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Journal of Energy & Natural Resources Law Volume 12, 1994 - Issue 4
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Original Articles

Competition Versus Regulation: Reform of Energy Regulation in North America

Jerry H FarrellSmith Lyons Torrance Stevenson & Mayer, Toronto.
&
Paul F ForshaySutherland Asbill & Brennan, WashingtonDC.
Pages 385-405 | Published online: 08 Jun 2015

  • RSC 1985, c N-7, as amended.
  • Alberta Natural Gas Company Ltd, Foothills Pipe Lines Ltd, Gazoduc TQM Inc, TransCanada PipeLines Limited, and Westcoast Energy Inc. These pipelines, together with five major oil pipelines, comprise the Group 1 companies. There are 28 small gas pipelines that comprise the Group 2 gas companies; they are regulated on a complaints basis.
  • The rates for sales service were the sum of the costs of purchasing and transporting system gas.
  • Petroleum Administration Act SC 1974–75–76, c 47, as amended. This statute was subsequently renamed the Energy Administration Act by SC 1980–81–82, c 114, §2(1).
  • The term “tolls” refers to the charge for the transportation component of sales service (the administered price of gas was a separate component) or for transportation service, as the case may be.
  • The export price for gas was deregulated in a limited fashion one year earlier, on 1 November 1984. Negotiated prices were subject to NEB review and approval and parties could still opt to retain administered prices.
  • Agreement on Natural Gas Markets and Prices dated 31 October 1985 among the governments of Canada and the producing provinces (Alberta, British Columbia, and Saskatchewan).
  • Id, par 4.
  • Id, par 7.
  • Reasons for Decision, September 1985, TransCanada Pipelines Limited, RH-2–85, pp 34–35.
  • Reasons for Decision, TransCanada PipeLines Limited, Availability of Services, May 1986 (RH-5-85), p 6. However, TransCanada was unwilling to provide transportation service to direct purchasers or their suppliers for reasons related to its system gas purchase contracts with producers, in particular its take-or-pay obligations thereunder. Accordingly, the NEB frequently issued orders directing TransCanada to make service available pursuant to §59(2) [now §71(2)] of the NEB Act.
  • TransCanada was also unwilling to reduce an LDC's sales service entitlement in these circumstances, for the reasons referred to in fn 11, supra.
  • RH-5–85 Reasons for Decisions per fnll, pp6–10, affirmed sub nom TransCanada PipeLines Ltd v National Energy Board (1987), 72 NR 172 (FCA).
  • Id, pp 33–34. The NEB maintained this regulatory policy prohibiting self-displacement in two subsequent proceedings. See Reasons for Decision, TransCanada PipeLines Limited, RH-3–86, May 1987, p 72, and Reasons for Decision, Manitoba Oil and Gas Corporation, MH-1–87, September 1987, pp6–7. In the latter, the NEB added the thought that self- displacement would be contrary to an orderly transition to market-sensitive pricing and the overall public interest.
  • See Unbundling, below.
  • In previously approving the bumping provision, the NEB indicated that the provision should only be used in special circumstances, and not as a general means of controlling the construction of facilities, because long-term markets were being served by short-term service agreements for direct purchases. See RH-3–86 Reasons for Decision per fn 14, supra, pp 57–58.
  • Reasons for Decision, TransCanada PipeLines Limited, GH-2–87, July 1988, pp 83–85.
  • Id, p 85.
  • Id, pp 85–86. The NEB confirmed the renewal rights policy in another Part III proceeding involving Trans Canada's second application in connection with the proposed Iroquois Gas Transmission System (Hearing Order GH-5-89). See Reasons for Decision, Trans Canada Pipe Lines Limited, GH-5–89, November 1990, Volume 1, Tolling and Economic Feasibility, pp 31–32.
  • RH-3–86 Reasons for Decision per fn 14, pp 59–60.
  • Reasons for Decision, Trans Canada Pipe Lines Limited, RH-1–88 Phase II, June 1989, pp 57–60.
  • Reasons for Decision, Trans Canada Pipe Lines Limited, RH-2–92, February 1993, p 84.
  • Reasons for Decision, Trans Canada Pipe Lines Limited, RH-1–88 Phase I, November 1988, p 6.
  • Id, p 9.
  • Id, p 14.
  • Id, pp 14–15.
  • 15 USC §717, et seq.
  • 15 USC §3301, et seq.
  • Phillips Petroleum Co? Wisconsin, 347 US 672 (1954).
  • NGPA, §§3312–3320.
  • Id §3331. The Natural Gas Wellhead Decontrol Act of 1989 completed this process. See Pub L No 101–60, 103 Stat 157 (1989) (codified as amended in scattered sections of 15 USC).
  • Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No 436, FERC Stats & Regs [Preambles] ¶30,665 at 31,472–73 (1985) (Order 436).
