Regulation of pipeline traffic, tolls and tariffs

Overview

The NEB regulates pipeline tolls and tariffs under its jurisdiction so that they are just and reasonable. We also regulate so that there is no unjust discrimination in tolls, service or facilities.

Pipeline companies regulated by the NEB are divided into two groups for financial regulatory purposes:

  • Group 1 consists of those pipeline companies with extensive systems and several third-party shippers
  • Group 2 consists of the remaining pipeline companies that operate smaller, less complex pipelines with few or no third-party shippers

To reduce the regulatory burden on smaller companies, we regulate on a complaint basis two of the Group 1 pipelines and all of the Group 2 companies. Under complaint-based regulation, the affected parties are encouraged to work out any problems with the pipeline company. If this is unsuccessful, they may file a complaint with the NEB.

When establishing tolls for the Group 1 companies, we typically follow one of two processes. The first option is to assess a detailed tolls application filed by the company. In most cases, this filing leads to a formal public hearing before the NEB. After hearing the evidence and arguments of all parties, we will issue our reasons for decision on all matters examined during the hearing. Tolls set during this process cover the company’s cost of service, including a fair and reasonable return to pipeline investors.

The second process option is for us to consider a negotiated toll settlement reached between the pipeline company, its shippers and other stakeholders. If negotiations are successful, the pipeline company will file a document that details the terms of the settlement and request NEB approval. We will assess the settlement against our Guidelines for Negotiated Settlements of Traffic, Tolls and Tariffs (dated June 12, 2002) to ensure the settlement yields just and reasonable tolls, and that no terms in the settlement are contrary to the Settlement Guidelines. We will also ask for comments from the company’s shippers and other stakeholders, to consider their support for the settlement. Some of the largest pipeline companies we regulate have reached multi-year incentive toll settlements with their shippers and other stakeholders.

In addition, tolls for services provided under similar circumstances and conditions must be the same for all customers.

Regulatory processes

The NEB is a court of record, and our decisions and reasons for decision are public documents. Applications and complaints about traffic, tolls and tariffs may be filed with us at any time. When examining tolls, we can decide whether an oral or written public hearing is needed. We seek input from interested parties before making a decision on an application or complaint.

Tariffs

A pipeline company cannot charge a toll unless it is included in a tariff filed with the NEB or approved by a Board order. This tariff may also include terms and conditions about a shipper's access to the pipeline, as well as the rights and responsibilities of both the pipeline company and the shipper once service begins.

A pipeline company's tariff contains the conditions under which transportation service is provided. The tariff includes conditions related to accepting new shippers, allocating capacity to shippers, and describing the type of service offered and associated terms as the quality of hydrocarbons and financial assurances requirements for shippers.

Pipeline companies must operate according to the principle of open access. This means that all parties must have access to transportation without discrimination, as long as they meet the requirements of the tariff. A gas pipeline company's tariff may contain conditions for open season and access procedures, the minimum duration of contracts, renewal requirements and the bidding process used to secure interruptible service.

Traffic

There are two types of pipeline carriers: common carriers and contract carriers.

A common carrier must accept all products offered to it for transportation. When there is not enough capacity for the volumes offered (and unless the Board has approved an alternative methodology), the pipeline company prorates its available capacity to accommodate all shippers. This gives all parties an equal proportion of the amount initially requested. We make sure that access to and allocation of capacity is fair.

Historically, oil pipelines (that is, pipelines that carry oil, natural gas liquids and petroleum products) operated as common carriers. Some oil pipelines are now requiring long-term take-or-pay agreements for a portion of the pipeline’s capacity, before construction begins. To date, all oil pipelines that have contracted capacity have also kept some capacity available for common carriage.

Contract carriers require a contract before accepting a product for transportation. Natural gas pipelines are operated as contract carriers.

In 1996, the NEB obtained jurisdiction over interprovincial and international pipelines that carry commodities other than hydrocarbons. These include steam, brine, chemicals, pulp or coal slurry, alone or combined with hydrocarbons. To date, all of these pipelines have been designated as Group 2 pipelines and are regulated on a complaint basis. (See section on Complaint-based regulation below.)

Toll regulation

Until the mid-1990s, the main method of regulation was cost of service. Under this approach, companies came before the NEB, often each year, to determine the amount of revenue the pipeline company was allowed to recover through its tolls.

To improve the effectiveness of the regulatory process, we have supported the use of negotiated settlements since the mid-1980s as an alternative to toll hearings. In September 1988, we issued our first Guidelines for Negotiated Settlements of Traffic, Tolls and Tariffs. These guidelines were updated in August 1994, and revised again in June 2002 to provide flexibility when addressing contested settlements. (For more information, see the Negotiated settlements section below.)

Cost-of-service regulation

A toll change in the context of cost-of-service regulation requires that a company file a toll application with the supporting documentation specified in Guide P of the NEB’s Filing Manual. We then hold a public hearing to allow input from interested parties. After considering the evidence and arguments of all parties, we issue a decision approving final tolls.

