CER found that the Settlement would result in tolls that are just and reasonable and not unjustly discriminatory.[43] The CER found that the Settlement is consistent with the cost-based/user-pay principle and promotes proper price signals in alignment with the economic efficiency principle.[44] Further, the CER found that the Settlement complied with the NEB’s Settlement Guidelines.[45] Overall, the proposed amendments represent an improvement in aligning tolls with the underlying costs of providing service.[46]
Notwithstanding its approval of the Application, the CER indicated it sees a need for continued improvements in NGTL’s rate design and services. Throughout the decision, the CER provided direction to NGTL regarding additional obligations to disclose information and facilitate discussions among the TTFP and interested parties regarding areas of concern.[47] The CER indicated it expects a pipeline company to share sufficient information with shippers on an ongoing basis. Shippers should be able to obtain information from a pipeline company during negotiations without having to resort to the information request process of a hearing.[48]
*Laura Scott (Student-at-Law – Legal Services Provider), Rosa Twyman (Legal Services and Business Director), and Laura-Marie Berg (Associate Legal Services Provider) with Regulatory Chambers, Calgary.