The National Energy Board (the NEB) has granted TransCanada PipeLines Limited's (TransCanada) application to shift regulation of the NOVA Gas Transmission Ltd. system (the Alberta System) from the Alberta Utilities Commission to the NEB. The NEB's GH-5-2008 Decision (the Decision), issued on February 26, 2009, determined that the Alberta System is properly within federal jurisdiction and subject to NEB regulation. Stikeman Elliott acted for TransCanada.

The Alberta System is an existing natural gas pipeline system consisting of over 23,500 km of pipeline, associated compression and other facilities, located entirely within Alberta. In 2007, it carried over 10 billion cubic feet of natural gas per day, accounting for approximately 66% of natural gas production from Western Canada, or about 16% of the total North American production. Natural gas flowing through the Alberta System moves through connecting pipelines to markets in Western and Central Canada, and the United States West, MidWest and NorthEast.

The NEB proceeding took two concurrent paths; one relating to the constitutional question of whether the Alberta System is properly within federal jurisdiction and therefore subject to NEB regulation, and the other relating to the issuance of a Certificate of Public Convenience and Necessity for the continued operation of the Alberta System (the Certificate).

Federal jurisdiction

The NEB issued a Declaratory Order that the TransCanada Alberta System is within federal jurisdiction and subject to regulation by the NEB. The NEB decision relied on tests articulated in the 1998 Supreme Court of Canada decision in Westcoast Energy Inc. v. National Energy Board (Westcoast).

Under the Constitution Act, 1867 and the Westcoast tests, a pipeline will fall within federal jurisdiction if it is either (1) part of a federal work or undertaking; or (2) integral to a federal work or undertaking. The primary factor in the first test is functional integration and common management, control and direction. Secondary factors include common ownership, common purpose and physical connection. On this point, the NEB determined that the federal undertaking is the transportation of natural gas to markets within Canada and the United States, and that the Alberta System, the TransCanada Mainline and the TransCanada Foothills System together comprise that single federal undertaking. The NEB also held that the second test was met, concluding that the Alberta System is essential to the combined TransCanada undertaking.

The NEB was also satisfied that the Alberta System is a pipeline within the meaning of the National Energy Board Act, since it is part of a pipeline system that transports natural gas and extends beyond the borders of Alberta.

The NEB Declaratory Order on jurisdiction will take effect upon the effective date of the Certificate, which will be 14 days following its issuance. If a Certificate is not issued, the Declaratory Order is to take effect on the date of the NEB's final decision on TransCanada's application for that Certificate.

Implementation

Subject to the approval of the Governor in Council, the NEB decided to issue the Certificate for the continued operation of the Alberta System. In doing so, the NEB decided that efficiency required that it accept decisions made by provincial regulators in respect of the Alberta System prior to the jurisdiction transfer, rather than making duplicate decisions that may result in inconsistency and uncertainty. The NEB, therefore, determined that the Certificate will include "Approved but Not Constructed" facilities. The NEB felt that this approach was consistent with the principles that underlie comity and the avoidance of retrospective regulation.

The NEB will commence regulating construction of "Approved but Not Constructed" facilities as soon as a Certificate comes into force. To prevent regulatory gaps, the NEB will enforce provincial approval conditions on the effective date of the certification of these facilities.

Although certain landowners requested that their concerns be heard prior to the granting of the Certificate, the NEB agreed with TransCanada's positions that the landowner concerns were not socio-economic effects under the Canadian Environmental Assessment Act and that the landowner consultation could be undertaken following the issuance of the Decision. The NEB felt that this was appropriate, since there were currently no proposals for the construction of new facilities or changes to existing facilities. The NEB also included a number of conditions to the Certificate regarding the landowner consultation process.

A Certificate may only be issued if the requirements of section 52 of the National Energy Board Act (the NEB Act) are met. The NEB concluded that the requirements had been met, finding that the Alberta System had adequate supply and was connected to sizeable markets, that continued gas flow at a reasonable level will ensure that the pipeline remains economically feasible and that adequate financing will remain available to the Alberta System. The NEB was also satisfied that the Alberta System is currently safe and will continue to be operated safely.

Further, the NEB stated that under normal business circumstances, it would expect that Alberta System tolls would be approved by the NEB. In the context of the transition to NEB regulation and the need to minimize regulatory uncertainty, the NEB will accept the filing of a tariff, including a schedule of tolls pursuant to the NEB Act to become effective upon the coming into force of the Certificate.

Impact of the decision

TransCanada has announced that federal regulation of the Alberta System means that TransCanada can extend the pipeline across provincial borders, allowing it to provide producers in British Columbia and the Northwest Territories with a direct connection to the pipeline network. This increases the probability that British Columbia and Northern gas will integrate directly with the Alberta hub, North America's largest natural gas trading point. TransCanada has also stated that the attraction of additional gas supplies to the Alberta System will increase the utilization of existing infrastructure, which is expected to result in reduced tolls, improved netbacks, higher royalties and better access to new and existing markets.

As stipulated by the Decision, TransCanada will implement a broad-based public consultation and communications program, including Aboriginal communities, landowners, shippers and interested stakeholders.

The Decision has no immediate impact on tolls for shippers on the Alberta System. With only "boiler plate" changes to reflect federal jurisdiction, the Alberta System tariff and tolls will be filed with the NEB in their present form and at their present levels. It is expected, however, that the negotiations on Alberta System rate design that have been ongoing for some time will move to the NEB for resolution in a tolls proceeding in the near future.