TransCanada Pipeline Ventures Ltd. Suncor Energy Inc.

Transcription

1 Decision Application to Have the Ventures Pipeline (Oil Sands Pipeline) May 20, 2009

2 ALBERTA UTILITIES COMMISSION Decision : Application to Have the Ventures Pipeline (Oil Sands Pipeline) Application No Proceeding ID. 27 May 20, 2009 Published by Alberta Utilities Commission Fifth Avenue Place, 4th Floor, Street SW Calgary, Alberta T2P 3L8 Telephone: (403) Fax: (403) Web site:

3 Contents 1 INTRODUCTION BACKGROUND ISSUES DISCUSSION OF ISSUES Powers of the Commission Under the Gas Utilities Act and Public Utilities Act and Non-Interference With the Contracts of the Parties Commission Views Time Period of Evidence to be included in Investigation Commission Views Inter-Affiliate Relationship between NGTL and Ventures Commission Views Are Rates Unjust or Unreasonable, Unjustly Discriminatory or Unduly Preferential? Commission Views DECISION APPENDIX 1 PROCEEDING PARTICIPANTS AUC Decision (May 20, 2009) i

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5 ALBERTA UTILITIES COMMISSION Calgary Alberta TRANSCANADA PIPELINE VENTURES LTD. SUNCOR ENERGY INC. APPLICATION TO HAVE THE VENTURES PIPELINE (OIL SANDS PIPELINE) REGULATED UNDER THE Decision PROVISIONS OF THE GAS UTILITIES ACT Application No SECTION 24 OF THE GAS UTILITIES ACT INVESTIGATION Proceeding ID INTRODUCTION 1. On March 23, 2006, (Suncor) applied to the Alberta Energy and Utilities Board (Board), the predecessor of the Alberta Utilities Commission (AUC or Commission), for an investigation of the services and tolls applicable to the pipeline held by TransCanada Pipeline Ventures Limited Partnership (Ventures Partnership or Ventures Pipeline) that were implemented by NOVA Gas Transmission Ltd. (NGTL) and TransCanada Pipeline Ventures Ltd. (Ventures) pursuant to section 24 of the Gas Utilities Act, R.S.A c. G-5 (Gas Utilities Act)(the Application). 1 Further, pursuant to section 36 of the Gas Utilities Act, Suncor requested that the Board fix just and reasonable rates, tolls and charges and schedules for service; and proper and adequate rates and methods of depreciation, amortization or depletion. 2. Ventures submitted that the Board lacked jurisdiction to grant the relief requested in Suncor s application, and requested that the Board deal with the issue of jurisdiction as a preliminary matter. Ventures argued that Suncor had failed to provide the factual context and legal argument to establish the Board s jurisdiction to entertain Suncor s application. The Board concurred with Ventures that it was proper to address the issue of jurisdiction as a preliminary matter. 3. On October 24, 2006, the Board issued Decision in which it determined that Ventures Pipeline was serving the public, and that it was a gas utility pursuant to section 1(g)(ii) of the Gas Utilities Act. Having found that the Ventures Pipeline was a gas utility, the Board found that section 24 of the Gas Utilities Act clearly authorized the Board to conduct an investigation into the Ventures Pipeline and the affairs of its owners, which the Board determined were Ventures and NGTL for the purposes of the Gas Utilities Act, as the Ventures Partnership was not a legal entity and NGTL and Ventures were the partners. The Board decided to exercise its jurisdiction under section 24 of the Gas Utilities Act, conduct an investigation to determine whether the rates charged are unjust or unreasonable, unjustly discriminatory or unduly preferential, and set out the scope of the investigation. 4. Ventures was ordered to file a report with the Board by November 30, Application No Decision : Preliminary Decision regarding Jurisdiction to have the Ventures Pipeline (Oil Sands Pipeline) Regulated under the Provisions of the Gas Utilities Act (Application ) (Released: October 24, 2006) AUC Decision (May 20, 2009) 1

6 5. Ventures appealed Decision to the Alberta Court of Appeal. Following a request on behalf of Ventures, the Board suspended the requirement to file such a report pending the appeal. 6. On February 19, 2008, the Alberta Court of Appeal issued its decision upholding the Preliminary Decision. 3 Accordingly, the findings and conclusions of jurisdiction reached in the Preliminary Decision remain valid and form the basis of the investigation. 7. Accordingly, the Commission by letter dated February 28, 2008, directed Ventures to file a report with the Commission by April 11, 2008, using a new application number, and upon receipt of such report, the AUC would establish a process and commence an investigation pursuant to section 24 of the Gas Utilities Act. 8. The Commission specified that the report (the Report) to be filed had to include the following information: 4 1. costs incurred for construction and expansion of the Ventures Pipeline; 2. costs to operate the Ventures Pipeline; 3. details related to capacity holders and quantities on the Ventures Pipeline; 4. contract terms and conditions including rates for the Ventures Pipeline; 5. facilities and operations configuration including interconnectivity to the NGTL system and other area systems as well as future expansibility; 6. market area forecasts and any requested new services or service quantity increases; and any other information that may have bearing on the Board s investigation. 9. Ventures filed the Report on April 11, 2008 along with a motion for confidentiality pursuant to sections 9 and 13 of Rule 001 AUC Rules of Practice regarding the information it has been directed to file. 10. Ventures argued that the confidential information was commercially sensitive to both Ventures and its shippers, and public disclosure of it would harm significantly Ventures and its shippers competitive positions. Also, maintaining confidentiality over the confidential information at this time was an especially important concern for Ventures and its shippers given that the Commission was only at the investigation stage. 11. On April 21, 2008, the Commission issued a Notice of Application regarding the investigation. 12. Any party interested in intervening in the proceeding was required to file a Statement of Intention to Participate (SIP) by May 1, The Commission also requested that interested parties to the proceeding include with their SIP, submissions regarding Ventures confidentiality motion. Ventures was given an opportunity to reply to those submissions by May 8, Court of Appeal Decision(Released: February 19, 2008): v. Alberta (Energy and Utilities Board), 2008 ABCA 55, Appeal of the Alberta Energy and Utilities Board Decision (Released October 24, 2006) This information was the same as set out on page 12 of Decision AUC Decision (May 20, 2009)

