On April 15, 2015, the National Energy Board (“NEB” or “Board”) released its decision on an application by NOVA Gas Transmission Ltd. (“NGTL”) for the North Montney Mainline Project (the “Project”).  This Project is pending Governor in Council approval, which is expected. The majority of the Board recommended approval to construct and operate the Project subject to 45 conditions on a variety of subjects including pipeline integrity, the protection of the environment, and matters of public and Aboriginal consultation.  There was a strong dissent from the majority’s decision to approve the sought-after facilities on the basis that a portion of the proposed pipeline and associated facility would traverse land that is of special significance to First Nations.

The Project includes the construction and operation of new facilities and a 301 km sweet natural gas pipeline connecting NGTL's Groundbirch Mainline to the North Montney area in northeastern British Columbia. It would also connect to a proposed Prince Rupert Gas Transmission pipeline and then to a future liquid natural gas (“LNG”) plant on the west coast which will supply global liquefied natural gas markets.  The Project is shown on the map below.

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Notwithstanding the dissent on facilities approval, the most significant part of the NEB’s decision is in respect of tolling methodologies.  Specifically, NGTL asked the Board to find that the costs of the Project should be added to the cost pool for the entire NGTL system (i.e. treated on a “rolled-in” basis), rather than creating a stand-alone cost pool for the Project’s facilities.  Rolled-in tolling involves the cost of incremental facilities added into the rate base of NGTLs system and allocated across aggregate system volumes. Rolled-in can be done through NGTL building, buying or leasing incremental facilities. 

The NEB approved rolled-in tolling for only a portion of the Project’s lifecycle, subject to the following conditions:

  • NGTL can only use its current tolling methodology during a Transition Period (defined by the NEB as starting when gas begins to flow on the project and ending when North Montney gas production is first delivered at the Mackie Creek Interconnection, likely 2019).
  • Before 2019, NGTL can use rolled-in tolling for a portion of total cost corresponding to what can be offset by incremental revenue from receipt and delivery contracts.
  • After the Transition Period (post 2019) NGTL can use stand-alone tolling for North Montney, or can alternatively apply to the NEB for a revised tolling methodology. The NEB’s expectation would essentially be a redesign of NGTL’s overall tolling methodology.

The Board made a number of additional findings related to rolled-in tolling, including:

  • Cost accountability, cost causation, facilities integration and cross-subsidization were among the NEB’s leading concerns with NGTL’s proposed tolling methodology.
  • NGTL is required to establish a separate cost pool and maintain separate accounting records for the Project and, during the Transition Period, to hold in a deferral account any North Montney cost of service related to the Project that is not offset by incremental revenue from Project-related receipt and delivery contracts.  The permitted use of rolled-in tolling is structured to limit any impact on other NGTL shippers by essentially treating revenues and costs separately from the balance of the NGTL System.
  • NGTL’s current tolling methodology was not appropriate for an extension at the extremities of the NGTL system.  The Board therefore encouraged NGTL to consider a different approach to its tolling methodology for westward extensions outside the current system footprint.
  • While physical and operational integration exists in the Transition Period, it is temporary. Furthermore, a mere physical connection is not sufficient to find that meaningful integration exists.
  • Applying the NGTL tolling methodology would result in excessive levels of cross-subsidization of the Project by existing NGTL shippers.  The Board further noted a lack of cost efficiencies as a reason for concern for the post-2019 long-term period.
  • The NEB’s decision is not necessarily a rejection of rolled-in tolling generally. In a post-Transition Period filing to the NEB, NGTL may be able to demonstrate that the North Montney Project facilities could be combined or rolled-in with other facilities, and still demonstrate cost accountability and cost causation.
  • NGTL allocates the total transportation receipt (“FT-R”) service revenue requirement to each receipt station using its receipt point pricing algorithm.  For any post-Transition Period filing to the NEB, NGTL should assess its methodology’s distance sensitivity and the continued appropriateness of its FT-R methodology.

The North Montney decision is the latest NEB determination which challenges the notion that a rolled-in methodology is the Board’s default position.  In RH-001-2014, which addressed toll-setting methodology parameters until 2030 for the TransCanada PipeLine Mainline, 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 Northwest Mainline Komie North Extension Project (“Komie North”) on the basis that rolled-in tolls were not an appropriate toll methodology because the proposed rate design would unreasonably subsidize the extension of the NGTL Alberta System and create economic inefficiencies.

In the North Montney decision, the NEB permitted the use of rolled-in-tolling for the Transition Period in order to support early production being sold into the NGTL system.  The NEB’s decision further permitted rolled-in tolling until 2019 because it could be structured to limit impacts on other NGTL shippers by essentially treating revenues and costs separately from the balance of the NGTL system.  These were clear factual differences between the Komie North and North Montney determinations.

The key messages to applicants from the NEB’s TransCanada Mainline, Komie North and North Montney decisions are that: (i) rolled-in tolling will be subject to increased scrutiny; (ii) demonstration of cost accountability and cost causation is essential; and (iii) consideration of alternate toll treatments is well advised.