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Canada Energy Regulator rejects proposal for firm service on Enbridge’s Canadian Mainline

Author(s): Martin Ignasiak, Sander Duncanson, Jessica Kennedy, John Gormley, Coleman Brinker, Maeve O'Neill Sanger

Dec 8, 2021

Introduction

On November 26, 2021, the Commission of the Canada Energy Regulator (the Commission) issued its Reasons for Decision in Enbridge Pipelines Inc. RH-001-2020 (the Decision), denying the application of Enbridge Pipelines Inc. (Enbridge) to introduce firm service on the Canadian Mainline (the Application). If approved, the Application would have made 90% of the Canadian Mainline’s currently uncommitted capacity subject to firm contracts for priority access, with contract terms ranging from eight to 20 years. Contracts for firm service were to be awarded through an open season process put forward as part of the Application.

In its reasons for denying the Application, the Commission provided much-needed guidance on what is entailed by a pipeline operator’s common carriage and non-discrimination obligations under the Canadian Energy Regulator Act (the CER Act), and confirmed the importance of cost information in assessing whether tolls will be just and reasonable. Guidance provided in the Decision will shape future negotiations and regulatory applications for firm service offerings on the Canadian Mainline and other interprovincial pipelines in Canada.

The Canadian Mainline and parties’ positions

Enbridge’s Canadian Mainline has a dominant position in transporting Canadian oil production to U.S. and global markets. The pipeline accounts for roughly 70% of the total oil pipeline capacity out of the Western Canada Sedimentary Basin and runs from liquid hubs in Edmonton and Hardisty, Alberta, to downstream delivery points including refining facilities and other pipelines that reach into the U.S. Gulf Coast. Due to this configuration, companies who contract with Enbridge to ship oil on the Canadian Mainline (shippers of record) generally own downstream refineries or hold contracts for capacity on downstream pipelines. Canadian producers have mainly opted to sell their crude oil to shippers upstream of the Canadian Mainline, rather than be shippers of record themselves.

A group of shippers supported Enbridge’s Application. Parties opposed to the Application included oil producers of various sizes, a producers’ industry association, the Government of Saskatchewan, refiners and integrated companies, and a connected feeder pipeline company. While the Application’s supporters are shippers of record for a large portion of volumes shipped on the Canadian Mainline, opponents represented a diverse group of stakeholders affected by the Application.

Common carriage and contracted capacity

The CER Act states that, subject to regulations, exemptions or conditions imposed by the Commission, an oil pipeline company “must, according to its powers, without delay and with due care and diligence, receive, transport and deliver all oil offered for transmission by means of its pipeline.” This requirement is known as the common carriage obligation.

A key question in the parties’ positions on the Application was whether and how firm service (such as Enbridge’s contracting proposal) may comply with the CER Act’s common carriage obligation. In the Decision, the Commission found that the common carriage obligation does not require oil pipelines to maintain 100% uncommitted capacity. Some capacity may be contracted, depending on the circumstances, so long as access to pipelines is reasonably preserved at all times.

The Commission held that the common carriage obligation can be satisfied when a pipeline company shows that

  • it is providing fair and equal opportunity to access firm service and the service offering is  appropriate in the circumstances, taking into consideration the reasonable needs of potential shippers
  • sufficient access to capacity remains after firm service is implemented, usually by making sufficient capacity available for uncommitted volumes or through a facilities expansion

Determining whether the common carriage obligation is met involves judgement and careful analysis of all the circumstances of the specific case. In the circumstances of the Application, the Commission set out key requirements and contextual considerations as follows:

  • the degree to which the proposed open season would facilitate a fair and equal opportunity to access firm service
  • the extent to which there would be access to capacity after implementation of firm service, considering the proposed 10% reservation for uncommitted capacity and whether Enbridge’s facilities are readily expandable
  • the contextual factors that inform whether sufficient access is maintained, such as the need for, benefits flowing from, and impacts of the Application

In light of these considerations, the Commission concluded that the Application did not meet Enbridge’s common carriage obligations. Specifically, the Commission noted that the proposed minimum contract lengths and financial assurance obligations would create barriers to some shippers’ ability to meaningfully access committed service. Further, the proposed 10% of pipeline capacity reserved for uncommitted volumes was unlikely to provide a meaningful option to access pipeline capacity. The change from 100% to 10% uncommitted volumes was likely to lead to higher apportionment and uncertainty, excessively reducing service quality and access for those shippers seeking to use uncommitted capacity. Potential for expansions and potential access to capacity through a secondary resale market did not alleviate the Commission’s concerns.

