Appendix A
Summary of Alternatives Considered for a Set-Aside Mechanism
ALTERNATIVES EXAMINED
Various alternatives were evaluated against the key considerations as defined in the joint Application.
Alternatives that did not meet one or more of the key attributes were not studied further. The following
describes the alternatives that were examined and rejected by the Joint Applicants.
1. Corporate Model
Under this option, the pipeline company would establish a subsidiary corporation to manage the
pipeline abandonment funds.
The use of funds could be limited through the corporate articles to ensure their deployment for
abandonment uses only. Corporations generally have advantages over a regular trust in terms of tax
rates and would allow for a relatively diverse range of investment alternatives. A corporate model
would be as likely as any other to allow for the collection of sufficient funds to fulfill the corporation’s
purpose (to cover future abandonment costs).
The biggest shortfall of using a corporate entity to hold the abandonment funds is the lack of ability to
properly identify a specific beneficiary for those funds. Also, while the funds within a corporation would
be protected from creditors, the equity of the corporation would not. These are fundamental
shortcomings that fail to address the attributes laid out by the Board in the RH-2-2008 Decision. To
provide creditor protection and to provide means to properly direct funds to a beneficiary, the equity of
the corporation would need to be held in a trust. Given that a trust would be necessary, pursuing a trust
as the primary vehicle is more logical. Lastly, a corporation’s articles may be changed which leads to risk
that the funds could be used for purposes other than pipeline abandonment.
2. Limited Partnership Model
With this alternative, a partnership would be formed and controlled by the pipeline company for the
purposes of pipeline abandonment.
The partnership model demonstrates many of the same strengths and weaknesses as the corporate
model detailed above. It was determined to be inappropriate for the same reasons as the corporate
model.
3. Not for Profit or Charitable Organization Model
The main benefit of using this type of structure is that they are tax exempt; however, the investment of
the collected abandonment funds violates the nature of a not-for-profit entity. Further, a charitable
entity would be required to devote all of its resources to a charitable purpose; pipeline abandonment
costs would not be considered a charitable purpose. This is not a valid model for consideration.
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Appendix A
Summary of Alternatives Considered for a Set-Aside Mechanism
4. Insurance Contract Model
Under this model, funds for abandonment would be paid from an insurance company in exchange for a
premium paid by the pipeline company using abandonment funds collected over the life of the pipeline
system.
Given the period of time that the model would need to be in place, it is doubtful that an insurance
contract could be negotiated at a reasonable rate. This model also suffers from the same deficiencies as
the corporate model with respect to the flexibility of the use of the funds and the inability to identify
beneficiaries.
5. Letter of Credit Model
Using this model, a pipeline company would apply to a bank for a letter of credit. Provided the terms of
the letter of credit were met, the bank would pay an amount up to the letter of credit value to a named
payee. In this case, the proceeds from the letter of credit would be used to fund the abandonment
costs.
The term of a letter of credit is typically quite short and would therefore have to be continually renewed
to provide ongoing coverage for abandonment costs. This short term nature calls into question whether
this model is suitable for an obligation that is long term. Further issues include the flexibility around the
use of funds and identifying the beneficiary, as per the corporate model. There is also a possibility that
the letter of credit model would be considerably less tax efficient than other options. Lastly, the
availability of a letter of credit to a company at each renewal would be based on the credit worthiness
of the company. Therefore, if a company were ever to be at risk of insolvency it would lose its ability to
obtain a letter of credit to fund abandonment costs at precisely the time that such coverage would be
most important.
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