In 2008, the National Energy Board (NEB) identified a proposed approach to address what came to be known as the Land Matters Consultative Initiative, or LMCI. There were four distinct streams, with Stream 3 focusing on the financial issues related to pipeline abandonment. The NEB considered the optimal way to ensure that funds will be available when abandonment costs are incurred for decommissioned pipeline infrastructure under its regulatory purview.
In its Reasons for Decision RH-2-2008, issued in May of 2009, the NEB set out guiding principles and considerations and a list of attributes for any mechanism that would be used to set aside funds for pipeline abandonment. It also established a five-year Action Plan for companies to follow. Regulated companies were directed to begin setting aside abandonment funds in the first toll year after May 2014. In RH-2-2008, a base case was included which pipeline companies could use when preparing their preliminary abandonment cost estimates. This base case was updated with additional information following a technical conference in November 2009. Pipeline companies were required to file their abandonment cost estimates with the NEB by the end of November 2011.
As part of the five-year Action Plan, Group 1 companies (major pipeline companies subject to ongoing NEB oversight) were required to file their proposals on how to collect funds, as well as a process and mechanism to set those funds aside, by the end of February 2013. Group 2 companies (other pipeline companies under the Board's jurisdiction) had until the end of May 2013 to file. In NEB proceeding MH-001-2013, the NEB considered the set-aside and collection mechanisms proposed by all Group 1 and Group 2 companies. Following an oral public hearing that commenced in January of 2014, the NEB issued its Reasons for Decision in May 2014.
Thirty-four companies, including all 13 Group 1 companies, proposed to use a trust to set aside funds for pipeline abandonment. Sixteen Group 2 companies proposed a letter of credit or surety bond. Other proposals included letters of guarantee, reliance on provincial liability management programs and reliance on future cash flows. Although compliance is mandatory, the NEB has allowed companies the option of three different collection mechanisms: trusts, surety bonds and letters of credit.
To assist pipeline companies with the creation of a suitable collection mechanism, the NEB issued indicative terms to serve as the substantive minimum requirements to be incorporated into each mechanism.
The trust option requires companies to place funds into a trust, the beneficiary of which is the pipeline company operating the infrastructure at the time of abandonment. The NEB, as an independent regulator, will not be party to any of these trust agreements.
To protect the funds, the trust agreement must only allow the trustee access to the funds for costs in relation to physical abandonment and will not be available to reimburse pipeline companies for any administrative expenses incurred by the trust.
The NEB has been flexible with regards to the fund collection method and frequency, approving all submissions that it has found reasonable. Variations of two methods dominated the submissions and seem the most likely to be used: (i) the use of a toll surcharge to pipeline users; and (ii) the insertion of a new line item in their revenue requirements. The NEB emphasized the importance of transparency by each pipeline within the context of their individual agreements, especially given that the amount collected for abandonment cannot be negotiated between shippers and the pipeline operators as it is approved by the NEB in advance.
A tax-efficient approach to trust creation and maintenance has been recommended by the NEB, and it appears that most pipelines will attempt to ensure that trust contributions meet Qualifying Environmental Trust Tax Credit requirements, as defined in the Income Tax Act, s. 248(1) (ITA).
Many pipeline companies are hiring investment managers to provide advice and guidance regarding the investment of trust funds. The NEB “base case” sets out a 3.5% rate of return, but the Board does not endorse one investment strategy over another. Allowing pipeline companies relative freedom with their choice of investment strategy, the NEB determined that the restrictions of the ITA are sufficient and that further limitations are not necessary at this time.
All companies must file their proposed set-aside and collection mechanisms with the NEB for approval by September 2, 2014.
For a link to the NEB’s Reasons for Decision MH-001-2013, dated May, 2014, click here.