NATIONAL ENERGY BOARD HEARING ORDER MH

Transcription

1 NATIONAL ENERGY BOARD HEARING ORDER MH-0-0 NOVA GAS TRANSMISSION LTD. NORTH MONTNEY MAINLINE PROJECT APPLICATION FOR VARIANCE AND SUNSET CLAUSE EXTENSION WRITTEN EVIDENCE OF GORDON ENGBLOOM ON BEHALF OF WESTCOAST ENERGY INC., CARRYING ON BUSINESS AS SPECTRA ENERGY TRANSMISSION December, 0

2 NATIONAL ENERGY BOARD HEARING ORDER MH-0-0 NORTH MONTNEY MAINLINE PROJECT APPLICATION FOR VARIANCE AND SUNSET CLAUSE EXTENSION WRITTEN EVIDENCE OF GORDON ENGBLOOM ON BEHALF OF WESTCOAST ENERGY INC., CARRYING ON BUSINESS AS SPECTRA ENEGY TRANSMISSION Q. Please state your name, business affiliation and address. A. My name is Gordon Engbloom. I am President of My address is 0 Street S.W., Calgary. Q. What is your expertise? A. My curriculum vitae is attached as Appendix A. 0 0 Q. What is the background for your evidence in this proceeding? A. NOVA Gas Transmission Ltd. ( NGTL ) has applied to the National Energy Board ( NEB or Board ) for variances to Condition of Certificate of Public Convenience and Necessity GC- and Condition of Order XG-N0-0-0 to enable it to proceed with specific components of the North Montney Mainline Project ( Variance Facilities ) independent of any final investment decision related to liquefied natural gas ( LNG ) exports from the west coast of British Columbia ( BC ) ( Variance Application ). As part of proceeding MH-0-0, the Board is also considering NGTL s request for approval pursuant to section of the National Energy Board Act to construct new receipt meter stations along the Variance Facilities. Together, the Variance Facilities and the receipt meter stations are referred to as the NMML Facilities. Q. What is the purpose of your evidence in this proceeding? A. My evidence first addresses the economic issues arising from item of the List of Issues regarding tolling matters and then responds to the joint evidence filed by Mr. John J. Reed and Mr. Toby Bishop of Concentric Energy Advisors, Inc. The NMML Facilities include the proposed Groundbirch compressors, which would be located on the existing Groundbirch mainline and would expand the capacity of that facility. The focus of my evidence is on the NMML Facilities without the Groundbirch compressors, and I refer to those facilities as the Extension Facilities. The Extension Facilities would extend the NGTL system 0 km into a mature supply area not now served by NGTL.

3 0 0 0 Q. What are your conclusions? A. My conclusions are: a) The potential cross-subsidization impact is excessive $. billion through 0 from existing NGTL system shippers to Extension Facilities shippers. The FT-R toll methodology applied to the Extension Facilities does not align with the Board s user pay/cost causation principle and in so doing fails to provide a price signal that achieves the goal of economic efficiency. b) There is no economic reason to utilize two distinct time periods for tolling of the Extension Facilities. The deliveries to an LNG project, which gave rise to the two periods, will not occur as planned. If the two periods are preserved, it will cause unnecessary uncertainty about the future toll design. Moreover, the excessive crosssubsidization starts from the beginning of service on the Extension Facilities, including for the entire -month sunset period. The level of cross-subsidy makes it inappropriate to have the FT-R toll methodology in effect at any time. Q. What is your recommendation? A. My recommendation is that the Extension Facilities be tolled on a standalone basis. This would involve a separate pool for the costs of the Extension Facilities. It would also involve NGTL being at risk for the recovery of the costs of the Extension Facilities and their utilization. A standalone toll would prevent excessive cross-subsidization and provide a proper price signal reflecting user pay/cost causation. List of Issues: Tolling Matters Q. Please state item of the List of Issues. A. Item of the List of Issues states: The potential impacts of the Variance Facilities and the Section Projects on the following tolling matters: The continued appropriateness of utilizing two distinct time periods for tolling considerations for the Variance Facilities. The continued appropriateness of applying NGTL s existing rolled-in tolling methodology for an interim period. Consideration of potential cross-subsidization impacts on current shippers and Variance Facilities shippers on the NGTL system.

4 0 0 0 As indicated earlier, my evidence will examine these issues in the context of the Extension Facilities. Q. Have you considered the potential cross-subsidization impacts on current shippers and Extension Facilities shippers on the NGTL system? If so, please describe your considerations. A. I have considered those impacts by first examining views of the Board from GH-00-0, where the Board stated: Although the facts and circumstances in each application are unique, the Board continues to find the cost causation principle and the goal of economic efficiency key to assessing the appropriateness of NGTL s proposed tolling methodology for extensions to its system. In the Board s view, just and reasonable tolls result from the consistent application of this principle and this goal over the long-term. and The Board finds that applying the NGTL tolling methodology as proposed to this Project would result in excessive levels of cross-subsidization of the Project by existing NGTL shippers. The proposed tolls derived from NGTL s single cost pool, rolled-in tolling methodology do not have a direct link with the cost of the proposed facilities and the tolls are not adequately aligned with the cost causation principle for the Project facilities. and For the Transition Period, the Board finds that these [FT-R] tolls generate insufficient revenue from the Project related FT-R contracts to make a meaningful contribution to costs, whether the revenue is allocated to the revenue requirement of the existing NGTL System or the incremental COS of the Project. The Board finds that NGTL s proposed tolling for the Project would result in excessive cross-subsidization during the Transition Period. The emphasis by the Board in GH-00-0 on user pay/cost causation and economically efficient price signals could not be clearer. I believe that emphasis is also warranted in this North Montney Variance proceeding. Q. In your view, what is the impact of the Variance Application on the Board conclusions from GH-00-0 regarding excess cross-subsidization? A. The Variance Application has no material impact and the original finding of excessive crosssubsidization remains. As shown in Table below, the cross-subsidy is in the order of $. billion over the FT-R contract terms. GH-00-0, page GH-00-0, page GH-00-0, page