  • Elimination of Variable Costs From Certain Natural Gas Pipeline Minimum Commodity Bill Provisions, FERC Stats & Regs [Preambles] ¶30,571 (1984) (Order 380).
  • Order 380 at 30,962.
  • Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No 436, FERC Stats & Regs [Preambles] ¶30,665, modified, Order No436-A, III FERC Stats & Regs [Preambles] ¶30,675 (1985), modified further, Order No 436-B, III FERC Stats & Regs [Preambles] ¶30,688, reh'g denied, Order No436-C, 34 FERC ¶61,404, r eh'g denied, Order No 436-D, 34 FERC ¶61,405, reconsideration denied, Order No436-E, 34 FERC &para61,403 (1986), remanded, Associated Gas Distributors Group v FERC, 824 F 2d 981 (DC Cir 1987), cert denied, 485 US 1006 (1988).
  • Id.
  • Inquiry Into Alleged Anticompetitive Practices Related to Marketing Affiliates of Interstate Pipelines, FERC Stats & Regs [Preambles] ¶30,820 (1988) (“Order 497”). See 18 CFR Part 161.
  • 18 CFR §161.3(e).
  • Id §161.3(f).
  • Id §161.3(g).
  • Id §250.16.
  • Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No 636, III FERC Stats & Regs [Preambles] ¶30,939, order on reh'g, Order No 636-A, III FERC Stats & Regs [Preambles] ¶30,950, order on reh'g, Order No 636-B, 61 FERC ¶61,272 (1992), reh'g denied, 62 FERC ¶61,007 (1993), appeal pending sub nom, Atlanta Gas Light Co v FERC, Case No (DC Cir) (Order 636).
  • Order 636 at 30,398.
  • Id at 30,402.
  • Id at 30,398.
  • Wat 30,409. See 18 CFR §§284.8(b)(2), 284.9(b)(2).
  • Order 636 at 30,409. Prior to unbundling, pipeline sales customers could receive, in effect, a “no-notice” transportation service that enabled them to receive gas up to their daily entitlement on demand without prior nominations or penalty. Recognising the utility of such a service, particularly in serving peak demand, Order 636 required pipelines providing sales for resales on 18 May 1992 to provide a similar “no-notice” firm transportation service as part of their restructured services.
  • Id at 30,426. Pipelines could retain downstream storage related to their load balancing obligations and no-notice transportation service.
  • Id at 30,420–21.
  • Id at 30,415.
  • Id at 30,434. In Order 636-A, FERC allowed pipelines and their customers to explore rate design alternatives to SFV if those alternatives would reduce significant SFV-related cost shifting among shippers. Order on reh'g, Order No 636-A, III FERC Stats & Regs [Preambles] 130,950 at 30,599–60 (1992).
  • Order 636 at 30,437–38.
  • Cochin Pipe Lines Ltd, Interprovincial Pipe Line Inc, Interprovincial Pipe Line (NW) Ltd, Trans Mountain Pipe Line Company Ltd, and Trans-Northern Pipelines Inc are Group 1 companies. The first and third companies are regulated on a complaints basis. There are 16 small oil pipelines that comprise the Group 2 oil companies; they are regulated on a complaints basis.
  • Petroleum Administration Act See fn 4, supra.
  • Agreement on Oil and Gas Pricing and Taxation dated 28 March 1985 among the governments of Canada and the producing provinces (Alberta, British Columbia, and Saskatchewan). The Western Accord was the precursor of the Gas Agreement insofar as gas deregulation is concerned.
  • The NEB removed its export controls effective 1 June 1985. See letter dated 29 April 1985 to specified addresses regarding Oil Export Procedures Effective 1 June 1985.
  • See §71(1) [then §59(1)] of the NEB Act.
  • Reasons for Decision, Interprovincial Pipe Line Limited, Apportionment of Pipeline Space, July 1985 (MH-5-85), p 7.
  • Id, pp 7–8.
  • 49 USC §1, et seq. In something of a regulatory anomaly, the version of the ICA enforced by FERC is not the recodified version applicable to railroad and motor common carriers. The ICA administered by FERC is the statute as it stood at the time of enactment of the Department of Energy Organisation Act, 42 USC §7101, et seq, which transferred jurisdiction over oil pipelines from the Interstate Commerce Commission to FERC. See 42 USC §7172(b).