7 13. The Commission received SIPs from the following interveners: Williams Energy (Canada), Inc. (Williams); BP Canada Energy Company (BP); Syncrude Canada Ltd. (Syncrude); ATCO Pipelines (AP); Petro-Canada; Canadian Association of Petroleum Producers (CAPP); The Office of the Utilities Consumer Advocate (UCA); NOVA Gas Transmission Ltd. (NGTL); Industrial Gas Consumers Association of Alberta (IGCAA); and Suncor Energy Marketing Inc. 14. On June 27, 2008, the Commission granted Ventures confidentiality motion. However, the Commission concluded that fairness dictated that NGTL, Williams, Suncor, Petro-Canada, and Syncrude shippers on the Ventures pipeline could obtain copies of the confidential information for purposes of the investigation proceeding on the terms and conditions set out by the Commission in its ruling. 15. With regards to other persons who filed SIPs, the Commission required additional information to determine whether these persons should have standing with respect to this investigation and whether they should be able to obtain copies of the Confidential Information. On July 15, 2008, BP and the UCA filed submissions requesting standing related to the Application. BP argued that it is affected because it is a shipper on the NGTL system and the Transportation By Others (TBO) charges paid by NGTL on the Ventures Pipeline flow through to the shippers. The UCA argued that it should be granted standing because the customers it represents may be affected by any future TBO charges to NGTL which would be incorporated into rates for NGTL services. 16. In making a determination regarding standing of BP and the UCA in this proceeding, the Commission considered that it was at the stage of conducting an investigation. The purpose of the investigation is to determine whether rates charged for transportation services on the Ventures Pipeline are unjust or unreasonable, unjustly discriminatory or unduly preferential, in a manner prohibited by the Gas Utilities Act. However, if, as a result of the investigation, the Commission concludes that charges on the Ventures Pipeline are to be regulated, it is at that stage that any changes to the TBO rate paid by NGTL will be determined. Therefore, the Commission determined that BP and the UCA had not shown a direct impact arising from the investigation and the Commission did not grant them standing for purposes of the investigation. 17. The Commission established a process schedule with deadlines for Argument and Reply Argument of January 30, 2009 and February 17, 2009, respectively. The Commission considers the record for the proceeding closed on February 17, BACKGROUND 18. The Commission is of the view that an understanding of the history of the Ventures Pipeline is imperative in assessing the reasonableness of rates on the Ventures Pipeline. The AUC Decision (May 20, 2009) 3

8 following is a chronology of Decisions or developments specifically related to the Ventures Pipeline from 1997 to present. 19. In the late 1990 s, several oilsands projects were proposed or under development in the Fort McMurray area. Ventures submitted that these projects included the Suncor Millennium project, the Syncrude UE-1 project, the Albian Sands project, the Mobil Oil Canada (Mobil) Kearl Lake project, the Petro-Canada MacKay River project, and the Williams upgrader gas project at the Suncor site. The natural gas requirements for each of these projects exceeded the capacity available on the Albersun and Simmons pipelines, which were the only transmission pipelines serving the area at the time. To address the need for additional gas transmission capacity in the area, an oilsands pipeline infrastructure group (Infrastructure Group) was formed in 1997, with Syncrude, taking the lead, and Suncor, Shell, Petro-Canada and Mobil as members. The Infrastructure Group engaged interested parties in discussions as to how to optimize new regional infrastructure development to best meet the collective needs of the members of the group. Arising from these discussions, the Infrastructure Group issued an invitation for proposals for pipeline infrastructure to several parties competing to provide incremental gas transmission service into the area. These parties included ANG Gathering & Processing Ltd., ATCO Gas Service Ltd., IPL Energy Inc., Ventures and the Simmons Group. 20. Ventures submitted that it was in the context of this evolution of gas transmission delivery service options into the Fort McMurray area that Ventures was identified to the Infrastructure Group and its members and that Ventures developed commercial proposals, in competition with other non-rate-regulated gas transmission service options, to meet the growing demand for gas pipeline infrastructure into the Fort McMurray area. 21. The Ventures Pipeline, the ATCO Muskeg pipeline, the Simmons pipeline and the Albersun pipeline, were developed as non-rate-regulated pipelines in the Fort McMurray area and underpinned by commercial contracts with one or a few shippers. 22. In 1998 NGTL reached an understanding with CAPP and the Small Explorers and Producers Association of Canada that it would not construct new delivery pipelines. An unresolved issue in these negotiations concerned details of what NGTL could or could not construct in response to service requests. These negotiations culminated in the Products and Pricing application and Decision At the time the Ventures Pipeline was proposed, NGTL was precluded from competing to provide new gas transmission delivery infrastructure into the Fort McMurray area. 23. In Decision and Addendum 7, the Board approved the Ventures application to construct and operate an at-risk pipeline for the purpose of transporting natural gas from an interconnection with the existing NGTL Liege Lateral pipeline underpinned by Suncor s major Decision NOVA Gas Transmission Ltd Products and Pricing (Application ) (Released: February 2000) Decision NOVA Pipeline Ventures Ltd. Application to Construct and Operate a Natural Gas Pipeline Wood Buffalo Lake to Fort McMurray Area (Application No ) (Released November 23, 1998) Decision and Addendum NOVA Pipeline Ventures Ltd. Application to Construct and Operate a Natural Gas Pipeline Wood Buffalo Lake to Fort McMurray Area (Application No ) (Released: June 4, 1999) 4 AUC Decision (May 20, 2009)