5 Q. Please explain how you made this determination. A. In assessing cross-subsidization, the Board has recognized that there are costs for the new facilities and for the use of the existing system. This evidence follows the same approach by identifying the FT-R revenue and deducting the cost of service ( COS ) of the new facilities and then deducting the cost associated with transportation on the existing system from the Saturn receipt point. Table shows the analysis of cross-subsidization and the results for both the Extension Facilities and the NMML Facilities. The analysis is for years because the FT-R contracts, which each have 0-year term, start on different dates, with the result that revenue and costs occur over a -year period. Details of the analysis in Table, including sources, are provided in Appendix B to this evidence. Table Calculation of Cross Subsidy Life of Contracts (years) Extension Facilities NMML Facilities Average Average Average Average Line Cumulative Annual Unit Cumulative Annual Unit $millions $millions $/Mcf $millions $millions $/Mcf FT-R Revenue,. 0.,. 0. less COS of Facilities (,) (.) (0.) (,) (.) (0.) equals Subtotal less Cost of Existing System (,) (.) (0.) (,) (.) (0.) equals Cross-Subsidy to 0 (,) (.) (0.) (,) (.) (0.) COS Remaining after 0,0, Annual Average Contract Demand (MMcf/d),. 0 Column For the case with the Extension Facilities, Line, Column shows cumulative FT-R revenue of $, million, which is the revenue from the shippers on the Extension Facilities over the term of their respective contracts. That cumulative revenue is reduced by the cumulative COS of the Extension Facilities, $, million, to yield a subtotal of $ million. The cost for the existing system, based on the Saturn receipt toll multiplied by the contract demand of the Extension GH-00-0, page The NMML Facilities include the Extension Facilities and the Groundbirch compressors. The FT-R revenue is the same whether considering either the NMML or the Extension Facilities, but there is a difference in cost. The focus of this evidence is on the Extension Facilities and their costs, but for completeness and comparison with NGTL s analysis, the costs of the NMML Facilities are also included. In both cases the values shown are subject to rounding.

6 0 0 Facilities shippers is $, million and deducting it from the subtotal yields a cross-subsidy of $, million. For the case with the NMML Facilities, Line, Column shows cumulative FT-R revenue of $, million, which is the revenue from the shippers on the Extension Facilities over the term of their respective contracts. That cumulative revenue is reduced by the cumulative COS of the NMML Facilities, $, million, to yield a subtotal of $ million. The COS for the existing system at Saturn is $, million and deducting it from the subtotal yields a cross-subsidy of $, million. Columns and for the case with the Extension Facilities and Columns and for the case with the NMML Facilities show the same variables in average annual and average unit values. The average unit values are based on the annual average contract demand shown in Line, Column. The unrecovered COS for the Extension Facilities and NMML Facilities, which is the COS that remains to be recovered after 0 when the last F-R contract ends, are shown in Line. Q. You have only referred to FT-R revenues. What is the treatment of indirect FT-D revenue in the Variance Application? A. In the original North Montney proceeding, NGTL proposed to credit indirect FT-D revenue to the cost of the new extension facilities, which exceeded the FT-R revenue on those facilities. In this Variance proceeding, both NGTL and Messrs. Reed and Bishop note that with the present value of the FT-R revenue on the NMML Facilities covering the present value of the COS over the 0-year FT-R contract terms, they do not credit indirect incremental FT-D revenue in their revenue and cost analysis. Q. Should any indirect FT-D revenue be credited to the costs caused by the transportation of gas for the Extension Facilities shippers? A. No. It is not reasonable to apportion any FT-D revenue towards mitigating the costs caused by the transportation of the North Montney gas on the Extension Facilities or on the existing NGTL System. It is inherent in NGTL's toll methodology that transmission costs are allocated equally to FT-D and FT-R services. The FT-R tolls must generate sufficient revenue themselves to recover the transmission costs allocated to FT-R service. Otherwise, there will be a shortfall in the recovery of the FT-R COS. Revenue cannot just be reallocated from FT-D service to FT-R service to make up for this shortfall. Since the tolls for NGTL s FT-R service and FT-D services are based on an allocation of GH-00-0, pages and, and Board letter, Part IV Order TG-00-0, Conditions (a) and (b) Revenue, May, 0 NGTL Additional Written Evidence, page - and Evidence of Messrs. Reed and Bishop, page, A

