On December 18, 2014 the National Energy Board (“NEB” or “Board”) approved a toll design for the TransCanada PipeLine (“TransCanada”) Mainline for 2015 to 2020 and for toll-setting methodology parameters until 2030.  The decision also approves tariff changes that introduce new services and contract options.

Highlights of the approved application include:

  • increased pipeline capacity potentially resulting in Eastern market access to Dawn and Niagara area supply;
  • renewal provisions respecting capacity requirements;
  • continuing  the concept of multi-year fixed tolls and pricing discretion, as established in a previous decision (RH-003-2011);
  • approval of TransCanada’s applied-for toll design for Mainline tolls for 2015 to 2020;
  • a segmented tolling structure; and
  • parameters for a toll-setting methodology up to 2030. 

Background

TransCanada owns and operates the Mainline, which is a high-pressure natural gas transmission system that extends form Alberta to Quebec. The Mainline connects to various downstream Canadian and international pipelines. In September 2011, TransCanada made an application to the Board. It faced rapidly declining throughput and substantial increases in tolls.  The Board released the RH-003-2011 Decision in March 2013 which fixed Mainline firm transportation tolls from July 1, 2013 to December 2017.  TransCanada was granted significant discretion to set bid floors for discretionary services with the intention that it would help maximize Mainline revenues. In the RH-003-2011 Decision the Board set out circumstances (off-ramps) that it expected would justify a new tolls application for the Mainline before December 2017.

In the period following the RH-003-2011 Decision, TransCanada submitted that there was a need to evolve from the RH003-2011 decision model due to ongoing changes in the natural gas market. Further, TransCanada faced a number of litigious proceedings by the three largest Mainline customers and largest local distribution companies – Enbridge Gas Distribution Inc., Union Gas Limited and Gaz Metro Limited Partnership (Market Area Shippers or MAS). Potentially faced with years of dispute resolution before the Ontario Energy Board, the NEB and the Ontario Superior Court, in September 2013 TransCanada and MAS reached a settlement.

On December 20, 2013, TransCanada filed an application for approval of a settlement agreement for its Mainline (the Application).  The Application requested that the Board: (i) approve the negotiated settlement; (ii) set the Mainline tolls in accordance with the TransCanada’s proposed methodology; and (iii) revise the tariff. After review, the Board determined that it could not approve the Settlement under the National Energy Board Guidelines for Negotiated Settlements of Traffic, Tolls and Tariffs. As the Board did not approve the settlement, an oral hearing took place in September 2014.

(i) New Services

TransCanada made a number of proposals with respect to new services including a minimum contract term for expansion facilities, diversion and alternate receipt point rights, modified delivery areas and new delivery locations, summer storage service, and enhanced market balancing. In respect of these issues the Board:  

  • approved a minimum contract term of no more than 15 years for expansion facilities;
  • approved a number of new services including modified delivery areas and new delivery locations, summer storage service and enhanced market balancing; and
  • accepted the long-haul to short-conversion as applied by TransCanada. The Board did not find that the proposed 20 % annual transition (proposed by Alberta NorthEast Gas, Limited) to be a workable or fair model for the conversion of long-haul to short-haul transportation on the Mainline.

(ii) Contract Renewal

TransCanada proposed that:

  • if it determined expansion facilities were required, it would provide notice to all shippers with existing contracts who, within 60 days, would have the option to extend the term for all or a portion of their applicable contract quantity for an additional period; and
  • if a shipper did not elect to extend its contract term within 60 days, the contract would expire at the end of existing term.

The Board found that the transition to access new gas supplies caused uncertainty and resulted in new facilities having to be built.  The Board further found that the demand for capacity in the Eastern Triangle exceeded capacity and therefore it was economically efficient for capacity to be awarded to those who value it most.  The Board recognised that TransCanada was likely to issue term-up notices for Mainline projects soon after the requisite term-up provision came into effect. Accordingly, the NEB approved TransCanada’s proposed term-up provision, which will come into effect on March 30, 2015.

(iii) Pricing of Discretionary Services

TransCanada applied for the continuation of pricing discretion established in the RH-003-2011 Decision. It argued that the factors that led the Board to implement pricing discretion continue to apply and maintaining pricing discretion remained a necessity.  Absent pricing discretion, shippers would return to the contracting behaviour observed before the implementation of the RH-003-2001 Decision. 