9 expansion of its oil sands upgrading facilities and with Novagas Canada Limited s (Novagas) proposed liquids extraction plant. 24. In Decision , the Board had approved the replacement of postage stamp rates with Receipt Point Specific Rates. The new rate design provided for higher accountability for the receipt component of NGTL s revenue requirement. The Board also approved new terms and conditions of service and directed that NGTL would not engage in lateral construction, to increase competition in small diameter pipes. There were no changes to the method of calculating the delivery charges for gas serving the intra-alberta market or the export market. Since Decision maintained the same cost allocation between intra and ex Alberta service, the zero intra-alberta delivery charge was also maintained. However, the Board raised concerns with respect to cost accountability and noted willingness to review the intra-alberta rate design if the current tolling structure did not reflect proper cost allocation. 25. Following Decision , NGTL and its customers established Guidelines for New Facilities, which described the circumstances under which NGTL would be allowed to provide delivery service. 26. In Decision , it was noted that delivery service to Fort McMurray was an unresolved issue during the Settlement negotiation. Parties agreed that NGTL would file an application for service extension into Fort McMurray and if approved by the Board, the cost of such service would then be treated as a flow-through non-routine adjustment to the negotiated revenue requirement. 27. NGTL determined that a TBO arrangement with Ventures, over the period 2001 to 2004, was the least cost and preferred alternative to meet the requested delivery service. NGTL submitted in Application No that a combination of a TBO arrangement with Ventures plus an NGTL facilities build-up after 2004 would yield the lowest initial capital and cost of service. The arrangement would allow NGTL to meet service requests into the Fort McMurray area until 2004 without requiring significant investment, until such time as long-term service requests into the area were better defined. Suncor supported NGTL s TBO application with the full knowledge of Ventures charges for providing NGTL with TBO service. 28. Ventures executed a contract with NGTL on October 26, 2001 for provision of transportation service to NGTL on the Ventures Pipeline (TBO #1). The Board, in Decision approved NGTL s application to proceed with its extension of regulated service into the region through the contract with Ventures on the Ventures Pipeline providing for TBO service. The Board approved the TBO # 1 between Ventures and its affiliate NGTL, but allowed inclusion of the associated costs only for the period up to and including December 31, This coincided with the termination of a settlement between NGTL and its shippers for the 2001 and 2002 revenue requirements. 8 9 Decision NOVA Gas Transmission Ltd. Application for Approval of The Alberta System Rate Settlement for (Application ) (Released: May 29, 2001) Decision NOVA Gas Transmission Ltd. Application for Approval of Costs-Delivery Service to the Fort McMurray Area (Application ) (Released: February 5, 2002) AUC Decision (May 20, 2009) 5