7 0 0 COS to each service, if FT-D revenue is reallocated to FT-R COS then the corresponding FT-D COS would not be fully recovered since there is no other source of revenue to compensate for the arbitrary diversion of FT-D revenue. Q. What is your conclusion with respect to the issue of potential cross-subsidization impacts on existing NGTL system shippers and Extension Facilities shippers? A. The potential impact is clear $. billion through 0 when the last FT-R contract terminates, an impact that confirms excessive cross-subsidization from existing system shippers to Extension Facilities shippers. It is important to emphasize that total cross-subsidization is a divergence between a proper price signal that adheres to the user pay/cost causation principle and the goal of economic efficiency, on one hand, and the actual toll, on the other hand. With the aggregate crosssubsidization calculated here, $. billion, the basis for the Board s conclusion in GH-00-0 that applying the NGTL tolling methodology as proposed to this Project would result in excessive levels of cross-subsidization of the Project by existing NGTL shippers has not been changed by the facts of the Variance Application. In particular, the FT-R toll methodology does not provide a direct link between the costs of the Extension Facilities and the existing system, on one hand, and, on the other hand, the toll paid by shippers on the Extension Facilities. Put simply, the FT-R toll methodology applied to the Extension Facilities does not align with the Board s user pay/cost causation principle and in so doing fails to provide a price signal that achieves the goal of economic efficiency. Q. But, has not NGTL stated that it has mitigated some of the Board s concerns about the level of cross-subsidization in GH-00-0? A. In its Additional Written Evidence ( AWE ), NGTL reviews the concerns described by the Board in GH-00-0 and concludes that those concerns are either now not applicable or have largely been mitigated. A. Do you agree? A. No. While certain features of the Variance Application are not as troublesome as they were in the original North Montney case, serious concerns remain. Examining NGTL s responses leads to the following; a) Concern regarding the variance in capital cost estimates still remains, but at a tighter range of -% to +0%. However, applying the 0% case to the COS of the Extension Facilities would increase the cumulative COS of those facilities by $0 million. That GH-00-0, page NGTL AWE, page - NGTL AWE, page -

8 0 0 would reduce the difference between cumulative FT-R revenue on the Extension Facilities and their cumulative COS from $ million to $ million, and increase the cumulative cross-subsidy from $, million to $,0 million. Nothing about reducing the potential variance in capital costs changes the conclusion that excessive cross-subsidization occurs; b) Concerns, and relate to revenue levels and certainty, and are an improvement over the original North Montney case. In GH-00-0, while the Board recognized that there were costs for the extension and for the existing system, it did not have to go beyond comparing FT-R revenue and COS on the extension during the Transition Period to determine that there was excessive cross-subsidization: Even setting aside the question of any contribution for service on the existing NGTL System, the Board finds that this $ million revenue shortfall would result in excessive cross-subsidization by shippers on the existing NGTL System during the Transition Period. In other words, the Board did not have to include any costs of the existing system to conclude there would be excessive cross-subsidization. In this Variance Application, that is not the case. Cumulative FT-R revenue on the Extension Facilities is greater than the forecast cumulative COS for those facilities, but there remains a $. billion cross-subsidy once the cost of the existing system is taken into account; c) As a subset of Concern, NGTL states that the NMML Facilities revenues will exceed COS over 0 years by $ million, or an average of $ million per year. A difference of $ million over 0 years is not $ million per year. In response to Westcoast IR.(a), NGTL stated that the $ million applied during the first 0 years of the contracts generating revenue. This is not a useful analysis since the FT-R contracts have staggered starts resulting in years being the full period over which they will generate revenue. As NGTL noted in its response to Westcoast.(a), the correct annual surplus over the full period of years is $. million; d) Concern relates to the amount of undepreciated costs that would remain after expiration of the receipt contracts on the NMML Facilities. NGTL says that amount will be reduced in the Variance case. Even the reduced amounts are large. Specifically, as shown in Table, the remaining cumulative unrecovered COS for the NMML Facilities is $. billion and is $. billion for the Extension Facilities; Applying the +0% variance to the NMML Facilities causes a cumulative COS of $, million, which exceeds the cumulative FT-R revenue of $, million. GH-00-0, page NGTL AWE, page -. Evidence of Messrs. Reed and Bishop, page, A. use the same $ million value For further detail, see Appendix B of this evidence for the derivation of this value

9 0 0 e) Concerns and relate to the FT-R toll design and there is no apparent mitigation on this matter. Nothing has changed with respect to the FT-R toll design, and the main factual change is that, unlike the original North Montney case, all the new receipt points on the Extension Facilities will be at the ceiling toll as will the Saturn receipt point, making it even clearer that with a zero-incremental toll there is no proper price signal to achieve economic efficiency. Q. Turning to the two tolling issues related to the Transition Period, what are the views of NGTL and Messrs. Reed and Bishop? A. As noted earlier, those issues are the continued appropriateness of utilizing two time periods the Transition Period and the Long-Term Phase, and the continued appropriateness of applying NGTL s existing toll methodology during the Transition Period. NGTL and Messrs. Reed and Bishop make the following statements regarding maintaining the two periods: while the need for the Toll Order has been reduced or eliminated, maintaining the Toll Order would be more than adequate in the circumstances of the NMML Facilities to address any residual concerns. and The two time periods that the Board previously used in GH-00-0 for purposes of evaluating tolling on the proposed facilities is technically no longer required considering that there is no longer a proposed interconnecting pipeline that would transport gas to an LNG export facility, and thus cause different flow patterns on the facilities in different time periods. Messrs. Reed and Bishop then added that the two periods may be of some use to the Board. Q. What are your views of the two issues? A. From an economic perspective there is no need for the two periods for two reasons. First, if the original North Montney proceeding had occurred in the absence of an LNG connection, the Board would not have used two periods to assess the FT-R toll methodology. Instead, in the original North Montney case, where it dealt with both facility and toll methodology matters, the Board would have followed past practice and made a single toll determination at the time of its approval of the facilities. Now the no-lng case is before the Board, and there is no economic reason for the Board to continue what would now be an arbitrary two period process. Indeed, maintaining the two periods would introduce uncertainty as to the ultimate toll methodology after the Transition Period, and that uncertainty is unnecessary and unwanted from an economic and tolling perspective. For example, see Table Westcoast.- showing the ceiling toll applied to Saturn and all receipt points on the Extension Facilities NGTL s Additional Written Evidence, page - Evidence of Messrs. Reed and Bishop, page, A.

