The Canadian Energy Regulator Shuts Down the Open Season for Enbridge’s Mainline

PDF Version: The Canadian Energy Regulator Shuts Down the Open Season for Enbridge’s Mainline

Decision Commented On: Canadian Energy Regulator, Letter Decision re Suncor Energy Inc. (Suncor), Shell Canada Limited (Shell), The Explorers and Producers Association of Canada (EPAC), and Canadian Natural Resources Limited (CNRL), Complaints regarding Enbridge Pipelines Inc. (Enbridge) Mainline Open Season, 27 September 2019

In what must be one of its first formal decisions, the Commission of the Canadian Energy Regulator (CER) (which replaced the National Energy Board (NEB) as of August 28, 2019) has required Enbridge to shut down the open-season that it was conducting for its mainline. The decision is brief (4 pages) and while it contains many references to the decisions and practice of its predecessor, the decision contains not a single reference to any statutory provision that it may be relying upon as authority to make this order. While I think that the conclusion is sound, I hope that the failure to reference statutory authority does not become common practice for the new regulator. Any decision maker claiming to exercise a statutory authority must satisfy itself that it has the authority to act and it should do so in a transparent and reasoned manner. There was perhaps a particular need to do so in this case since the application was filed under the terms of the National Energy Board Act, RSC 1985, c N-7 (NEBA),but resolved by the CER.

There are some ironies in this early decision of the CER. It is not the sort of facilities decision that led to the calls for reform and replacement of the NEB but a decision on the much more technical issues of economic regulation of natural monopolies – interprovincial pipelines. Another irony is that the CER is at pains to establish regulatory continuity rather than a break with the past:

In coming to its decision on this matter, the Commission has been guided by the established regulatory framework, including past decisions of its predecessor, the NEB, regarding toll and tariff regulation. The NEB’s past decisions consistently underlined the importance of fairness and transparency in open season processes. The NEB has also stated that market power must not be allowed to be abused, both in terms of substance and appearance or perception. An apprehension that some market players are abusing their power may lead to inefficient outcomes, and needs to be addressed. (at 1-2; references omitted)

This affirmation of regulatory continuity will come as a relief to industry and institutional investors (even if the actual decision in this case represents a break with NEB jurisprudence) but it may also beg the question why was there so much pressure for change. The answer of course is that the calls to “reform” the NEB were not animated by concerns with respect to the NEB’s authority regarding the economic regulation of pipelines, but rather by the permitting of new facilities.

The Background

The Enbridge mainline system is the largest crude oil pipeline system in Canada with a capacity of approximately 2.85 million barrels per day (bpd). It consists of “[a]series of pipelines that run between Edmonton, Alberta and Superior, Wisconsin. Four pipelines extend the system beyond Superior, providing access to markets in Minnesota, Illinois, Indiana, Ohio, Michigan and Ontario.” (Source, Enbridge). It therefore connects production in the Western Canadian Sedimentary Basin with markets in eastern Canada and the US Midwest.

The Enbridge mainline currently operates entirely on a common carrier model rather than a contract carriage model. This means that capacity on the system is allocated based on monthly nominations by shippers rather than on the basis of long term contracts. This mode of allocating capacity is firmly rooted in section 71(1) of NEBA which provides that:

71(1) Subject to such exemptions, conditions or regulations as the Board may prescribe, a company operating a pipeline for the transmission of oil shall, according to its powers, without delay and with due care and diligence, receive, transport and deliver all oil offered for transmission by means of its pipeline.

This section establishes that common carrier status is the rule although the Board may prescribe exemptions. As a matter of practice, the Board has increasingly allowed significant capacity on oil pipelines to be allocated to contract carriage principally on the grounds that it is difficult if not impossible to finance new facilities (including expansions) on the basis of common carrier status. It is far easier to raise capital on the basis of long term firm contracts for capacity. The Enbridge mainline is currently the only oil pipeline in Canada to operate entirely as a common carrier. For further discussion of how common carriers operate in practice (especially when nominations exceed capacity and must be prorated) see the two reports prepared by the NEB in response to a request from Minister Sochi for the Board’s advice with respect to optimizing pipeline capacity: NEB, Western Canadian Crude Oil Supply, Markets and Pipeline Capacity, December 2018, and NEB, Optimizing Oil Pipeline and Rail Capacity out of Western Canada, March 2019.

An important part of the context for this decision is that Enbridge would like to move its mainline operation from the common carrier model to the contract carriage model for 90% of the available capacity. The remaining 10% would be allocated according to the traditional model of nominations. See Canadian Mainline Open Season FAQs. Enbridge has yet to make that application to the NEB or the CER although it has been negotiating with shippers for more than a year about possible contract terms.

As noted above, the Commission’s decision began with an affirmation of the NEB’s practice and jurisprudence. That led it to highlight the following circumstances associated with the application for relief:

1. Enbridge’s control of over 70% of oil transportation capacity out of the Western Canadian Sedimentary Basin, via pipeline or rail;

2. The lack of alternative transportation options for potential shippers (all other Canadian crude oil export pipelines are contracted and/or fully utilized, and rail is more expensive, involves long lead times in arranging transportation, and moves only a small portion of total western Canadian crude oil production);

3. The impact that proposed Mainline firm service would have on aggregate uncommitted oil pipeline capacity from western Canada (aggregate uncommitted oil pipeline capacity would be reduced from approximately 80% to 15% of total oil pipeline capacity);

4. The fact that Enbridge’s proposed firm service offering only involves existing, rather than new, pipeline capacity; and

5. The considerable opposition to Enbridge’s current open season. (at 2; references omitted)

Source: NEB/CER.