10 29. In Decision , 10 the Board approved NGTL s 2003 Revenue Requirement and Tariff Settlement applications filed with the Board on February 27, 2003 and March 31, 2003, respectively. This Decision also approved Ventures pipeline TBO costs for the 2003 test year. 30. A subsequent contract for additional capacity was entered into between NGTL and Ventures dated August 21, 2003 (TBO #2). 31. Decision dealt with the Board s determinations based on evaluation of the 2004 Phase I General Rate Application of NGTL, which included an updated Code of Conduct. The Board approved the costs of Ventures TBO # 2 arrangement until April 1, 2006, the Boardimposed deadline for the potential acquisition of the Ventures assets by NGTL. The Board also approved the acquisition of the Simmons pipeline assets as filed based on least cost alternative analyses and the potential incremental revenue benefit to NGTL s customers. 32. On June 7, 2005 the Board issued Decision , 12 NGTL s Phase I Settlement, which included TBO costs related to transportation service provided by Ventures into the Fort McMurray area. NGTL was directed to provide the Board and interested parties an update on the status and results of negotiations in regard to an acquisition of the Ventures assets before April In accordance with that direction, NGTL filed a letter with the Board on March 31, 2006 advising the Board as follows: NGTL presented a proposal to Ventures during the summer of 2005 to acquire the Ventures Assets at a price consistent with the LCA analysis. Ventures advised NGTL that the purchase offer was unacceptable. Furthermore, NGTL had discussions with Ventures, Suncor and Williams regarding alternative commercial arrangements, but was unable to reach an arrangement acceptable to all parties. Due to the confidentiality agreements described above, NGTL is unable to disclose the content of these discussions; however NGTL wishes to assure the Board that it has made all reasonable efforts to acquire the Ventures Assets On March 23, 2006, Suncor applied to the Board pursuant to section 24 of the Gas Utilities Act, for an investigation of the services and tolls applicable to the pipeline held by the Ventures Partnership that were implemented by NGTL and Ventures pursuant to section 24 of the Gas Utilities Act Decision NOVA Gas Transmission Ltd Revenue Requirement and Tariff Settlement Applications (Applications & ) (Released: June 24, 2003) Decision NOVA Gas Transmission Ltd General Rate Application Phase I (Application ) (Released: August 24, 2004) Decision NOVA Gas Transmission Ltd Revenue Requirement Settlement (Application ) (Released: June 7, 2005) Decision , page 8 Attachment Suncor-Ventures 20(a): NGTL letter to the EUB-March 31, 2006 Application No AUC Decision (May 20, 2009)

11 35. More recently, NGTL applied to the Board to construct the Fort MacKay Mainline consisting of the Thickwood Hills section (50 km x 30 inch diameter) and the Birchwood section (85 km x 36 inch diameter) ISSUES 36. The Commission notes that in this Application it received evidence from Suncor and Ventures, and Argument from Suncor, Ventures, Syncrude, and NGTL, as well as Reply Argument from Suncor, Ventures and NGTL. Parties to the proceeding raised the following issues to be considered within the Commission s investigation: Powers of the Commission under the Gas Utilities Act and Public Utilities Act and noninterference with the contracts of the parties; Time Period of consideration of reasonableness of rates on Ventures Pipeline; Inter-Affiliate Relationship between NGTL and Ventures; and Are Rates Unjust or Unreasonable, Unjustly Discriminatory, or Unduly Preferential? 37. The purpose of the investigation is to determine whether rates charged for transportation services on the Ventures Pipeline are unjust or unreasonable, unjustly discriminatory or unduly preferential, in a manner prohibited by the Gas Utilities Act. Given the confidential nature of the evidence presented within this proceeding, this decision has confidential portions as indicated which will only be released to parties that signed confidential undertakings. 4 DISCUSSION OF ISSUES 38. In reaching the determinations contained within this Decision, the Commission has considered the record of this proceeding, including the Argument and Reply provided by each party. Accordingly, references in this Decision to specific parts of the record are intended to assist the reader in understanding the Commission s reasoning relating to a particular matter and should not be taken as an indication that the Commission did not consider other relevant portions of the record with respect to that matter. 4.1 Powers of the Commission Under the Gas Utilities Act and Public Utilities Act and Non-Interference With the Contracts of the Parties 39. Suncor noted that section 25 of the Gas Utilities Act and section 81 of the Public Utilities Act explicitly lay out the powers of the Commission as it relates to unjust or unreasonable rates. Suncor added that Section 25 of the Gas Utilities Act states: o 25 No owner of a gas utility shall (a) make impose or extract an unjust or unreasonable or unjustly discriminatory or unduly preferential individual or joint rate, commutation rate or other special rate, toll, fare, charge or schedule for any gas or service supplied or rendered by it within Alberta, 16 NGTL s Fort McKay Mainline (Thickwood Hills Section) Application, dated March 28, 2006 and NGTL s Fort McKay Mainline( Birchwood Creek Section) Application dated June 12, 2007 AUC Decision (May 20, 2009) 7

12 (b) adopt or impose any unjust or unreasonable classification in the making of or as the basis of any individual or joint rate, toll, fare, charge or schedule for any gas or service rendered by it within Alberta, (c) adopt, maintain or enforce any regulation, practice or measurement that is unjust, unreasonable, unduly preferential, arbitrarily or unjustly discriminatory or otherwise in contravention of law, or provide or maintain any service that is unsafe, improper or inadequate, or withhold or refuse any service that can reasonably be demanded and furnished when ordered by the Commission, or (d) make, or give, directly or indirectly, any undue or unreasonable preference or advantage to any person or to any locality, or subject any particular person or locality to any prejudice or disadvantage in any respect whatever [emphasis added] 40. Suncor argued that section 81 of the Public Utilities Act gives the Commission the following general power to override contracts and set rates: 81 When, by a contract between an owner of a public utility and a municipality or person for the supply of a commodity or service by means of the public utility, a rate, toll or charge is agreed on either as a fixed or variable rate, toll or charge, or a maximum or minimum rate, toll or charge, and whether that rate, toll or charge is agreed on with respect to a present or future supply of an existing or non existing commodity or service, then, notwithstanding anything in this Act, the Commission may, on the application of the owner, municipality or person and on it being shown on the hearing of the application that the rate toll or charge is insufficient, excessive, unjust or unreasonable, change the rate toll or charge to some other greater or lesser rate toll or charge that it considers fair and reasonable [emphasis added]. 41. Suncor submitted that what is at stake in this investigation is not the sanctity of contract, but the rule of law. It added that the law in Alberta prohibits owners of gas utilities from charging any excessive, unjust, unreasonable or unjustly discriminatory rates. No exception is made for tolls established pursuant to contract, nor is there any presumption, legal or otherwise, that tolls contained in contracts are either to be presumed or deemed to be just and reasonable. Suncor submitted that the very reason the Commission exists is to regulate the unconstrained right to contract at common law. Suncor argued that the Province of Alberta has expressly given the Commission the power to override contracts, as the Province of Alberta has determined that it is in the public interest that owners of gas utilities be prohibited from charging excessive, unjust, unreasonable or unjustly discriminatory rates. 42. Suncor submitted that, according to Ventures, the Mobile-Sierra doctrine holds that rates established in a freely negotiated contract are presumed to be just and reasonable and, only if there has been a clear demonstration of serious harm to the public interest, generally measured in terms of harm to the consuming public, may the regulator consider modifying the rates or charges determined by contract. Suncor argued however that the so-called doctrine, as it was formulated by three members of the United States Supreme Court in Morgan Stanley, is much narrower in scope: 8 AUC Decision (May 20, 2009)