10 0 The second economic reason to not continue with two periods is that, as demonstrated earlier in this evidence, with the FT-R toll methodology applied to the Extension Facilities, there is excessive cross-subsidization throughout the 0-year contract terms of shippers on those facilities. Indeed, as shown in Table there is excessive cross-subsidization in the -month sunset period. Table Cross-Subsidy in -Month Sunset Period Extension Existing Facilities System Saturn Cross- COS Cost Subtotal FT-R Rev Subsidy $millions $millions $millions $millions $millions 0 (.) (.) (.). (.) 00 (.) (.) (0.). (.) 0 (.) (.) (.). (.) 0 (.) (.) (.). (.) Q, 0 (.) (.) (.). (.) Total (.) (.) (,00.0). (.) This level of cross-subsidy makes it inappropriate to have the FT-R toll methodology in effect at any time. As recommended in this evidence, standalone tolling for the Extension Facilities is required from the outset of service to ensure the user pay/cost causation principle is adhered to and that proper price signals lead to the goal of economic efficiency. Q. With respect to your recommendation to apply standalone tolling to the Extension Facilities, Messrs. Reed and Bishop anticipated this recommendation and state that it would be unjustly discriminatory and inappropriate as a matter of regulatory policy to impose a new tolling approach for the NMML Facilities without addressing the concerns with tolling and applying that same tolling approach elsewhere on the NGTL System. Do you agree? A. No. The key regulatory policy in tolling is the user pay/cost causation principle, and the Board applies it to the greatest extent possible. 0 The Extension Facilities are distinguishable in several ways, including that they extend into a new geographic location not previously served by NGTL. Only the shippers on the Extension Facilities will receive service over the path of those facilities. No other NGTL shippers will be similarly situated, will use the same path, or caused the costs of the Extension Facilities. Further, with respect to not imposing a new tolling approach for the NMML Facilities without addressing the concerns with tolling, the Board denied the same FT-R methodology in GH-00-0 and in GH In doing so, the Board observed that its user pay/cost causation Extension Facilities COS is from Appendix A. Saturn FT-R revenues are from Table Westcoast.-, which shows an April, 0 start date for FT-R service. Evidence of Messrs. Reed and Bishop, page, A.0 0 GH-00-0, page 0

11 0 0 principle is fundamental, but did not otherwise restrict or fetter NGTL from any tolling revisions that it could pursue to replace the FT-R methodology, including localized solutions that can be developed separate from a new system-wide design. The Board provided additional generic guiding comments on NGTL s FT-R toll design in GH But, NGTL has not pursued this opportunity and now almost five years have passed since the Board issued GH-00-0 in January 0. This delay in addressing user pay/cost causation in its toll methodology for major extensions is due to NGTL s inaction and it is unreasonable that NGTL should seek to deny the proper application of the Board s key tolling principle to the Extension Facilities due to NGTL not bringing forward a new tolling proposal that addresses proper price signals. Evidence of Messrs. Reed and Bishop Q. What is the primary conclusion of Messrs. Reed and Bishop with respect to tolling? A. Messrs. Reed and Bishop conclude that the costs of the Extension Facilities should be rolled-in to the existing NGTL system and that the same toll design should apply to the NMML facilities as is applied elsewhere on the NGTL system. In arriving at that conclusion, they rely on two primary observations. Q.0 What is the first primary observation? A.0 The first primary observation is: Consistent with the Board s prior precedent, it is the aggregate demand of the system that is causing the need for the NMML Facilities, and thus it is reasonable that the tolling of the NMML Facilities be the same as applied elsewhere on the NGTL system. Q. Do you agree with the position of Messrs. Reed and Bishop on the use of aggregate demand in the case of tolling the Extension Facilities? A. No. The correct view of the Extension Facilities is that they are physically distinguishable from the existing system and are for the use of the shippers that ship gas on the Extension Facilities and cause their costs. Specifically, there are 0 km of new pipeline extending beyond the NGTL system s existing geographic footprint, with shippers on that extension all seeking access to the existing NGTL system. GH-00-0, page GH-00-0, page GH-00-0, page GH-00-0, pages 0 and Evidence of Messrs. Reed and Bishop, page, A.