Notwithstanding that it has yet to make an application and secure NEB/CER approval for moving to contract carriage, Enbridge unilaterally instituted an “Open Season” to allocate capacity on its mainline on August 2, 2019. While the details of the open season procedure are only available to potential shippers who execute a confidentiality agreement, the basic idea is that anyone who wants firm capacity on the Enbridge system will need to enter into a long term contract for that capacity. The “open season” was set to close on October 2, 2019.

A number of shippers (Suncor, Shell and CNRL) and an industry association (EPAC, the Explorers and Producers Association of Canada) took issue with Enbridge’s initiative and in particular its decision to engage in an open-season before it had made any application to the NEB for approval of a contract carriage model. That led the Board (now the CER) to initiate a written process to consider these complaints. In doing so the CER specifically requested that parties address:

- whether an open season should be held before or after the CER has decided on any future application filed by Enbridge for firm service … as well as supporting rationale, and
- whether the CER has the authority to stay the open season pending the CER’s decision on the Submissions, and any prejudice or harm that may occur as a result.

It might be noted that the last bullet seems directed at the issue of the authority to grant interim relief but may also embrace the broader question of the CER’s jurisdiction to stay an open season process.

As noted in the introduction, the CER decided to grant the relief sought in what the CER described numerous times in its short decision as these “specific and unique circumstances”. The CER gave two principal reasons for its decision, namely, concerns about “the fairness of Enbridge’s open season process and the perception of abuse of Enbridge’s market power” (at 2). The market power concern seems to be that existing shippers will feel compelled to participate in the open season even though the CER has yet to approve Enbridge’s move to contract carriage and any resulting terms and conditions. The related fairness concern is that shippers will need to make “upstream and downstream commercial arrangements based on uncertain terms and conditions of service” (at 3). While shippers will have to incur these costs if the CER approves a move to contract carriage, “holding an open season after such a regulatory decision will allow prospective shippers to make more informed supply, market, and contracting decisions” (at 3).

The CER did address two arguments that had been made by Enbridge and others in support of allowing the open season to continue. The first was that the open season would provide valuable information that would assist the CER in making a decision as to contract carriage. The CER rejected that largely for market power reasons suggesting also that Enbridge’s negotiations and consultation over the preceding months might “be valuable in forming Enbridge’s potential Mainline firm service application.” (at 3) Other parties acknowledged that open seasons do provide valuable information to support an application to build new capacity since they reduce the risk of building under-utilized or stranded assets, but in this case the open season was not being used to assess the appetite for new capacity but rather to support a future contract carriage application. Indeed, if the open season were allowed to run its course and Enbridge were able to sign up 90% or even more of capacity, one assumes that the momentum to allow Enbridge to move from common carrier status to contract carriage would be unstoppable.

The second argument was that an open season is a commercial process and that it would therefore be inappropriate for the CER to intervene. NEB practice of non-intervention in open season procedures was cited in support. However, in this case the CER concluded that “intervention is necessary at this time in the specific and unique circumstances of Enbridge’s current open season, which are distinct from previous cases.” (at 3)

As noted above, while the CER asked parties to offer comments on the CER’s authority to grant the relief sought, the CER does not itself refer to any section of its constating legislation to support its conclusions. What authority was it relying on?

First, section 36 of the transitional provisions of Canadian Energy Regulator Act (CERA) – which are found in An Act to enact the Impact Assessment Act and the Canadian Energy Regulator Act, to amend the Navigation Protection Act and to make consequential amendments to other Acts, SC 2019, c 28) – makes it clear that “Applications pending before the National Energy Board immediately before the commencement day are to be taken up before the Commission of the Regulator and continued in accordance with the National Energy Board Act as it read immediately before the commencement day.” It follows from this that the authority to deal with the requests for relief must be found in NEBA rather than in the largely identical terms (on these issues) of CERA.

Those supporting the requests for relief (see in particular Suncor Energy Inc. Reply Comments, September 13, 2019) referenced sections 11, 12, 13, 59, and more generally Part IV of NEBA dealing with tariffs and tolls. One of the challenges the applicants faced in identifying the CER’s authority to act is that the NEBA does not mention the term “open season” at all and, as Enbridge emphasized, the open season process “is a commercial process, not a regulatory process.” (See Comments of Enbridge Pipelines Inc, September 11, 2019 at para 52). I think that the best response to this is that the NEB/CER must have jurisdiction over an open season process insofar as the open season is intimately linked to the process of establishing just and reasonable tolls and to the circumstances in which the CER might vary the presumption in favour of common carrier status in section 71. The NEB/CER certainly has authority under section 59 to make any and all orders with respect to all matters relating to traffic, tolls and tariffs.

But the reader, and in particular those subject to the CER’s order, should not have to infer the authority for the order – a regulator needs to communicate that authority. In this decision the CER suggests that its approach is “consistent with the NEB’s long-standing principles of transparency, fairness, and preventing abuse of market power” – but to the extent that the decision fails to disclose the authority on which it is based, the decision is surely lacking in transparency.

This post may be cited as: Nigel Bankes, “The Canadian Energy Regulator Shuts Down the Open Season for Enbridge’s Mainline” (October 4, 2019), online: ABlawg, http://ablawg.ca/wp-content/uploads/2019/10/Blog_NB_CER_Enbridge.pdf

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