13 Under the Mobile-Sierra doctrine, the Federal Energy Regulatory Commission... must presume that the rate set out in a freely negotiated whole-sale-energy contract meets the just and reasonable requirement imposed by [the Federal Power Act 41 Stat. 1063, as amended]. The presumption may be overcome only if FERC concludes that the contract seriously harms the public interest Suncor also submitted that the presumption simply cannot operate in the face of section 81 of the Public Utilities Act. As referenced above, that provision expressly states that when a contract for utility service specifies a rate, the Commission may change it to some other rate that it considers to be fair and reasonable. In light of this, Suncor took the position that it simply defies commonsense to suggest that the Commission must presume that a rate established in a contract is just and reasonable. Suncor noted that Ventures had not cited any decision of a Canadian court in which such a presumption is recognized as part of Canadian law. 44. Suncor submitted that the Gas Utilities Act sets out the scheme and a mandate for the Commission to protect the public interest by way of regulating public utilities. In Decision , the Board found that the Ventures Pipeline is serving the public and that it is a gas utility. In particular, the Board concluded that Suncor is a member of the public that is entitled to protection pursuant to the Gas Utilities Act and that being a sophisticated party does not disentitle Suncor to protection. The Board further concluded that Ventures indirectly provides service to customers of NGTL (through the TBO agreement), who constitute the public. Suncor therefore argued that serious harm to the public interest is demonstrated by the fact that Suncor, Williams, and other shippers that receive regulated service from NGTL pursuant to TBO #2, are paying rates for transmission service on the Ventures Pipeline that provide the owners of the Ventures Pipeline with excessive, unjust and unreasonable returns. 45. NGTL submitted that the application of the Sierra-Mobile doctrine operates in this case with the presumption that the rates are just and reasonable. It added that the existing contracts were freely negotiated between sophisticated parties. NGTL argued that the Commission should not interfere in these contracts absent a clear demonstration of overriding public interest considerations and that Suncor has not identified any such public interest considerations. It concluded that the Commission should refuse Suncor s request on the basis of sanctity of contract alone. 46. In relation to the Ventures TBO specifically, NGTL submitted that no such public interest consideration exists. If the Commission was to interfere with the existing rates on the Ventures Pipeline, under the Ventures TBO or any other existing contracts, NGTL suggested that it could have unintended and adverse consequences for NGTL and its shippers on the Alberta System through possible higher rates. NGTL submitted that the prior public review by the Board of the Ventures TBO reinforces the presumption of contractual validity and further justifies the Commission refusing any Suncor invitation to interfere with or set aside the terms of the Ventures TBO. 47. Ventures asserted that public and regulatory policy firmly support sanctity of contract and run counter to any suggestion that the Commission should make a determination, arising out of 17 Suncor Argument Attachment A: Supreme Court of the United States- Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomich County, Washington, et al(released June 26, 2008), page 4 AUC Decision (May 20, 2009) 9

