NATIONAL ENERGY BOARD
HEARING ORDER RHW-001-2016
APPLICATION FOR APPROVAL OF T-SOUTH WINTER FIRM SERVICE
____________________________________________________________________________
REPLY ARGUMENT OF WESTCOAST ENERGY INC.,
DOING BUSINESS AS SPECTRA ENERGY TRANSMISSION (WESTCOAST)
____________________________________________________________________________
September 30, 2016
Introduction
1.
Following is the Reply Argument of Westcoast. Westcoast will respond to certain submissions
made in the Final Arguments of FortisBC Energy Inc. (Fortis), BP Canada Energy Group ULC (BP
Canada), Powerex Corp. (Powerex), Pacific Northern Gas Ltd. (PNG) and Tenaska Marketing
Canada (Tenaska).
Fortis Argument
2.
Fortis reiterates its support for a winter firm service in principle, but objects to the conversion
and reversion provisions of WF Service. In opposing these provisions, Fortis’ main theme is that
the provisions are unnecessary because the T-South system is today fully contracted:
Westcoast’s only justification for the added complexity [of the conversion and reversion
provisions] is to avoid substitution away from year-round service to winter only service.
However, Westcoast has provided no evidence as to why that substitution must be
blocked. Importantly, there is no evidence that year-round capacity that may be turned
back in favour of winter service would remain uncontracted. To the contrary,
Westcoast’s own evidence is that the available year-round capacity is fully contracted
and it was shippers’ requests for additional capacity that led to the proposal for winter
firm service. 1
…
[T]he need for these provisions is premised on the need to address a problem that
Westcoast perceives to exist. However, there is no evidence before the Board that
allowing shippers to substitute year-round capacity for winter seasonal service would
negatively impact the year-round offering. There has been no effort made and no
evidence proffered to identify or quantify the impact of allowing existing year-round
shippers to substitute some of that capacity for winter seasonal. 2
…
Contrary to its assertions that the Conversion and Reversion Provisions are necessary to
protect the value of year-round service, the evidence is that demand for that service
1
Fortis Argument, page 3, para 7.
2
Fortis Argument, pages 14 and 15, para 50.
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currently outstrips supply. Westcoast has confirmed that WFS “is only being offered
because the year-round firm capacity … is fully contracted”. Given this, and in the
absence of any evidence to the contrary, it is reasonable to conclude that year-round
capacity made available by a shipper substituting that service for WFS would be
contracted by the market. 3
…
By declining to provide any evidence of the consequences of decreased demand for
year-round service (or even any evidence to show that a decrease would result)
Westcoast is asking the Board to approve the Conversion and Reversion Provisions as a
solution to a problem that it has not demonstrated exists. 4
3.
In response, Fortis misses the point. The fact that the system is fully contracted today does not
mean that the system will remain fully contracted in the future. If there was such an assurance
then Westcoast would agree that these provisions are not required and presumably Fortis
would have no reason to be concerned about the operation (and alleged complexity and
uncertainty) of these provisions in the first place. But there is no such assurance.
4.
While Fortis argues that because the T-South system is fully contracted today “it is reasonable to
conclude that year-round capacity made available by a shipper substituting that service for WFS
would be contracted by the market”, no party has claimed or can claim that the T-South system
will remain fully contracted at all times in the future. Even if Fortis were correct about today, its
arguments on this point are only relevant to the conversion provisions since the reversion
provisions will only operate prospectively based on the three year review process. Without the
reversion provisions, if and when the T-South system enters a period in the future when it is no
longer fully contracted on a year-round basis, the system would risk being forever burdened
with 160 MMcf/d of WF Service that is provided at a 38% discount relative to that capacity being
contracted as firm year-round service (which would have been the case if WF Service was not
3
Fortis Argument, page 15, para 53.
4
Fortis Argument, page 16, para 56.
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offered in the first place). This discount would confer a significant benefit upon those holding
WF Service in these circumstances, paid for by other shippers who would have to account for
the discount in the tolls for year-round firm service.
5.
Fortis also argues that the conversion provisions are unjustly discriminatory because they will
apply to shippers who hold year-round service and WF Service who elect to not renew yearround service, and not to shippers who hold only WF Service. 5 Fortis does not make this
argument with regard to the reversion provisions, as those provisions apply to all holders of WF
Service regardless of whether they hold year-round service.
6.
In Westcoast’s submission, the conversion provisions are not unjustly discriminatory. The
conversion provisions will apply equally to all shippers who hold both year-round service and
WF Service. And they will apply to these shippers for good reason and justification: only
shippers who hold year-round service and WF Service will be in a position, absent the
conversion provisions, to create uncontracted capacity on the T-South system by swapping yearround service for WF Service.
