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
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
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
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
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
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.
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