The Board agreed with TransCanada that capped levels of pricing discretion, particularly with bid floors, will increase the likelihood that bid floor prices will impact commodity prices. It stated that the exercise of pricing discretion will evolve with the market for Mainline capacity.  The Board therefore decided to maintain pricing discretion as was established in the RH-003-2011 Decision. The Board will review the continued appropriateness of the existing pricing discretion for the 2018 to 2020 time period in a future Mainline tolls application. It further directed TransCanada to provide remedies on how TransCanada will prevent access to, and use of, non-public, shipper-specific information in setting bid floors for discretionary services.

(iv) Revenue Requirement

TransCanada applied for a revenue requirement for each year between January 1, 2015 and December 31, 2020.  The proposed revenue requirements were used to establish tolls for each respective year.  The Board found that the proposed revenue requirements for 2015 to 2020 were reasonable and therefore approved the proposed revenue requirements and rate bases for the 2015 to 2020 period.

Level of the balance in the Toll Stabilization Account (TSA) was a key revenue requirement issue.  TransCanada’s stated that the TSA was established to capture the cumulative annual differences between actual total revenues and actual total costs in order to maintain multi-year fixed tolls. TransCanada proposed to transfer the TSA balance to the Long Term Adjustment Account (LTAA), thus eliminating the TSA at the end of 2014.

The Board considered the proposed treatment of the LTAA as an adjustment account to eliminate any variances between the actual and forecast revenue requirements and actual and forecast revenues during the 2015 to 2020 period, net of incentive mechanism adjustments, to be reasonable. The Board approved the transfer of the TSA balance as of December 31, 2014 to the LTAA and the subsequent elimination of the TSA.

(v) Toll Design

The Board determined that a material change in the financial position of the Mainline and to market circumstances since the implementation of compliance tolls had occurred. The Board noted that TransCanada’s forecasts were reasonable and found that the proposed allocation of costs among the three Mainline segments to be reasonable. The Board therefore:

  • approved TransCanada’s proposed toll designs and required TransCanada to file a compliance filing for 2015 to 2020 tolls by March 31, 2015; and
  • approved rolled-in tolling into the Eastern Triangle rate base of the Eastern Triangle capital expansions between 2015 and 2020, and proved in principle the practice of rolling-in Mainline facilities costs in the future, such that the costs of facilities additions in the Eastern Triangle will be rolled-in to Eastern Triangle tolls until 2030.

TransCanada requested Board approval of a tolling parameter in which all costs associated with the Eastern Triangle will be separated from the other lines. The Board noted that evolving contracting practices indicated a greater preference for intra-segment transportation in the future.  Accordingly it approved the segmentation tolling parameter in principle and indicated it would continue to monitor the appropriateness of the segmentation tolling parameter prior to implementation.

(vi) Risks and Rewards

TransCanada proposed that the Mainline’s Return on Equity (ROE) be set at 10.1% from 2015 until the end of 2020.  Additionally, TransCanada proposed to maintain the 40% equity ratio previously approved by the Board. The Board found that the 10.1% ROE and 40% deemed equity ratio is a fair return for the Mainline, commensurate with its risk under the proposal, and in accordance with the fair return standard and approved the cost of debt as proposed by TransCanada and 60% deemed debt ratio.

(vii) 2018 to 2020 Toll Review

TransCanada proposed a review of tolls prior to 2018 for the 2018 to 2020 period. Depending on the outcome of a review, TransCanada submitted that the tolls would be adjusted on a prospective basis and that TransCanada would consult with Mainline stakeholders before any filing to the Board for approval of a toll change.

The Board held that it expected that the tolls established for 2015 to 2020 be substantially aligned with the underlying costs and revenues in each of those years. The Board directed TransCanada to file an application prior to December 31, 2017 for approval of tolls for the 2018 to 2020 period.

Conclusions

Under NEB Decision RH-001-2014, Mainline tolls are established 2015 to 2020.  The Decision therefore reflects a “toll bridge” to methodology parameters applicable from 2020 until 2030, rather than a final destination on toll design.  Significant monitoring of TransCanada will also occur in the meantime, specifically on discretionary service pricing, toll segmentation and a 2018 toll review. Mainline customers, among other parties, will of course also need to monitor these developments closely and reach their own conclusions on whether they are ultimately a “bridge too far”.

The elephant in the room on rate design issues may be rolled-in tolling. Traditionally the NEB’s default position, in RH-001-2014, the Board was clear that it would consider in future applications “the reasonableness of continuing the practice of rolled in tolling”.   The Board did precisely that in its denial of NOVA Gas Transmission’s Northwest Mainline North Extension Project on the basis that rolled-in tolls were not an appropriate toll methodology for the project.  The message to applicants from both RH-001-2014 and the Komie North Extension decision is that rolled-in tolling will be subject to increased scrutiny and consideration of alternate toll treatments is well advised.