7.
Fortis also argues that the conversion and reversion provisions result in “contrasting
commitments” between Westcoast and the holders of WF Service:
Any shipper seeking WFS must commit to that service for the duration of the term. By
contrast, the Conversion and Reversion Provisions operate to excuse Westcoast from
making a reciprocal commitment as to the service it will supply. 6
…
Fundamentally, the fatal flaws of WFS are illustrated by the contrasting commitments
incumbent on Westcoast and the shippers. Any shipper that bids on and is awarded WF
5
Fortis Argument, pages 12 and 13, paras 41 to 45.
6
Fortis Argument, page 10, para 33.
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Service is obligated to commit to taking that service for a defined term; Westcoast is
afforded certainty of that commitment. However, the corresponding commitment
made by Westcoast to provide service is inherently uncertain. The shipper has little or
no control over how and when its service may be varied. 7
8.
Westcoast would make two points in response. First, Westcoast is committing to provide
holders of WF Service with long-term firm service during the winter months (providing them
with certainty their needs will be met when market needs are highest), with renewal rights for
that service; the conversion and reversion provisions do not diminish that commitment.
Second, the conversion and reversion provisions appropriately increase the commitment that
WF Service holders must make to the T-South system (which, absent these provisions, would be
a blanket commitment for 5 months of service at a 150% toll), to a commitment level that is
closer to what shippers who hold year-round firm service must make (12 months of service at a
100% toll). This increased commitment is to the benefit of the system generally.
BP Canada Argument
9.
BP Canada argues that WF Service is unnecessary because an alternative to WF Service already
exists in Westcoast’s tariff, namely, Short Term Firm Service (STFS). Westcoast has already
addressed in its Final Argument why WF Service and STFS are different services designed to
meet different objectives. Westcoast will not repeat those reasons here, other than the critical
point that STFS is limited in term to periods less than one year without renewal rights and
therefore does not provide shippers who have long term market needs with certainty that their
long term market needs will be met. Accordingly, unlike WF Service, STFS cannot lead to an
elimination of expansion facilities.
7
Fortis Argument, page 17, para 60.
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10.
BP Canada also suggests that a T-South expansion project might actually lead to lower tolls
because the incremental revenue from the expansion capacity might exceed the cost of the
expansion. 8 That is not the evidence in this proceeding. In Westcoast’s response to Board IR 1.3
b), Westcoast stated that:
For those requiring reliable firm service during the winter months, the alternative to WF
Service would be to support a pipeline expansion by signing up for long-term year-round
service, which is a more expensive and less efficient option for all shippers.
With regard to timeliness of service, no one can argue that using existing system capacity to
meet long term needs (as WF Service will do) is less timely than the approval and construction of
new expansion facilities.
11.
BP Canada also argues that WF Service will erode the value of year-round firm service because
the higher firm T-South contract levels associated with WF Service will reduce service reliability
levels and the availability of AOS. 9 Westcoast disagrees that WF Service will have any impact on
its ability to provide reliable firm service in the winter months, and it would not offer the service
if it believed otherwise. Moreover, this argument about eroded value is tantamount to saying
that incremental firm capacity that is available on the system should be set aside and reserved
as redundant capacity to actually further enhance the value of year-round firm service. What BP
Canada describes as “eroding” or “impacting” the value of year-round service is no different
than what occurs on any pipeline system when uncontracted firm capacity becomes contracted
and the amount of available firm capacity on the system decreases.
8
BP Canada Argument, page 3, paras 4 and 5.
9
BP Canada Argument, page 5, para 9 and page 9, para 23.
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12.
The arguments of BP Canada under the heading “WF Service is Overly Complex and Creates
Substantial Uncertainty” are essentially just another pitch by BP Canada for STFS (e.g., BP
Canada claims that “STFS avoids the complexity and uncertainty associated with WF Service”). 10
In response, Westcoast would say again that WF Service and STFS are not substitutes for one
another; they are different services designed to meet different objectives. Furthermore, for the
reasons set out in its Final Argument, Westcoast does not agree that WF Service is “overly
complex” or will create “substantial uncertainty”. 11
Powerex Argument
13.
Powerex states that it has no fundamental objection to the implementation of WF Service,
provided that three key issues are addressed:
14.
(a)
first, whether Westcoast is capable of consistently supporting a firm HDA delivery of
1,610 MMcf/d (1,450 MMcf/d of annual firm plus 160 MMcf/d of WF Service) without
jeopardizing the reliability of existing shippers’ firm service;
(b)
second, the Board must consider whether approval of the Application will negatively
impact existing shippers by reducing toll revenue, resulting in higher tolls; and
(c)
third, if the Application is approved by the Board the conversion and reversion
provisions must remain as described in the Application. 12
With regard to Powerex’s third issue, Westcoast agrees that the conversion and reversion
provisions are important to the proposed service and should be approved by the Board as
described in the Application.