12 0 0 Q. Is your view consistent with the views of the Board? A. Yes. In GH-00-0, the Board stated: A principle referenced in many Board decisions is that tolls should be, to the greatest extent possible, cost-based and that the users of a pipeline system should bear the financial responsibility for the costs caused by the transportation of their product through the pipeline. By maintaining that the notion of aggregate demand applies to an extension, Messrs. Reed and Bishop fail to acknowledge that the Board seeks to understand the cause of the proposed extension facilities. In GH-00-0, for example, the Board found that the proposed extension was caused by the shipper (Progress) that underpinned the extension and in so doing explicitly rejected that the proposed extension was caused by the aggregate demand of other NGTL shippers. That same result applies to the Extension Facilities where shippers that will use that extension underpin it and cause its costs. By relying on aggregate demand in the case of an extension, Messrs. Reed and Bishop make no meaningful distinction between the toll treatment of expansions and extensions. They contend that any facility addition that is integrated and provides the same service, whether an expansion or an extension, is caused by aggregate demand, such that the costs of the facility addition are to be rolled-in and all shippers always pay for all facility additions. This cannot be a reasonable view of the Board s principle of user pay/cost causation to achieve the goal of economic efficiency. A better view is that the Board s user pay/cost causation principle contemplates that to the greatest extent possible direct assignment of costs should occur so that those who cause the costs bear those costs. The Extension Facilities are physically distinguishable, and their costs are determinable, as are the shippers requesting and using the Extension Facilities. The greatest extent possible is in hand. Q. Can you provide an example of your view? A. Yes. Suppose some shippers sought to build their own extension, other shippers sought to contract with a third party for a new extension, and still other shippers sought to contract for a new extension of an existing system, in each case to connect to the same existing system. With each of these cases, the existing system receives new supply to mitigate declines behind its system. In the cases of a shipper-owned or a third-party pipeline, the standalone nature of these pipelines embodies the user pay/cost causation principle and requires that the shippers using those extensions pay for the related costs since those shippers caused the costs of the extension to be incurred. Correct application of the user pay/cost causation principle would also require the extension owned and GH-00-0, page 0 GH-00-0, page

13 0 0 constructed by the existing pipeline to have a standalone toll. In all three cases, then, the shippers on each alternative extension pipeline would have proper price signals and pay the cost they caused, the existing system would receive new supplies and the existing system shippers would not be required to cross-subsidize the extension. To accept rolled-in tolling under these circumstances not only creates excessive crosssubsidization, but also unduly distorts the price signal and acts to distort the pace and scope of gas and pipeline development. Enhancing the economically efficient pace and scope of gas and pipeline development is achieved through applying the Board s principle of user pay/cost causation to extensions. Further, as the Board has noted, avoidance of undue cross-subsidization is heightened and even more important when competition among pipeline alternatives exists. Q. What is the second primary observation that Messrs. Reed and Bishop used to recommend rolled-in tolling? A. When asked if the circumstances of the NMML Facilities are consistent with Board precedents, Messrs. Reed and Bishop stated: In our opinion, consistent with the Board s prior precedent, the test for determining whether applying the same toll design to the NMML Facilities that applies elsewhere on the NGTL System at any particular time, would be satisfied. Based on the current circumstances, the NMML Facilities would be fully integrated with the existing NGTL system, the nature of service to be provided on the NMML Facilities would be the same, and shippers on the NMML Facilities will be reasonably covering the cost of the NMML Facilities and making a contribution to the cost of the existing NGTL System. Earlier, this evidence demonstrated excessive cross-subsidization. To avoid excessive cross-subsidization, however, it is not sufficient to reasonably cover the cost of the NMML Facilities and make a contribution to the cost of the existing system when the result is a $. billion cross-subsidy. These quoted terms are not consistent with the Board s to the greatest extent possible language which it uses to guide the principle of user pay/cost causation. With respect to integration and same service, caution should be used when applying those factors to an extension versus an expansion. An expansion, say an additional compressor unit at an existing compressor station, or a loop parallel to an existing pipeline, generally involves full integration and provides the same service along an existing path. For example, there are station interconnections at the site of the new compressor or there may be multiple cross-over connections between the loop and existing pipelines. Given this level of integration, the facilities are jointly used to meet the aggregate demand of all shippers. Such integration almost always results in the expansion facilities being owned by the owner of the existing system and not by a third party. GH-00-0, page 0 Evidence of Messrs. Reed and Bishop, page, line 0

14 0 0 Q. Is an extension different? A. Yes, an extension is different. For an extension the presence of integration and same service factors is a necessary but insufficient condition to roll-in the costs of the extension. An extension is a new path beyond the existing system and, as the Board has observed, while it can affect the throughput of the existing system, it does not increase the capacity of that system. 0 An extension s physical facilities and associated costs are distinguishable and the shippers that request, cause and use the extension are known. All this means that the principle of user pay/cost causation can and should be applied to an extension and in particular the extent of cross-subsidization should be assessed. A. Has the Board made this clear? A. Yes. In GH-00-0, the Board stated that integration of extension facilities is different than for an expansion; specifically, in reference to expansions of TransCanada s mainline path from the Alberta border to Ontario, the Board said: The term integrated was sometimes used where either proposed or existing facilities could provide service (to existing and incremental supplies) from the Alberta border to Ontario. In the Board s view, in neither the Transition Period nor the Long -Term Phase in this [North Montney] Project are the facilities integrated in that sense. Importantly, in GH-00-0, the Board had regard for the factors of integration and same service, but it was focussed foremost on its fundamental principle of user pay/cost causation and any associated cross-subsidization in regard to the North Montney extension. Q. Is that important? A. It is important because in system expansion cases, the Board has repeatedly found that where the expansion facilities are integrated with existing facilities and provide the same service as those existing facilities, it would be an economic and legal error to stream incremental expansion costs to new shippers. Rather, while the Board ensures that the expansion to provide additional capacity is the result of the aggregate demand of all shippers, being those shippers that remain on the system and new shippers, the Board does not measure cross-subsidization since all shippers are responsible for the costs of the expanded system. This allows rolling-in the expansion costs 0 GH-00-0, page GH-00-0, page GH-00-0, pages and See GH-- Part, Section. and GH-- page For example, in GH-00-0, which approved NGTL s 0 System Expansion Project, there is no mention or analysis of crosssubsidization.