Overall, the Commission found that the benefits of the Application would accrue primarily to Enbridge and a subset of current shippers of record on the Canadian Mainline, while the adverse effects would be concentrated among a different subset of shippers and stakeholders, primarily those without significant refining interests. Enbridge did not justify the uneven distribution of access to the Canadian Mainline that would result if the Application were approved. This was in contrast to other cases where need for or benefits of implementing firm service justified a decrease in overall access to an oil pipeline.

Cost transparency in establishing just and reasonable tolls

Having denied the Application for failing to meet Enbridge’s common carriage obligation, the Commission also provided analysis and findings on Enbridge’s proposed tolling methodology. The CER Act requires that all tolls charged to pipeline customers be “just and reasonable, and must 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.”

The Commission reaffirmed tolling principles previously articulated by the Commission and its predecessor, the National Energy Board. These fundamental principles include

  • cost-based/user-pay: tolls should be, to the greatest extent possible, cost-based and users of a pipeline system should bear financial responsibility for the costs caused by the transportation of their product through the pipeline without unjustified cross subsidization by other toll payers.
  • economic efficiency: tolls should promote proper price signals, in order to maximize the utilization of the pipeline system and thus lower costs. However, there would have to be strong reasons for departing from the principle of cost-based/user-pay tolls in order to set tolls that would encourage economic efficiency.
  • no acquired rights: payment of tolls in the past confers no benefit on toll payers beyond the provision of service at that time.

The Commission noted that where there is substantial and broad support for a tolling methodology, the Commission can often rely on the commercial discretion and preferences of stakeholders as a strong signal that the resulting tolls would be just and reasonable. Where broad support is absent, available cost information will be used to assess whether the proposed methodology would result in just and reasonable tolls.

The Commission found that Enbridge’s approach obscured whether the methodology proposed in the Application would produce just and reasonable Canadian Mainline tolls, based on a consideration of cost of service. The Commission noted that the parties are best positioned to develop tolling solutions and that “cost of service tolling may not be optimal for parties, including as it relates to driving innovation, allocating and sharing risks, and incenting cost reductions”. The Commission nonetheless emphasized that a cost of service tolling methodology is available to Enbridge, and as a potential recourse for stakeholders, should further negotiations be unsuccessful.

Discrimination in financial assurance requirements

The Application proposed different contract types subject to different credit terms: requirements contracts requiring a letter of credit for two months of financial and other obligations, and take-or-pay contracts requiring a letter of credit for 12 months of financial and other obligations. These assurances would be an increase from the assurances covering 30 days of obligations required under the existing uncommitted service structure.

The Commission was not persuaded that this increased level of financial assurances was required, considering the volume risk that Enbridge sought to mitigate and the fact that the Application included no major new capital investments. The Commission found that Enbridge’s approach was likely to disproportionately impact market participants that are not investment grade (such as smaller producers and aggregators) and therefore more likely to require credit support. Absent justification, the financial assurances requirement proposed by Enbridge could result in discrimination affecting certain shippers’ ability to participate in the open season.

Implications

A large number of western Canadian oil producers welcome the Commission’s decision to deny the Application, which would have transferred benefits unequally to a subset of shippers with refining interests in the U.S. and impeded access for Canadian producers to scarce egress from the Western Canada Sedimentary Basin. With the Application having been denied, the existing interim tolls and conditions of service remain in effect on the Canadian Mainline. The Decision provides an opportunity and guidance for Enbridge, shippers, producers, aggregators and other stakeholders to continue to pursue a negotiated solution, and does not rule out the possibility of some level of firm service on the Canadian Mainline in the future.

Significantly, the Decision provides guideposts for meeting the CER Act’s common carriage obligation, reaffirms the cost-based and user-pay principle as central to determining whether tolling is just and reasonable, and emphasizes the need to consider practical barriers for smaller producers’ access to pipeline capacity when considering whether service offerings cause unjust discrimination. We expect the Decision will encourage more transparent negotiation processes seeking support from a broad variety of stakeholders.