  • The ICC employed a ‘valuation methodology’ that established a pipeline's rate base by considering: cost of reproduction new; cost of reproduction new minus depreciation; original cost; original cost minus depreciation; present value of land and rights of way; and working capital including materials and supplies. See Reduced Pipe Line Rates and Gathering Charges, 243 ICC 115, 137 (1940). The ICC then attributed weightings to these factors, under its Oak Formula’, to arrive at a pipeline's valuation rate base. The Oak Formula is described in Williams Pipe Line Co, Opinion No 154, 21 FERC ¶61,260, 61,696 n 295 (1982). In addition, a 1941 consent decree between the US Department of Justice and various oil companies and their pipeline subsidiaries effectively limited a pipeline's rate of return to seven per cent on its valuation rate base. See United States v Atlantic Refining Co, Civ Action No 14060 (DDC 23 December 1941). The consent decree was vacated by agreement in 1982. See ‘Order Modifying Final Judgment’, United States v Atlantic Refining Co, Civ Action No 14060 (DDC 13 December 1982).
  • Williams Pipe Line Co, Opinion No 154, 21 FERC ¶61,260 (1982), reh'g denied, Opinion No 154-A, 22 FERC 7para;61,086 (1983) (Opinion 154).
  • 21 FERC at 61,641–50.
  • Id at 61,649.
  • Id.
  • Farmers Union Central Exchange v FERC, 734 F 2d 1486, 1527 (DCCir), cert denied, 469 US 1034 (1984). See 49 USC §1(5).
  • Williams Pipe Line Co, 31 FERC ¶61,377 (Opinion 154-B), order on reh'g, 33 FERC 161,327 (1985) (Opinion 154-C).
  • The TOC methodology first requires determination of a nominal rate of return on equity that reflects a pipeline's risks and cost of capital. Next, the inflation component of that rate of return is removed, leaving the ‘real’ rate of return. The real rate of return times the equity portion of the rate base yields the yearly allowed equity return. The inflation factor times the equity rate base provides the equity rate base ‘trending’ or write-up. Like depreciation, the write-up is amortised over the life of the property. See Opinion 154-B at 61,834.
  • See, eg, ARCO Pipe Line Co, 52 FERC ¶61,055 (1990); Kuparuk Transportation Co, 55 FERC 161,122 (1991).
  • Buckeye Pipe Line Co, 44 FERC ¶61,066, at 61,185–86, order on reh'g, 45 FERC ¶61,046 (1988). A pipeline could demonstrate a lack of market power by showing: ‘that its shippers have alternate ways to ship their product, that buyers have alternate means of obtaining supplies, or the existence of other constraining factors which would restrain its prices to ensure that they are just and reasonable.’ 44 FERC at 61,186.
  • Buckeye Pipe Line Co, LP, 53 FERC ¶61,473 (1990), reh'g granted in part and denied in part, 55 FERC 161,084 (1991).
  • 53 FERC at 62,675–76.
  • Id at 62,683.
  • See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992, Order No 561, III FERC Stats & Regs [Preambles] ¶30,985, at 30,944 (1993) (Order 561) (“using an analysis similar to that used in antitrust cases to determine whether the pipeline possessed market power is itself a costly time and resource consuming effort”).
  • 42 USCA §7172 note [Section 1801] (Supp 1993) (Sections 1801–1804 of the Energy Policy Act).
  • Id [Section 1803]
  • Id [Section 1802]
  • See fn 74, supra.
  • Order 561 at 30,940.
  • Id at 30,951–56.
  • Id at 30,953–54.
  • Protests of index-based rates would have to demonstrate that “the discrepancy between the actual cost increase to the pipeline and the proposed change in rate is so substantial that the proposed rate change is not just and reasonable within the meaning of the ICA” Id at 30,955.
  • Id at 30,949.
  • Id at 30,947.
  • Id
  • FERC has issued a Notice of Inquiry concerning “the appropriate information to be included by oil pipelines with their cost-of-service rate filing”, and the need for revisions to the information annually reported to FERC by oil pipelines. See ‘Cost-of-Service Filing and Reporting Requirements for Oil Pipelines; Notice of Inquiry’, FERC Docket No RM94-2-000, 58 Fed Reg 58817–19 (22 October 1993).
  • FERC has issued a Notice of Inquiry aimed at streamlining pipeline market power determinations. See Market-Based Ratemaking for Oil Pipelines; Notice of Inquiry, FERC Docket No RM94-1-000, 58 Fed Reg 58814–16 (22 October 1993).
  • Order 561 at 30,956–59.
  • Id at 30,944.
  • The NEB may also regulate any interprovincial power line designated as such by the Governor-in-Council (ie the federal cabinet): §58.4 of the NEB Act.
  • In early years, the NEB's primary concern was to ensure that proposed exports were surplus to provincial requirements. In later years, as provincial oversight increased, the NEB's focus shifted to ensuring that prospective out-of-province Canadian requirements were considered prior to issuing a licence.
  • The Minister asked the NEB to examine five issues: (a) the potential to reduce or eliminate any overlap of federal and provincial regulation; (b) the appropriateness of the method for determining whether the electricity to be exported is surplus to reasonably foreseeable Canadian requirements; (c) the appropriateness of the three price criteria used to assess proposed export; (d) the potential to reduce the amounts of material that must be filed by applicants for licences and certificates; and (e) the appropriateness of the 25-year limit on the duration of electricity exports.