14 its investigation, that there is a public interest in the Commission exercising its jurisdiction to regulate the rates for service on the Ventures Pipeline. This public and regulatory policy is clearly articulated in the United States in what is referred to as the Mobile-Sierra Doctrine which was recently upheld and reaffirmed by the Supreme Court of the United States in the Morgan Stanley case. The Mobile-Sierra Doctrine holds that rates established in a freely-negotiated contract are presumed to be just and reasonable and, only if there has been a clear demonstration of serious harm to the public interest, generally measured in terms of harm to the consuming public, may the regulator consider modifying the rates or charges determined by contract. Venture submitted that the legal principles established in these decisions quite properly prohibit regulatory agencies from adopting a paternalistic approach - that is, an approach that would restrict experienced and innovative parties to agreements that were based upon the traditional cost-of service- based approach that is generally applied in circumstances where a utility has the ability to impose unilateral rates. 48. Ventures submitted that Suncor s request and position in this proceeding ignore the public interest in maintaining the sanctity of valid contracts. Ventures argued that the public interest in maintaining the sanctity of valid contracts gives rise to the presumption that rates freely negotiated between parties, and recorded in a valid contract, meet the just and reasonable standard and should not be interfered with except in extraordinary circumstances where there has been a clear demonstration of serious harm to the public interest. Suncor s request and position in this proceeding is contrary to long-standing economic theory and public and regulatory policy. 49. Ventures submitted that there is no dispute that Suncor negotiated and executed the Transportation Service Contract between Suncor and Ventures (Suncor Contract) on January 1, 1998 and that the contract is valid and enforceable in accordance with its terms. Ventures argued that if Suncor believed that it had a basis to argue that the Suncor Contract was invalid or unenforceable, Suncor has had ample opportunity to make that argument before a court. Ventures submitted that the Commission should not allow Suncor to attempt to bring a collateral attack through this regulatory proceeding respecting the enforceability of a valid contract that it freely negotiated and from which it has taken significant benefits. It added that there was no need for nor public interest in the Commission creating new regulatory exceptions to the sanctity of valid contracts. 50. Ventures added that economic theory has long recognized that certainty of contract is essential for a healthy economy. Long-term forward contracts of the nature of the Suncor Contract, in particular, help to reduce financial risk. In the circumstances before the Commission in this proceeding, Suncor and Ventures are sophisticated industry players. Suncor was the owner and operator of pipelines in the Fort McMurray area prior to the construction of the Ventures Pipeline. At the time that Ventures executed the Suncor Contract, Ventures was a new entrant into the gas transmission service market in the Fort McMurray area. Suncor and Novagas (now Williams) entered into a long-term forward contract with Ventures for the provision of gas transmission services. Ventures submitted that it was based on the long-term certainty of the revenue stream under the Suncor and Williams contracts that Ventures made a significant outlay of capital to provide necessary pipeline infrastructure, in a capital-intensive industry, which outlay of capital would not be recouped for a number of years. Suncor and Williams were the only counterparties at the time the pipeline was constructed and there was no certainty that Ventures could obtain buyers prepared to contract for unutilized capacity on the Ventures Pipeline. 10 AUC Decision (May 20, 2009)

15 4.1.1 Commission Views 51. The Commission does not accept Ventures main argument that the sanctity of valid contracts gives rise to the presumption that rates freely negotiated between parties, and recorded in valid contracts, meet the just and reasonable standard and should not be interfered with except in extraordinary circumstances where there has been a clear demonstration of serious harm to the public interest. 18 This argument ignores the legislative framework of the Gas Utilities Act. Ventures asked the Commission to determine the issue of just and reasonable rates on the basis of long-standing economic theory and public and regulatory policy. 52. The Commission is of the view that the issue in this investigation is not the validity of the contract between Suncor and Ventures or the other contracts or the parties rights to contract as they see fit. No party has argued in this proceeding that the contracts are not valid. Therefore, the Commission does not need to embark on an examination of the principles of contract law and economic theory. Rather the issue is whether the Commission has the authority to review rates set out in contracts pertaining to a gas utility. 53. The Commission is also of the view that the presumption that rates freely negotiated between parties meet the just and reasonable standard does not apply to this situation because of the legislative framework for gas utilities in Alberta. The Commission notes the following statutory analysis of the Federal Power Act (FPA) by the Supreme Court of the United States in the Morgan Stanley case: the FPA requires regulated utilities to file compilations of their rate schedules or tariffs with the Commission 19, and to provide service to electricity purchasers on the terms and price there set forth. S.824d (c). Utilities wishing to change their tariffs must notify the Commission 60 days before the changes is to go into effect. S.824d (d). Unlike the Interstate Commerce Act, however, the FPA also permits utilities to set rates with individual electricity purchasers through bilateral contracts. S. 824d(c), (d). As we have explained elsewhere, the FPA departed from the scheme of purely tariff-based regulation and acknowledged that contracts between commercial buyers and sellers could be used in ratesetting. Verizon Communications Inc. v. FCC, 535 U. S. 467,479 (2002). Like tariffs, contracts must be filed with the Commission before they go into effect The Supreme Court of the United States then went on to explain: In two cases decided on the same day in 1956, we addressed the authority of the Commission to modify rates set bilaterally by contract rather than unilaterally by tariff. In United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, we rejected a natural-gas utility s argument that the Natural Gas Act s requirement that it file all new rates with the Commission authorized it to abrogate a lawful contract with a purchaser simply by filing a new tariff, see id., at The filing requirement, we explained, is merely a precondition to changing a rate, not an authorization to change rates in violation of a lawful contract (i.e., a contract that sets a just and reasonable rate). See id., at Ventures Part 1 Argument, page 9 Federal Energy Regulatory Commission Supreme Court of the United States: Morgan Stanley Capital Group Inc. v. Public Utility District No. 1 of Snohomich County, Washington, et al(released June 26, 2008), page 2 AUC Decision (May 20, 2009) 11

