On April 2, 2009 the National Energy Board (Board) issued a milestone decision in denying Enbridge Pipelines Inc.'s (Enbridge) application for Tolls and Tariffs on its Line 9 pipeline in the RH-3-2008 proceeding. The decision is significant both because the Board (i) ruled on its expectations for the appropriate conduct of parties participating in an open season process and (ii) ruled that the applied-for toll structure, favouring one large shipper to the detriment of a small shipper, was unjustly discriminatory.
The Line 9 pipeline provides crude oil transportation service in an east-to-west direction from Montreal, Québec, to Sarnia, Ontario, delivering offshore crude and condensate to Ontario refineries. NOVA Chemicals (Canada) Ltd. (NOVA Chemicals) owns and operates a "flexicracker" at Corunna that utilizes crude oil and condensate delivered by Line 9 as a feedstock to create polyethylene and associated co-products. These products supply many other facilities in the Sarnia Valley. The Board described this situation as making NOVA Chemicals a "captive shipper" to Line 9.
Tolls and Tariffs on Line 9 had previously been calculated based on a Facilities Support Agreement (FSA) that was signed by Enbridge and five historic shippers to support the reversal of Line 9 from west-to-east to east-to-west service, which service began in 1999. The FSA expired in 2007. Enbridge filed an application (RH-2-2007) for approval of new a toll structure that included accelerated depreciation, contemplating east-to-west service ending in 2013 in light of the anticipated growth of oil sands-based crude volumes in western Canada. This application was opposed by the two remaining significant shippers on Line 9 – NOVA Chemicals and Imperial Oil Limited (IOL) (it was contemplated that IOL would ship more than twice the daily volumes as NOVA Chemicals). The application was withdrawn several weeks before its scheduled hearing date.
Several weeks later, Enbridge applied to the Board (RH-3-2008) for approval of a Transportation Service Agreement (TSA) that was the result of bi-lateral negotiations between Enbridge and IOL. The TSA was supplemented by a confidential Memorandum of Understanding between IOL and Enbridge, the undisclosed commitments of which were found to potentially be to the detriment of NOVA Chemicals (as discussed further below).
NOVA Chemicals and IOL each signed and returned the TSA to Enbridge during the Open Season process, seeking to become "Committed Shippers" in the amounts of 22,000 bbl/day and 100,000 bbl/day, respectively. Committed Shippers entered into a take-or-pay obligation for the five-year term of the TSA and enjoyed a 20% toll premium relative to uncommitted shippers, with uncommitted shipper revenue going to the account of Committed Shippers (disclosed as being approximately $18 million to the credit of IOL for 2008). Rather than providing for a "true-up" as in a traditional cost-of-service toll design, the TSA's tolls escalated by 75% of the gross domestic process implicit price index (GDPP) each year. This "volume risk" on the part of Enbridge was characterized as providing IOL with required "toll certainty."
In addition to the five-year term, the TSA had an "evergreen" provision and obligated Committed Shippers to repay, on a pro-rata basis, the remaining debt component of Line 9's deemed equity structure upon the discontinuance of service. This obligation did not arise in the event that Line 9 was re-reversed to west-to-east service.
However, Enbridge did not accept NOVA Chemicals' signed TSA because NOVA Chemicals' credit rating was below investment grade. Enbridge requested a letter of credit in the amount of $33 million as a financial assurance, in addition to the financial assurances already in place. This amount represented five years of demand charges for the volumes specified in NOVA Chemicals' executed TSA.
The Board ruled that in the circumstances of this case, with only two shippers on Line 9 and only one of which was a Committed Shipper, crediting the net excess revenue to one shipper rather than to the revenue requirement was unfair to the uncommitted shipper. The Board also ruled that the financial assurances requested of NOVA Chemicals in these circumstances were unreasonable. The Board stated that it would not provide its views as to what constituted appropriate financial assurances, merely that what Enbridge requested in this case did not meet that standard.
The Board characterized the TSA as "highly beneficial" to IOL while being "unduly discriminatory" to NOVA Chemicals. Furthermore, the benefits to IOL and the disadvantages to NOVA Chemicals were exacerbated by the fact that Enbridge negotiated only with IOL, giving rise to the perception that one or both negotiating parties may have made inappropriate use of influence in the negotiating process. As such, the applied-for toll design and resulting financial assurances were deemed to be coming at "an unreasonable cost to [NOVA Chemicals]" and hence "contrary to the public interest," given that NOVA Chemicals and IOL compete with respect to chemical end products. This aspect of the decision is important because the Board has rarely denied an applied-for toll design on the basis of undue discrimination, although the Board specifically noted that it would not have disallowed the TSA if all of the parties had agreed to it.
The Board also ruled that the open season process was flawed. It stated that, while it does not prescribe guidelines governing any open season process, it expects that "open seasons will consult with all interested parties in a transparent and fair manner." The Board specified that, while this does not preclude bi-lateral negotiations where appropriate, in this instance, because NOVA Chemicals was the only other party known with certainty to Enbridge to have a vested long-term shipping interest in Line 9, NOVA Chemicals should have "had the opportunity to more fully participate in the development of the TSA." The Board also ruled that the confidential Memorandum of Understanding signed between IOL and Enbridge contained articles that were "commercially sensitive to NOVA Chemicals' operations." Accordingly, the Board ruled that NOVA Chemicals may have been disadvantaged relative to IOL, the only other Line 9 shipper.
This ruling provides additional information about what must be included in an Open Season process. While the Board has not set out its requirements in detail, it has reaffirmed the principles that (i) openness and transparency must be the hallmarks of an open season process, and (ii) an open season process must be appropriate to the circumstances of the application. The ruling also demonstrates that the practical outcomes of the application of a toll design must be considered in determining whether unjust discrimination has occurred.
Gord Nettleton is a partner with Osler, Hoskin & Harcourt LLP practising in the Calgary office's Litigation Department. Matthew Keen is an associate in the firm's Calgary office.
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