15 0 0 with the result that there is no direct link between the cost of the expansion and the toll paid by the new shippers. It is also important because there is a different standard for rolling-in the costs of an extension. A logical evaluation progression for an extension would start with an initial determination of whether it is integrated with the existing system and provides the same service. If not, then there is no reason to consider rolling-in the extension costs and a standalone toll would occur. If there is integration and same service, then the focus turns to an assessment of the user pay/cost causation principle. If excessive cross-subsidization is determined under a rolled-in toll methodology, then that methodology is rejected and a standalone toll would occur. Finally, if the factors of integration and same service are present and there is no excessive cross-subsidization under the existing system toll methodology, then the extension costs would be rolled-in. Q. What did the Board find in GH-00-0? A. In GH-00-0, based on its view that under the FT-R toll methodology there would be excessive levels of cross-subsidization, the Board found that rolling in the costs did not produce just and reasonable tolls. The Board then also concluded that in the Transition Period by limiting the use of the FT-R toll methodology to not more than months after the start of gas flows on North Montney and by establishing a deferral account, it could then approve that toll methodology as just and reasonable for the Transition Period. The result is that instead of the Board unconditionally approving the FT-R toll methodology, as would be expected if aggregate demand applied, the Board conditioned its approval of the FT-R methodology on the basis of concerns of excessive cross-subsidization even though it found that during the Transition Period the extension would be meaningfully integrated with the existing NGTL system and be providing the same service. Q. Other than in GH-00-0, is there another Board decision that is relevant to this proceeding? A. Yes. A Board report relevant to this case makes it clear that Messrs. Reed s and Bishop s alleged consistency of Board decisions in favor of roll-in tolling is wrong. In GH-00-0 regarding the Komie North pipeline, the Board addressed a proposed km extension to the NGTL system in northeast BC ( NEBC ). The Board rejected the proposed FT-R toll methodology without even determining whether the new facilities were integrated with the existing system. Instead, the Board determined that in the context of the Komie North pipeline s costs and risks, the: proposed rate design would unreasonably subsidize the extension of the NGTL Alberta System into an area where it would compete with infrastructure already in GH-00-0, page GH-00-0, page GH-00-0, page and GH-00-0, page

16 0 0 place. Basing pricing for transportation on cost causation promotes economic efficiency through proper price signals to the market. In this context, the Board is of the view that the tolls for NGTL s transmission service must have an appropriate allocation of cost and risks. The Board also found that the FT-R toll methodology did not reflect the user pay/cost causation principle. Specifically, The Board finds that there would be zero additional revenue from contracts at Fortune Creek [the upstream terminus of Komie North] relative to comparable contracts at points downstream on the system, despite the extra costs required to build the Project facilities. As a result, the Board does not find the ceiling rate appropriate for use on the Komie North Section. 0 In more generic terms, the Board stated: Efficient resource development in this circumstance requires transportation price signals that reflect the true costs of sourcing distant supplies. Q.0 What do you take away from this decision? A.0 The obvious implication is that the Board had more than the factors of integration and same service in mind when it considered the tolling of the Komie North extension. In particular, the Board was focussed on its fundamental tolling principle; namely the user pay/cost causation principle. Q. What is the importance of the Board s GH-00-0 and GH-00-0 reports? A. The clear consequence of these two cases is that tolling extensions is different than tolling expansions; specifically, for extensions, there is no economic imperative to accept the existing toll methodology or to roll-in costs. Indeed, although Messrs. Reed and Bishop note that the Board added its principle of user pay/cost causation to its factors of integration and same service when considering the original North Montney extension, they fail to note that the result of that addition was that the Board determined that: applying the NGTL tolling methodology as proposed to this Project would result in excessive levels of cross-subsidization of the Project by existing NGTL shippers. Q. But don t Messrs. Reed and Bishop also rely on GH-00-0 to support their position? A. They do. This is the decision regarding the Towerbirch project, which included the Tower Lake Section ( TLS ) as part of the project. The TLS is a -km extension from the Groundbirch mainline. Like the Majority in the GH-00-0, Messrs. Reed and Bishop argue that, since declines in GH-00-0, page 0 0 GH-00-0, page GH-00-0, page See, for example, RH--, page GH-00-0, page

