Canada: AEUB Approves Rate Design That Departs From Standard Principles

Article by Paul Jeffrey, ©2006 Blake, Cassels & Graydon LLP

In its February 21, 2006 decision on NOVA Gas Transmission Ltd.’s (NGTL) rate design, the AEUB approved NGTL’s application to maintain the status quo, albeit with some reluctance and in the face of a host of alternatives proposed. The AEUB observed that in so doing it "marks a departure for the Board from its goal of attempting to match cost causation with cost responsibility".

On April 15, 2005, NGTL filed a 2005 Phase II General Rate Application. In it, NGTL fulfilled the AEUB’s earlier direction to file a fully allocated Cost of Service Study, an updated Distance of Haul study, an updated Cost of Haul study and rate design alternatives for the AEUB’s consideration, including an allocation of transmission costs "greater than zero" to the intra-Alberta delivery service rate. At issue for the AEUB, among other things, was the continued appropriateness of free intra-Alberta deliveries on NGTL in the presence of competition for those volumes from others, most notably in this case, ATCO Pipelines (ATCO).

NGTL conducted the studies, generated alternatives and filed the requested material, but preferred that the existing rate design be maintained.

ATCO undertook and filed its own studies, as did the Industrial Gas Consumers Association of Alberta (IGCAA). ATCO argued for an increase to cost accountability on NGTL by increasing its intra-Alberta rate while IGCAA argued for a reduction in the full-path rate for Alberta customers – a continuance of the intra-Alberta delivery rate at zero and a reduction in the firm receipt toll, shifting costs predominantly to export shippers. Export shippers (WEG) resisted the proposed changes, as did the Canadian Association of Petroleum Producers (CAPP).

In a surprisingly brief decision (given the level of debate and volume of evidence adduced at the hearing), the Board elected to go with the majority and maintain the status quo. But it displayed some discomfort in doing so. The AEUB found some merit in ATCO’s proposals that would have increased FT-A tolls, but ultimately discounted those proposals because: (1) ATCO is a competitor of NGTL and the proposals would have advantaged ATCO in that competition; and (2) ATCO said its proposals would benefit the core customers of the province yet core customers appearing before the AEUB said they preferred the status quo. Core customers preferred the AEUB use a different mechanism to manage the pipe-on-pipe competition than adjusting the rate designs of both, to ensure parity of cost accountability on the two systems. It preferred the objective be managed through a "least cost alternative" approach to facilities additions.

The AEUB also found some merit in IGCAA’s proposals. But in the end the AEUB was not persuaded IGCAA had proved its approach to be superior to NGTL’s. The AEUB was persuaded by the position of the ex-Alberta markets that pay the overwhelming majority of NGTL’s revenue requirement and the producers with whom they contract.

The AEUB considered the IGCAA evidence to be worthy of further consideration and approved continuance of the status quo rate design just "for the 2005 test period". Technically that is all it could have done but the wording used by the AEUB on that point suggests it still remains open to being persuaded to move off the existing rate design.

The AEUB was reluctant to make a change in the face of such diverse approaches, all in their own way appearing to it as having at least some legitimacy. It encouraged "a collaborative process among the parties" on the following matters:

1. WEG’s suggestion of delivery point-specific, or at least border-specific, rates;

2. IGCAA’s suggestion of changes to the short haul FT-P rate;

3. NGTL’s suggestion of more closely aligning costs of specific projects under the EAV calculation; and

4. ATCO’s and WEG’s proposals to bring greater cost accountability to the NGTL rate structure.

The AEUB also restated its intent to "conduct a review process on issues that are considered to constitute competitive issues". The AEUB said it "intends to canvass interested parties by June 2006 to assist in developing the scope for this process". Its earlier comments suggest the focus of this debate will be to try to resolve its struggle with how to properly regulate competing gas pipelines by decisions on facilities proposals instead of by changing their rate designs.

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