10
BP Canada Argument, pages 7, 8 and 9.
11
Westcoast Final Argument, page 16, paras 38 and 39.
12
Powerex Argument, page 1, lines 19 to 25, and page 2, lines 1 to 6.
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15.
With regard to Powerex’s first issue, Westcoast has owned and operated the Westcoast pipeline
system for almost 60 years. It is Westcoast’s evidence in this proceeding, as the owner and
operator of the pipeline system, that there is approximately 160 MMcf/d of additional firm
capacity available from CS No. 2 to the HDA in the winter months (November to March)
compared to the summer months (April to October). Accordingly, contracting this capacity as
WF Service will not jeopardize the reliability of existing shippers’ firm service.
16.
Westcoast did not claim, as Powerex asserts in its argument, that Westcoast’s obligation to
provide contract demand credits to its firm shippers if it is required to curtail firm service in the
winter months as a result of insufficient pipeline capacity “proves” that firm capacity exists to
provide WF Service. 13 Westcoast’s point is that it will receive no additional return on common
equity from providing WF Service and in fact will be financially penalized if it is required to
curtail firm service as a result of providing WF Service. In these circumstances, the Board might
ask why would Westcoast offer to provide incremental T-South service in the winter months
that it is not capable of providing? The answer is that Westcoast would not; the capacity does
exist and Westcoast would not contract 160 MMcf/d of WF Service in the first place if it had any
doubt about its ability to provide the service. Westcoast has no interest or incentive in
providing a service that it cannot reliably provide or that would jeopardize existing firm service,
and indeed has a disincentive for doing so.
17.
Westcoast does not intend to engage in a point by point response to Powerex’s arguments, as
Powerex’s claims about the capacity of the T-South system essentially come down to erroneous
conclusions that it draws based solely from the volumes of gas that were physically delivered by
Westcoast to the HDA last winter. For example, Powerex states that:
13
Powerex Argument, page 9, line 19, and page 15, line 1.
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The System is contracted volumetrically. Any assessment of Winter System capacity to
the HDA should be determined using volumetric flow data. In contrast to Westcoast’s
stated capacity of 1,702 MMcf/d, the Hearing evidence shows that the Westcoast
pipeline actually delivered an average of 1,573 MMcf/d during the Winter 2015/2016
period as a whole, despite significant additional demand to the HDA. During the three
coldest months (December through February) the pipeline delivered an average of 1,610
MMcf/d with 45% of the days falling below this average level. 14
18.
Powerex goes on to state that “the appropriate benchmark that must be considered in assessing
System capacity for the purposes of contracting any additional firm service relative to the HDA is
the physical capability of the System to deliver volumes, relative to existing firm volumetric
contractual obligations”. 15 However, Powerex then simply ignores the fact that those “existing
firm volumetric contractual obligations” include, among other T-South firm service contracts,
delivery contracts for firm service from both CS No. 2 to the HDA and from Kingsvale to the HDA.
19.
WF Service will be firm service from CS No. 2 to the HDA. Therefore, as stated in Westcoast’s
Final Argument, what is relevant from a capacity perspective is the physical capacity of the
system on the full CS No. 2 to the HDA path relative to the “existing volumetric contractual
obligations” on that path. The firm capacity that is currently contracted from CS No. 2 to the
HDA is 1,345 MMcf/d. Accordingly, contracting 160 MMcf/d of WF Service will increase
Westcoast’s “firm volumetric contractual obligations” from CS No. 2 to the HDA to 1,505
MMcf/d during the winter months. Yes, as Powerex points out, the total firm service obligations
to the HDA will increase to 1,610 MMcf/d, but of this amount 105 MMcf/d is contracted at the
southern end of the system from Kingsvale to the HDA.
20.
Gas is physically delivered onto the T-South system at two locations, namely, at CS No. 2 and at
Kingsvale. Gas that is physically delivered onto the T-South system at Kingsvale is delivered to
14
Powerex Argument, page 4, lines 22 and 23, and page 5, lines 1 to 5.
15
Powerex Argument, page 14, lines 10 to 13.
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the HDA and is therefore included among the reported physical delivery volumes at the HDA. 16
The same data from last winter relied on by Powerex in its argument shows that gas delivered to
the HDA net of receipts at Kingsvale averaged 1,560 MMcf/d. 17 As noted in Westcoast’s Final
Argument, the data also shows that there was only one day in all of December, January and
February last winter when deliveries to the HDA net of receipts at Kingsvale were less than
1,505 MMcf/d (i.e., the current 1,345 MMcf/d of firm year-round contracts from CS No. 2 to the
HDA plus an additional 160 MMcf/d day of WF Service from CS No. 2 to the HDA). 18
21.