  • “The Regulation of Electricity Exports: Report of an Inquiry by a Panel of the National Energy Board Following a Hearing in November and December 1986”, June 1987.
  • Energy, Mines and Resources Canada, “Electricity/Êlectricité: Canadian Electricity Policy”, September 1988.
  • §119.06(2) of the NEB Act.
  • §119.06(2)(c) of the NEB Act.
  • §58.14(2)(a)-(c).
  • National Energy Board, “Memorandum of Guidance to Interested Parties Concerning Full Implementation of the September 1988 Canadian Electricity Policy”, July 1993.
  • “The report was submitted to the Minister in February 1994.
  • 16 USC §824, et seq.
  • 16 USC §2601, et seq.
  • Id §824a-3(a).
  • Id §824a-3(b).
  • See 18 CRF §292.304. The utility and the QF were free to negotiate a rate other than the full avoided cost rate.
  • Regulations Governing Bidding Programs, IV FERC Stats & Regs [Proposed Regs] ¶32,455, at 32,023 (1988).
  • See Id.
  • Regulations Governing Independent Power Producers, IV FERC Stats & Regs [Proposed Regs] ¶32,456 (1988). IPPs were defined as wholesale producers, other than QFs, that are unaffiliated with franchised utilities in the area in which the IPPs are selling power and that lack significant market power, Id at 32,103–3.
  • Id at 32,121–28.
  • Id at 32,103–3.
  • See Administrative Determination of Full Avoided Costs. Sales of Power to Qualifying Facilities and Interconnection Facilities, IV FERC Stats & Regs [Proposed Regs] ¶32,457 (1988).
  • See Order Terminating Proceedings, 64 FERC ¶61,364 (1993).
  • See, eg, Enron Power Enterprise Corp 52 FERC ¶61,193 (1990); Commonwealth Atlantic LP, 51 FERC ¶61,368 (1990).
  • See 16 USC §824b.
  • Utah Power & Light Co, Opinion No 318, 45 FERC 161,095 (1988), remanded sub nom Environmental Action Inc v FERC, 939 F 2d 1057 (DC Cir 1991), order on remand, 57 FERC 161,363 (1991); Northeast Utilities Service Co, Opinion No 364, 56 FERC ¶61,269 (1991).
  • Public Service Co of Indiana, Inc, Opinion No 349, 51 FERC ¶61,367 (1990); Energy Services, Inc, 58 FERC ¶61,234 (1992).
  • Pub L No 102–486, 1992 USCCAN (106 Stat) 2915.
  • “Eligible facilities” embrace facilities used for either (i) the generation of power exclusively for sale for resale or (ii) the generation of power, and leased to one or more public utilities. 15 USC §79z-5a(a)(2).
  • Id §79z-5a(a)(1).
  • Id §79z-5a(e).
  • 16 USC §824k(h).
  • Id §824j(a).
  • Id.
  • 16 USC §823j(a) (1988).
  • Energy Policy Act, §721, codified at 16 USC §824j(a) (1993).
  • Id.
  • See City of Bedford, Virginia, 66 FERC ¶61,185 (1994); Minnesota Municipal Power Agency v Northern States Power Co, 66 FERC ¶61,114 (1994); and Florida Municipal Power Agency v Florida Power & Light Co, 65 FERC ¶61,125, order on reh'g, 65 FERC ¶61,372 (1993).
  • Minnesota Municipal Power Agency v Southern Minnesota Municipal Power Agency, 66 FERC ¶61,223 (1994).
  • See Northeast Utilities Service Co, 58 FERC ¶61,070, reh'g denied, 59 FERC 161,042, order granting motion to vacate and dismissing request for rehearsing, 59 FERC ¶61,089 (1992), aff'd in part and remanded in part sub nom Northeast Utilities v FERC, No 92–1165, et al (1st Cir 1993); Pennsylvania Electric Co, 58 FERC ¶61,278, reh'g denied and pricing policy clarified, 60 FERC ¶61, 034, reh'g denied, 60 FERC ¶61,244 (1992), aff'd sub nom Pennsylvania Electric Co v FERC, 11 F 3d 207 (DC Cir 1993).
  • See Inquiry Concerning the Commission's Pricing Policy For Transmission Services Provided by Public Utilities Under the Federal Power Act, Docket No RM93-19-000, 58 Fed Reg 36400 (7 July 1993).
  • See Inquiry Concerning the Commission's Pricing Policy For Transmission Services Provided by Public Utilities Under the Federal Power Act; Establishing Dates for Technical Conference, Docket No RM93-13-000, 59 Fed Reg 8612 (23 February 1994).

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