17 0 0 natural gas production occur behind the NGTL system, all NGTL shippers reap the benefit of adding new supplies and thereby all NGTL shippers contribute to the need for new extensions, like the TLS. This leads to the conclusion that aggregate demand of the system causes the costs of extensions, and rolling-in those costs is acceptable. Q. Do you have comments on this conclusion? A. Yes. In a mature basin, multiple parties are able to construct extension pipelines. Under these circumstances, there is no economic reason to subsidize one of the extensions, such as the extension owned by the owner of the existing system. The concern expressed by the Majority in GH-00-0 and by Messrs. Reed and Bishop regarding the need for new supplies can and will be met by gas market dynamics that includes natural gas prices. Those market forces are a much better guide to determine where and when gas resources should be developed. There is no need to interfere with those market forces or to subsidize one of the options for pipeline extensions, and in particular there is no need to provide an excessive subsidy to that option. Q. Do you have further comments regarding the Evidence of Messrs. Reed and Bishop? A. Yes. From an economic perspective, the position of Messrs. Reed and Bishop on roll-in of costs is inconsistent with the Board s goal of providing proper price signals to pipeline shippers to enhance economic efficiency in the development of gas resources. Nowhere in Messrs. Reed s and Bishop s evidence is the term price signal used. Yet, as noted earlier in this evidence, the Board in GH emphasized the need for proper price signals to reflect the true cost of sourcing distant supplies and enhance the goal of economic efficiency. A toll design, such as FT-R, that has limited distance sensitivity cannot meet this goal, particularly at the outer most parts of NGTL s system. Thus, it must be rejected if economically efficient resource development is sought. A. Are there any other inconsistencies in the evidence of Messrs. Reed and Bishop? A. Yes. With regard to the context of pipeline development, NEBC has a long history of being a competitive pipeline environment for raw and sales gas pipelines. Yet, Messrs. Reed and Bishop make no mention of competition in NEBC in their recommendation for rolled-in costs. The regulated FT-R toll methodology as it applies in NEBC thwarts competition. For example, the capital cost of the Extension Facilities is $. billion, with an annual COS in 0 of $. million and yet the annual incremental revenue is $0. It is clear the FT-R toll methodology in these cases provides an uneconomic price signal that does not reflect the true costs of sourcing distant supplies. Competition cannot meaningfully occur under these conditions. Evidence of Messrs. Reed and Bishop, A, page provides a Majority report quote and their own description. Westcoast-NGTL-.

18 0 0 Q. Do you have a view that a lack of proper price signals in NGTL s tolls hinders pipeline competition in NEBC? A. Yes. Competition is hindered in two ways. First, the lack of a proper price signal, in this case NGTL s zero incremental toll, provides shippers in the North Montney seeking access to NGTL s existing system with a much more financially attractive alternative. Many shippers may not even seek an alternative and instead queue for available capacity on NGTL. Those shippers have little or no incentive to seek out alternatives to NGTL if there is any prospect of getting service on NGTL to connect to the existing system under the existing toll methodology. Second, pipelines in a position to compete, such as Westcoast, may not do so because they know their efforts would be futile. Westcoast may have had an alternative to the Extension Facilities that involved lower capital cost, looping mainlines, and new laterals to field gas processing plants, but it could not have pursued it with shippers since they have an option with NGTL that Westcoast cannot compete against; namely, NGTL s zero-incremental toll. Other potential pipeline competitors are likely to have the same view. As well, NGTL s flawed toll methodology puts a chilling affect even on those parties, like Westcoast, that already have operating pipelines in the area. The draw to get a zero-incremental toll is strong and shippers will be enticed to migrate to the pipeline offering that toll. Doing so not only assists them in lowering their costs, but it also assists them in staying competitive in terms of supply costs with those other producers in the region that have access to NGTL. Q. At a more generic level, how does competition mix with regulation when they are both present? A. The emulation of competitive outcomes or promotion of competition should be and often are paramount in the goals of regulators, including the Board. Playing fields need to be level for competition to succeed. Messrs. Reed and Bishop appear to believe that there is no room for competition unless it conforms to the regulated world regulated toll vs regulated toll. That becomes a problem when regulation fails to provide economically efficient results. When that occurs, as the Board has found in Komie North and the original North Montney reports, there is a need to review regulated tolls no matter their use in the past or elsewhere. The idea of regulation as a surrogate for competition inherently rests on the assumption that competition is not available. Where it is available, there can be less need for economic regulatory control. If there is competition among pipelines, as there is in NEBC to supply gas to the existing NGTL system and, more generally, to all downstream markets, then let it guide the pace and scope of gas developments in NEBC. Put another way, since the Board s primary interests are in cost causation and economic efficiency, then the competition that exists in NEBC is a clear opportunity to move in that direction by approving stand-alone tolling for the Extension Facilities Westcoast-NGTL-.

19 Q. Does that complete your written evidence? A. Yes

20 Appendix A Curriculum Vitae Gordon M. Engbloom 0

21 Curriculum Vitae Name: Education: Gordon M. Engbloom, P.Eng M.A. (Economics) Queen s University at Kingston, Ontario, B.Sc. in Chemical Engineering University of Alberta Edmonton, 0 Professional Affiliations: Length of Service with Current Employer: Association of Professional Engineers, Geologists and Geophysicists of Alberta International Association for Energy Economics 0 years Gordon Engbloom has years of energy sector experience, the last 0 years as sole consultant with his firm, (Confer). Mr. Engbloom has worked for a wide variety of clients, including natural gas aggregators; electric and natural gas utilities; crude oil, natural gas and natural gas liquids producers; independent power producers; regulatory agencies; and governments. Mr. Engbloom has appeared before regulatory boards and gas price arbitration panels as an expert witness. Consulting experience includes commercial analysis and strategy for sale, purchase, pricing and arbitration under natural gas contracts; advisor for natural gas pricing and royalty regimes; natural gas deregulation analysis, including issues regarding gas contracting, pricing and transportation access; electric energy deregulation, including issues of power pool structure and mitigation of market power; forecasts of natural gas prices; forecasts of total energy, natural gas and electric energy demand using end-use analysis within a top-down model of economic and demographic variables; and cost benefit and economic impact analyses of resource developments and natural gas exports. Confer has extensive experience in crude oil and natural gas matters, including estimating natural gas supply and demand, deregulation, contracting, pricing, and pipeline costs, rate design and tariffs. Mr. Engbloom has consulted with natural gas aggregators, producers, marketers, policy makers, crude oil shippers, and pipeline and distribution utilities. Confer also has extensive experience in the electric energy matters, including analysis of market design and industry structure, deregulation, transmission access, generation procurement options and strategies, market demand and forecasts, independent power contracts and natural gas supply to electric generation plants. Mr. Engbloom has consulted with electric utilities, independent power producers, and government departments and agencies.