Contrary to Powerex’s submissions, physical gas receipts onto the system at Kingsvale are not
irrelevant to an assessment of the capacity of the T-South system to provide WF Service and
Westcoast’s ability to meet its firm volumetric contractual obligations, if that assessment is
done (as Powerex tries to do) solely by reference to volumetric deliveries to the HDA.
22.
Powerex also claims that heat value is a “critical issue” that Westcoast has not addressed. 19
However, Powerex presents this issue in support of its argument that “the System’s capacity to
deliver gas to the HDA should be assessed solely on volumetric deliveries”. 20 Westcoast has not
responded to Powerex’s arguments about heat value (or its arguments about “Authorized
Nominations” versus “Authorized Volumes”) because volumetric deliveries on the T-South
system to the HDA last winter raise no doubt as to Westcoast’s ability to meet its firm
volumetric contractual obligations to the HDA even once WF Service is in place.
16
Powerex Response to Westcoast IR 1.1(d).
17
Attachment to Westcoast’s response to Powerex IR 1.2(i) and (j).
18
Westcoast Final Argument, pages 10 and 11, para 24.
19
Powerex Argument, page 9, line 18.
20
Powerex Argument, page 12, lines 10 and 12.
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23.
With regard to Powerex’s second “key issue”, Powerex makes the claim that “the annual
revenue impact of WFS is likely to be negative and could result in an increase in firm tolls, thus
harming existing firm shippers”. 21 Westcoast would make four points in response.
24.
First, if WF Service is fully contracted it will produce a consistent and reliable revenue stream of
$12.4 million annually, regardless of the level of use of the service. This revenue stream, unlike
revenue streams from interruptible services, will not come and go from day to day and year to
year.
25.
Second, Powerex’s foregone revenue calculations assume that, of the 1,702 MMcf/d of winter
system capacity, any available capacity above firm contracts is utilized at a 100% load factor as
AOS, DDs and/or IT on every single day during the winter months (i.e. November, December,
January, February and March). 22 It is completely unrealistic to assume as Powerex does that the
T-South system will operate at a 100% load factor on every day of the winter months. While this
might be a fair assumption for some cold winter days, there is no basis for thinking that this is a
reasonable assumption over the entire winter period (regardless of market-area temperature
conditions) over multiple years.
26.
Third, Powerex’s foregone revenue calculations assume that a number of the existing TSPNG
and TSIND firm contracts were only entered into to take advantage of the nomination priority of
downstream diversions relative to IT, and are not serving market demands at the TSPNG and
TSIND delivery points. While Powerex can speak to its own contracting practices, there is no
evidence to support Powerex’s assumption regarding the contracting practices or intentions of
other shippers who hold firm capacity to the TSPNG and TSIND delivery points. Moreover, the
21
Powerex Argument, page 7, lines 14 to 16.
22
Powerex response to Westcoast IR. No. 1.2(b).
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potential forgone revenue from Powerex’s own firm contracts to these delivery points is itself
overstated. For example, Powerex has included in its foregone revenue calculation $1.5 million
of annual revenue associated with a Powerex contract to the TSIND delivery point that has
already expired. 23
27.
Fourth, Powerex’s foregone revenue argument ignores the cost side of the equation, giving no
regard to the avoided costs of facility upgrades or expansions that may be required if WF Service
is not first made available to the market. WF Service will optimize utilization of existing T-South
infrastructure by allowing firm long term gas transportation needs to be met by existing facilities
without the need for facility upgrades or expansion.
PNG and Tenaska Arguments
28.
PNG requests in its argument that “were the Board to approve Westcoast’s WF Service
application, the Board also direct Westcoast to revise its tariff to set the priority of downstream
diversions to be higher than all other interruptible services that include both AOS and IT-S”. 24
Tenaska also argues in favour of this change. 25
29.
There is no application before the Board to alter the priority of interruptible services on the TSouth system under Westcoast’s tariff. Consequently, there has been no evidence in this
proceeding, or opportunity for affected parties to assess and comment, on the potential
implications and consequences of such a change. In Westcoast’s submission, any proposal to
alter the priority of interruptible services on the T-South system should first be raised and
23
Powerex Written Evidence, page 8, lines 12 to 17, and Powerex response to Westcoast IR No. 1.2(c).
24
PNG Argument, page 3, para 9.
25
Tenaska Argument, page 5, para 14.
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discussed with Westcoast’s Toll and Tariff Task Force and, in any event, only adjudicated by the
Board in the context of a formal application to the Board for such a change.
DATED at the City of Calgary this 30th day of September, 2016.
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