NERA's Role in the National Energy Board's Rejection of 'Rolled-In' Pricing for a Major Canadian Gas Pipeline Extension

The Situation

In February 2013, the Canadian National Energy Board (NEB) declined to recommend to the Governor in Council that a Certificate of Public Convenience and Necessity be granted to NOVA Gas Transmission Ltd. (NGTL, a subsidiary of TransCanada Corp.) for a planned 97-km, 36-inch extension of the NGTL system into the shale gas fields in the Horn River Basin of northern British Columbia (the proposed "Komie North" section).

Rolled-in pricing historically has been a somewhat contentious practice in both Canada and the US. Unlike the default incremental pricing treatment for new pipelines now used by the US Federal Energy Regulatory Commission (which contributes to the competitiveness of new pipeline entry and speeds the granting of Certificates of Public Convenience and Necessity in the United States), the NEB has long used a case-by-case examination for new pipeline proposals with a seeming wide latitude for the use of rolled-in pricing.

So, while NGTL's proposal in this case went against the established pricing policy in the US, it was unclear how the NEB would rule on NGTL's application.

NERA's Role

FortisBC Energy Inc. retained NERA to support its opposition to NGTL's proposal. FEI is the main gas distributor in British Columbia and would potentially suffer from anticompetitive pricing upstream of its distribution system. Dr. Makholm, NERA's leading expert in pipeline regulation, acted as the testifying expert in the case. Vice President Kurt G. Strunk and Associate Analyst Stephen Collins served as consulting experts.

Dr. Makholm submitted written evidence in the proceeding in which he established that NGTL's proposal would go against the public interest and result in inefficient and anticompetitive infrastructure development. NERA's evidence demonstrated how NGTL's proposal was contrary to policies in the US and, most importantly to the case, failed to adhere to the basic regulatory principles endorsed by the NEB.

The Result

Following a review of written and oral evidence from Dr. Makholm and other parties to the proceeding, the NEB issued a report in January 2013 outlining its final conclusions in relation to NGTL's proposal.

In concordance with Dr. Makholm's testimony, the NEB unequivocally concluded that the proposed toll treatment was inappropriate for the Komie North extension. In stating the reasons for its conclusion, the Board found that the proposal "would unreasonably subsidize the extension of the NGTL Alberta System into an area where it would compete with infrastructure already in place" and would result in inefficient price signals and uncompetitive development.