22 Alberta Energy Resources Conservation Board G. M. Engbloom Appearances Before Regulatory Boards In a proceeding regarding an application to construct and operate a mining oil sands plant, jointly provided evidence of the project s economic impact and net benefits. Client was Alsands Oil Sands Project. In a proceeding regarding future energy requirements for Alberta, provided evidence on long-term forecasts of Alberta economic activity and energy demand. Clients were the Electric Utility Planning Council, Canadian Western Natural Gas Company Limited and Northwestern Utilities Limited. In a proceeding regarding an application for industrial development permit to construct and operate an ethylene oxide/glycol plant, provided evidence of the project s economic impact and net benefit. Client was Union Carbide Canada Limited. In proceedings during the mid-s up to October regarding applications for and an inquiry into the removal of ethane at field locations in Alberta, provided evidence of the economic impact and net benefits. Clients were various individual oil and gas producers for the applications and the Ethane Owners Group for the Ethane Inquiry. In and proceedings regarding an application to convert a heavy oil pipeline to natural gas service, provided evidence on the net benefits. Client was Northwestern Utilities Limited. Ontario Energy Board In a proceeding regarding an application for flexible utility retail rates to serve large commercial and industrial consumers, provided evidence of the competitive fuel market at various locations within the utility s service area. Client was Union Gas Limited. National Energy Board In a proceeding regarding applications to construct natural gas pipeline facilities and authorize natural gas exports, provided evidence of the net benefits of a proposed natural gas export. Client was Canadian Occidental Petroleum Ltd. In a proceeding regarding natural gas export applications, prepared evidence to address the Export Impact Assessment. The evidence was on behalf of several applicants. The evidence was filed, but no appearance at the hearing was necessary. In a proceeding regarding applications to develop Sable Island natural gas and construct and operate an interprovincial gas pipeline, provided evidence regarding economic pipeline toll design and regulations for export of Sable Island natural gas. Client was Nova Scotia Power Inc. In a proceeding regarding an application by Alliance Pipeline L.P. to construct and operate a natural gas pipeline system from northeast B.C. and northwest Alberta to Chicago, provided evidence regarding the role of competitive forces within a regulated environment and specifically in respect of the Alliance Pipeline Project. The client was the applicant.

23 In a proceeding regarding an application for a long-term licence to export natural gas from the Sable Island offshore field to the northeast U.S., provided evidence on the export impact assessment of the proposed exports. Clients were Boston Gas and Imperial Oil. In a 00 proceeding regarding an application to construct and operate a high-pressure natural gas pipeline to Vancouver Island, provided evidence on gas supply, economic evaluation of alternatives, and tolls and tariffs. Client was the applicant, GSX Canada Limited Partnership (Canada). In a 00 proceeding regarding a Section application to transfer a gas pipeline to crude oil service, provided evidence on economic aspects of the public interest in approving the transfer. Client was TransCanada PipeLines Limited. In a proceeding that involved a hearing appearance in late 00, provided evidence on the toll design and investment policy applied for by the Mackenzie Valley Pipeline. Client was the Yukon Government. In a 00 proceeding regarding tolls on Enbridge s Line between Sarnia and Montreal, provided evidence on toll design. The evidence was filed but the hearing was subsequently cancelled. Client was NOVA Chemicals (Canada) Limited. In a 00/0 proceeding regarding tolls on Enbridge s Line between Sarnia and Montreal, provided evidence on toll design. Client was NOVA Chemicals (Canada) Limited. In a 00/ proceeding regarding access to an idle NGL pipeline between Windsor and Sarnia, appeared as a witness for a prospective shipper. No direct evidence was filed by Mr. Engbloom, but he assisted the shipper with preparation of its evidence. Client was NOVA Chemicals (Canada) Limited. British Columbia Utilities Commission In a proceeding (G--) regarding utility gas cost recovery, provided evidence on gas commodity costs, gas price adjustments for load factor, interruptible gas supply and competitive pricing. Client was BC Gas Inc. In a 00 proceeding regarding cost of service allocation and toll design for firm and interruptible service, provided evidence related to cost allocation factors, firm toll design, interruptible toll design, allocation of interruptible revenue, and recovery of cumulative revenue deficiency related to Centra Gas British Columbia. Client was BC Hydro, a transmission shipper on the pipeline. In a 00 proceeding regarding an application to construct and operate a gas-fired electric generation plant on Vancouver Island, provided evidence in support of gas prices forecasts. Client was BC Hydro, the applicant. California Public Utilities Commission In a proceeding (A.-0-00) regarding an application by Pacific Gas & Electric for a finding that costs arising from its gas and electric operations were reasonable during the period to, including the costs of its purchases of Canadian natural gas, provided evidence of the