Deconstructing Pipelines: NERA's Role in Canada's Omnibus "Pipeline Abandonment" Proceeding before the National Energy Board

The Situation

On 31 May 2013, TransCanada filed an application with Canada's National Energy Board (NEB) for approval of a collection mechanism for recovery of costs related to pipeline abandonment, in accordance with the NEB's Land Matters Consultation Initiative (LMCI). TransCanada proposed a surcharge based entirely on energy billing determinants. Enbridge Gas Distribution Inc. and Union Gas Ltd., the Ontario gas distributors, opposed TransCanada's application.

NERA's Role

Enbridge and Union retained NERA Senior Vice President Dr. Jeff D. Makholm as a witness to represent them on issues of TransCanada's proposed collection mechanism. Vice President Kurt Strunk served as consulting expert.

TransCanada’s application proposed a "postage stamp" methodology, a surcharge based on energy billing determinants flowing on the pipeline. Notably, this methodology did not account for the distance that gas was shipped, despite large variances in length of haul and many pipeline costs being distance-based.

NERA, in the testimony of Dr. Makholm, argued that pipeline abandonment costs were a function of both distance and geography, where a longer pipeline means higher costs. NERA stated that there was no reason to depart from the method used for recovering pipeline construction, and that the ratio of rate base approach would be reasonable and appropriate because it would better reflect the distance-related nature of the cost than TransCanada’s proposal, which excluded distance as a factor.

In addition, NERA claimed that cost allocation is not an exact science, but a way to use objective measure to differentiate among pipeline shippers in a reasonable and workable fashion.

The Result

On 31 May 2014, the NEB released a decision rejecting TransCanada's collection mechanism in favor of NERA's recommended methodology.