Under this cost-of-service approach, a pipeline company's tolls are set so investors can recover costs and earn a reasonable return on their investment. To set tolls, most companies forecast their cost of service and throughput for a forward test year(s). The cost of service is made up of operating expenses, depreciation, return on capital, and income and other taxes. We allow a pipeline company the opportunity to earn an approved rate of return.

In determining the rate of return, we consider whether:

  • the pipeline can attract capital on reasonable terms and conditions
  • the allowed return is comparable to the return available to other companies of similar risk
  • the financial integrity of the regulated pipeline will be maintained

Negotiated settlements

Beginning in the mid-1990s, the NEB approved a succession of multi-year negotiated settlements. These settlements often include incentives to reduce costs and provisions to share savings between the pipeline company and its shippers. In some cases, settlements have included various innovative performance mechanisms.

The Guidelines for Negotiated Settlements of Traffic, Tolls and Tariffs clarify our role and establish acceptable criteria for the settlement process. Generally, we want to make sure all interested parties have a fair opportunity to participate in the settlement process and that there is a general acceptance of the outcome. The guidelines have facilitated the resolution of specific toll matters and also the development of incentive regulation.

The existence of a negotiated settlement does not limit the NEB’s authority. In considering whether to approve a settlement, we take into account the views of all interested parties as well as broader public interest concerns, including potential impacts upon public safety and protection of the environment. We either accept or reject a settlement package in its entirety. A settlement which is unopposed may allow us to determine that the resulting tolls will be just and reasonable without a public hearing.

In the case of a contested settlement, we can choose one of three options:

  • dismiss the objections and approve the settlement
  • deny the settlement and refer the matter for hearing
  • approve the terms of the settlement on an interim basis and then hold a hearing to address the issues raised by dissenting parties (more information about Tolls on an interim basis is below)

Light-handed regulation is one form of negotiated settlement used for gathering and processing facilities on the Westcoast Energy system. Under the Framework for Light-handed Regulation which was established to address unique competitive issues on those facilities, the pipeline negotiates tolls individually with its customers based on a number of factors.

Complaint-based regulation

In 1985, the NEB concluded that smaller pipelines under our jurisdiction should be subject to a lighter degree of toll and tariff regulation. We divided pipeline companies into two groups:

  • Group 1 companies that operate extensive pipeline systems
  • Group 2 companies that operate smaller pipelines

There are currently 13 Group 1 companies and approximately 100 Group 2 companies, including 13 commodity pipelines companies.

We use a complaint-based approach for the financial regulation of Group 2 companies. This method of regulation is described in each company's tariff. The pipeline company is responsible for providing shippers and other interested persons with enough information so they can determine whether the tolls are reasonable. Once filed with the NEB, the tariffs containing new tolls automatically become effective. If a complaint is filed, we may establish a procedure to examine tolls. If no complaint is filed, we may presume that the filed tolls are just and reasonable. Overall, this approach has resulted in few complaints.

Toll design

Toll design is the process of deriving tolls for different services and different distances from the cost of service or revenue requirement and throughput or contracted quantities. Tolls should generate sufficient revenue to recover approved costs, and at the same time fairly allocate charges to users in relation to the costs and benefits of different services. The basic principle is user pay.

Toll design divides costs between the various functions performed by the pipeline system, such as transmission and metering, and then determines costs and usage of those functions. Some costs are common to every unit of throughput. Other costs may depend upon variables such as the distance shipped, and still other costs may be unique to a particular type or class of shipper.

With additions to an existing pipeline, there may be toll issues about whether expansion costs should be rolled into a single, existing rate base and charged to all shippers equally (rolled-in methodology) or kept separate and charged only to particular shippers (incremental methodology). In deciding such matters, we consider several factors, such as whether the new facilities would be used to provide a new distinct service which would be used only by certain shippers, or an expansion of an existing service which would provide a benefit to the entire system.

Tolls on an interim basis

We can only consider toll adjustments on a forward – or prospective – basis. In situations where the desired effective date for new tolls will have passed before a decision on final tolls can be made, we may issue an order allowing the company to charge tolls on an interim basis until the final toll order is issued. The tolls contained in the final order can then be made effective from the date of the interim order. Refunds or charges that result from the difference between interim and final tolls usually include interest charges.

Surveillance reporting

Unless specifically exempted, a Group 1 pipeline company must file a surveillance report at the end of each quarter based on the Toll Information Regulations. Guide BB of the Filing Manual outlines the information and the format of surveillance reports. These reports provide details of financial performance and explain any significant variations from approved amounts. Through these reports, the NEB and interested stakeholders can monitor the results for each company over time.

We normally require all Group 2 companies to file audited financial statements each year. However, Group 2 companies, chiefly those with no third-party shippers, may seek an exemption from this filing requirement.

Accounting

The NEB’s Gas Pipeline Uniform Accounting Regulations and Oil Pipeline Uniform Accounting Regulations establish a uniform system of accounts for Group 1 companies. This provides for the recording of costs in a consistent manner. Group 2 companies are required to keep their accounts in accordance with generally accepted accounting principles (GAAP). We can audit a pipeline company's records to ensure the accuracy of filed documents and compliance with the NEB Act, regulations, decisions, toll orders and other accounting and reporting directives. (See Tolls on an interim basis, discussed in this document.)

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