16 In FPC v. Sierra Pacific Power Co., 350 U. S. 348, (1956), we applied the holding of Mobile to the analogous provisions of the FPA, concluding that the complaining utility could not supersede a contract rate simply by filing a new tariff. In Sierra, however, the Commission had concluded not only (contrary to our holding) that the newly filed tariff superseded the contract, but also, that the contract rate itself was not just and reasonable, solely because it yield[ed] less than a fair return on the net invested capital of the utility. Id., at 355. Thus, we were confronted with the question of how the Commission may evaluate whether a contract rate is just and reasonable. In such circumstances the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest- as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory. Id., at (emphasis deleted). As we said in a later case, [t]he regulatory system created by the [FPA] is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity. Permian Basin, supra. at The Supreme Court of the United States went on to add that over the past 50 years, decisions of that Court and the Courts of Appeals in the United States have refined the Mobile- Sierra presumption to allow greater freedom of contract and that parties could contract out of the presumption. 56. These passages from the Morgan Stanley case clearly show the statutory underpinning of the Mobile-Sierra presumption and subsequent case law which dictates that rates set by bilateral contracts are presumed to be just and reasonable and will be overturned only when the mutually agreed-upon contract rate seriously harms the consuming public The Commission finds that there are no similar provisions in the Gas Utilities Act or the Public Utilities Act to those in the FPA which permit utilities to set rates with individual purchasers by contract and to file such rates as tariffs. Ventures and NGTL did not argue that either the Gas Utilities Act or the Public Utilities Act contains such provisions, only that the Commission should adopt the Mobile-Sierra presumption and presume that the rates set out in the contracts in question are just and reasonable. Without such statutory provisions, the Commission cannot apply the Mobile-Sierra presumption that the contracts in question in this investigation are presumed to set just and reasonable rates. As a result, the Commission rejects the Ventures and NGTL submissions regarding the sanctity of contracts. 58. The Commission consequently does not consider the Amici Curiae Brief filed in the Morgan Stanley case and submitted by Ventures and the portions of Dr. Gaske s evidence on economic theory as relevant to this investigation Ibid, pages 4 and 5 Ibid, page AUC Decision (May 20, 2009)

17 59. The starting point for the Commission s analysis regarding the tolls provided in contracts between the parties is the findings and conclusions of the Board in Decision , in which the Board stated: more the Board determined that Suncor an that Suncor should not lose its status as a member of the public simply by entering into a private contract, nor is there anything in the legislation to suggest that is the case. The Board also does not accept Ventures Ltd. s argument that since Suncor is a sophisticated party that it is not a consumer in need of protection. In the Board s view, being a sophisticated party does not mean that party is not entitled to protection. Further, the Board considers that Ventures Ltd. indirectly provides service to the public through the transportation by others (TBO) agreement with NGTL. When the Ventures Pipeline was first approved by the Board in 1998, it was underpinned by contracts with Suncor and Novagas Canada Limited. Since then, the use of the Ventures Pipeline has changed. NGTL and Ventures Ltd. first entered into a TBO arrangement in 2002, and a TBO arrangement has been in place since. The TBO arrangement results in the Ventures Pipeline indirectly serving customers of NGTL, as this service is open to any customer of NGTL and this does constitute the public. Further, the capacity on the Ventures Pipeline is psig and the TBO arrangement with NGTL is for a capacity of psig. Moreover, the affiliate nature of the arrangement and the ownership structure of the Ventures Partnership are important in this determination. NGTL holds a 99.99% limited partnership interest in the Ventures Partnership. The other 0.01% is held by Ventures Ltd. who is the general partner of the Ventures Partnership. In turn, NGTL owns Ventures Ltd. As a result, NGTL is in essence the owner of the Ventures Partnership and the Ventures Pipeline. NGTL is a regulated gas utility and these facts lend support to the conclusion that Ventures Pipeline is indirectly, through NGTL, serving the public Under the Gas Utilities Act or Public Utilities Act, the Commission generally sets the just and reasonable tolls or rates that regulated utilities may charge in Alberta. Even in cases where the utility and its customers negotiate tolls or rates in a negotiated settlement, the Commission must determine that the negotiated tolls or rates are in the public interest. However, section 81 of the Public Utilities Act appears to be an exception to the general scheme in that an owner of a public utility and a municipality or person may contract for the supply of a commodity or service by means of the public utility at a rate, toll or charge determined in the contract. But even in such cases, a party to that contract may apply to the Commission to determine if the rate, toll or charge set out in the contract is insufficient, excessive, unjust or unreasonable. If after a hearing, the Commission finds the rate, toll or charge insufficient, excessive, unjust or unreasonable, it may change the rate, toll or charge to some other greater or lesser rate, toll or charge that it considers fair and reasonable. The Commission is of the view that this section clearly provides that a rate, toll or charge freely negotiated is subject to change if it is insufficient, excessive, unjust or unreasonable. 61. In addition, as noted above, it is important in the circumstances of this investigation, that the Commission consider that when the Ventures Pipeline was first approved by the Board in 1998, it was underpinned by contracts with Suncor and Novagas and built as an at risk pipeline. The rates in these contracts were not regulated rates of a gas utility. Since then, the 23 Decision , pages 4 and 5 AUC Decision (May 20, 2009) 13

18 use of the Ventures Pipeline changed. NGTL and Ventures first entered into a TBO arrangement in 2002, and a TBO arrangement has been in place since. 62. Although the Commission is reluctant to interfere in freely negotiated contracts, the Commission is mindful of its mandate under the Gas Utilities Act to protect the public interest by way of regulating public utilities. The Gas Utilities Act requires the Commission to balance competing interests. Once Ventures was declared a gas utility, the rates set in the contract of each shipper are subject to the provisions of the Gas Utilities Act and Public Utilities Act allowing the Commission to change rates in a contract if it finds that the rates are unjust or unreasonable, unjustly discriminatory or unduly preferential. 4.2 Time Period of Evidence to be included in Investigation 63. While the Commission may consider what happened in the 1997/1998 timeframe as part of the investigation, Suncor submitted that any orders it makes pursuant to the Gas Utilities Act as a result of the investigation must operate prospectively. As such, Suncor suggested that the Commission s investigation would be incomplete if it did not consider how the use of the Ventures Pipeline has changed since 1997/1998, particularly as a result of the TBO arrangements with NGTL in 2001 and 2004, and how those changes in use have affected the market in which the Ventures Pipeline currently operates. Suncor noted the following: 1. NGTL got out of the business of providing delivery service in Alberta without any prior notice or transition. 2. The creation of Ventures was concurrent with NGTL s departure from the delivery service in Alberta. Prior to Decision , which facilitated NGTL s entry back into the delivery business in Alberta, and only a little over a year after the approval of the Ventures application, NGTL informed Ventures that it would be offering regulated Fort McMurray delivery service and that there was a high likelihood NGTL would be providing it through the Ventures Pipeline. 3. The Ventures Pipeline was approved as an at-risk, unregulated pipeline, but shortly thereafter NGTL changed the use of the Ventures Pipeline by establishing Fort McMurray delivery service through a short-term Transportation by Others (TBO) arrangement with Ventures for a large portion of the Ventures Pipeline capacity (TBO #1). 4. A second long-term TBO with NGTL followed (TBO #2). 64. Suncor argued that it was these changes in use, the circumstances surrounding these changes, and the subsequent developments that prompted Suncor to file the Application. 65. Further, Suncor added that it does not agree with Ventures assertion that there was competition when the Suncor contract was executed. However, even if competition did exist at that time (which Suncor does not believe was the case), it came to an end when NGTL established regulated service in the Fort McMurray area. From that point forward, any available capacity on unregulated pipelines in the area essentially became stranded unless it could be sold to NGTL. That situation will continue as long as regulated service is provided by NGTL. 14 AUC Decision (May 20, 2009)

19 66. Ventures submitted that the Suncor Contract was negotiated in a competitive environment. There were many entities capable of meeting Suncor s incremental gas supply requirements. Ventures submitted that the only relevant period to determine if Ventures would have the ability to exercise market power would be to evaluate the competitiveness of the market at the time that its contract(s) were signed, which, for purposes of the Suncor Contract and the Novagas Contract, was the 1997/1998 period. No other time period is relevant for purposes of determining the justness and reasonableness of the Suncor and Novagas contracts. Ventures added that the market for natural gas transportation service in the Fort McMurray area was competitive at the time the Suncor Contract was negotiated Commission Views 67. The Commission notes that neither section 25 of the Gas Utilities Act nor section 81 of the Public Utilities Act provide any guidance as to the timeframe to evaluate the reasonableness of rates and contracts, nor restricts the Commission in this area. However, the Commission does not agree with Ventures submissions that the timeframe is the most appropriate for the investigation because the Commission is not charged with the responsibility of investigating the justness and reasonableness of the Suncor and (Williams) (formerly Novagas) Contracts. Rather, the Commission considers that the purpose of the investigation is to determine the reasonableness of rates charged on the Ventures Pipeline, which would include the initial contracts of Suncor and Williams. In particular, the Commission considers that the TBO arrangements between NGTL and Ventures are a key consideration in this investigation due to their inter-affiliate relationship, potential market power, and impact on the public. The Board commented on these aspects in Decision , the Decision in which the Board found that the Ventures Pipeline was serving the public and was a gas utility. The Board stated in Decision the following: Moreover, the affiliate nature of the arrangement and the ownership structure of the Ventures Partnership are important in this determination. NGTL holds a 99.99% limited partnership interest in the Ventures Partnership. The other 0.01% is held by Ventures Ltd. who is the general partner of the Ventures Partnership. In turn, NGTL owns Ventures Ltd. As a result, NGTL is in essence the owner of the Ventures Partnership and the Ventures Pipeline. NGTL is a regulated gas utility and these facts lend support to the conclusion that Ventures Pipeline is indirectly, through NGTL, serving the public The Commission therefore finds that to investigate the reasonableness of the rates charged to shippers on the Ventures Pipeline, the Commission must consider not only the timeframe, when the original contracts were signed and underpinned the construction of the pipeline, but all circumstances and contracts up to the close of the record in this proceeding. 4.3 Inter-Affiliate Relationship between NGTL and Ventures 69. Suncor noted that Ventures suggests that it was independent of NGTL and had no advantage as a result of its affiliate relationship. Suncor submitted that all the evidence, however, suggests otherwise. The evidence is that senior NGTL employees designed, engineered and constructed the Ventures Pipeline. These were the same employees responsible 24 Decision , page 5 AUC Decision (May 20, 2009) 15